QUALIFICATION OF INTERNAL TRANSACTIONS AS "STRUCTURAL"

When considering internal financing in currencies between the Bank’s prudential banking book (“BB”) and the trading book (“TB”), aiming at balancing the balance sheet of both BB and TB, we would be keen to know whether the “banking book leg” of such refinancing could be eligible to the exemption pursuant to art. 352(2) CRR? In particular, could such positions be assumed to hedge/incentivize the CET1 ratio against changes in FX rates while they stem from internal financings between the BB and the TB of the same entity? Could such positions be assumed to be structural?

The example 10 page 100 (and following) of the Guidelines on the treatment of structural FX under Article 352(2) of Regulation (EU) No 575/2013 (CRR) provides the following example for the subsidiary at solo level reporting in USD: Value in EUR Value in EUR Assets in USD BB 300 Liabilities in USD BB 200 Assets in USD TB 100 Assets in GBP BB 20 Assets in DKK BB 30 Liabilities in DKK BB 10 CET1 in USD 240 This balance sheet does not mention the internal refinancing transaction that may exist between the BB (prudential banking book) and the TB (prudential trading book). Indeed, the Bank’s internal management of TB and BB positions relies on the principle that both the balance sheet of the BB and the balance sheet of the TB must be balanced (i.e. BB assets must equal BB liabilities and, similarly, TB assets must equal TB liabilities). To ensure this equality, internal refinancing transactions are conducted between the BB and the TB. This typically happens when there are not enough TB liabilities to fund TB assets. In such a case, the TB will request an internal refinancing to the BB; conversely, the BB will grant an internal loan to the TB of the same amount. Operationally speaking, the process can be summarized as follows: First, the trading desk notifies its need for financing to the group treasury which is located in the BB; Second, the group treasury provides the liquidity to the trading desk via an internal transaction BB à TB; Third, the group treasury refinances itself (i.e. borrows the same amount of liquidity subject to the internal liquidity framework) via an external transaction with the market. This principle, within the Group, applies at the level of each entity having a prudential trading book. As regards example 10 page 100 of the EBA GL, the following balance sheet, including an internal funding transaction between the BB and the TB – so that both the balance sheet of the BB and the balance sheet of the TB are balanced – is also representative of the subsidiary at solo level: Value in EUR Value in EUR Assets in USD BB 300 Liabilities in USD BB 200 Internal Loan in USD BB 100 Assets in USD TB 100 Internal refinancing in USD TB 100 Assets in GBP BB 20 Assets in DKK BB 30 Liabilities in DKK BB 10 CET1 in USD 240 In that case, calculation detailed in page 103 that reads as: “the position in USD for which the exemption is sought would be 300 – 40 – 10 – 200 = 50.” should be read as: “the position in USD for which the exemption is sought would be 300 + 100 – 40 – 10 – 200 = 150.” Please note that this position would remain at 150 whatever may be the value of the “Assets in USD TB”. For example, should a trading desk enter into a new position that would require an additional 150 of financings in USD, it would request this amount of liquidity to the central treasury and the “Assets in USD TB” would now equal 250 instead of 100. Then: internal Loan in USD BB (asset) = 250; internal refinancing in USD TB (liability) = 250; liabilities in USD BB = 350. This increase results from the group treasury refinancing itself via external transactions with the market; and the position in USD for which the exemption is sought would remain unchanged at “300 + 250 – 40 – 10 – 350 = 150” with the proposed method; the current formula detailed in page 103 would give a result with a negative value: “300 – 40 – 10 – 350 = -100”.