Structural FX: considering tax effect when calculating maximum open position that can be waived from FX charge

May tax effect be considered when computing the maximum open position that can be waived in the context of the structural FX provision referred to in Article 352(2) of Regulation( EU) No 575/2013?

Article 352(2) of Regulation( EU) No 575/2013 (CRR) states that FX positions deliberately taken to hedge against adverse effects of FX on its ratios (CET1 ratio) may be excluded from the calculation of net open currency positions (no MRWA), subject to permission of competent authorities. FX results arising from capital in subsidiaries are tax exempted but from capital in branches (plus related FX hedges) are taxed, resulting in less effective protection of the CET1 ratio. Consequently, hedges for branches need to be increased to be sufficiently effective. Ignoring this tax effect would make it difficult to effectively hedge a bank’s CET1 ratio and the bank’s MRWA at the same time. Thus, excluding the tax effect does not fully facilitate the hedge against adverse effect of FX on ratios. Including tax elements makes economic sense and is in line with the regulatory definition of CET1 capital and intentions described in the EBA Guidelines on the treatment of structural FX under Article 352(2) of Regulation( EU) No 575/2013