EBA · 2023_6746 Final Q&A

Correlation parameter for Intra-bucket correlations for credit spread risk for non-securitisations

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
325ai
Topic
Market risk
Submitted by
Consultancy firm
Submitted
2023-03-12
Answered
2023-06-16
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

In the first subparagraph of Article 325m of Regulation (EU) No 575/2013 (CRR) it is stated that institutions apply a risk factor per issuer and per maturity, irrespective of whether these credit spread rates of the issuer derive from debt instruments or credit default swaps. However, the correlation factor linked to the basis risk is present in article 325ai of (CRR). Must this value always be equal to 1 since there is no longer a division between the two types of curve as regards risk factors or does this basis risk refer to another type of risk? In this second case to which?

Background

Article 325m reports: - The delta credit spread risk factors to be applied by institutions to non-securitisation instruments that are sensitive to credit spread shall be the issuer credit spread rates of those instruments, inferred from the relevant debt instruments and credit default swaps, and mapped to each of the following maturities: 0,5 years, 1 year, 3 years, 5 years, 10 years. Institutions shall apply one risk factor per issuer and maturity, regardless of whether those issuer credit spread rates are inferred from debt instruments or credit default swaps. The buckets shall be sector buckets, as referred to in Section 6, and each bucket shall include all the risk factors allocated to the relevant sector. Aritcle 325 ai provides: -  ρkl (basis) shall be equal to 1 where the two sensitivities are related to the same curves, otherwise it shall be equal to 99,90 %.

Answer

Bond and CDS curves are to be treated as two separate curves (i.e. two separate risk factors) in accordance with Article 325m(1) of Regulation (EU) No 575/2013 (CRR) for the purpose of computing delta risk. For example, a CDS curve on the single name X, and a Bond curve on the same single name, shall constitute two curves, and rho_kl(basis) shall be set at 99.9% to reflect the CDS-bond basis. On the contrary, a single credit spread curve specific to the issuer shall be used for curvature risk in accordance with Article 325m(3) of Regulation (EU) No 575/2013.

Original source: European Banking Authority, Q&A ID 2023_6746

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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