EBA · 2024_7233 Final Q&A

Seniority categories to use when offsetting the gross JTD amounts of short exposures and long exposures within the DRC calculations for non-securitisations

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
325x, para. 1
Topic
Market risk
Submitted by
Competent authority
Submitted
2024-10-29
Answered
2025-01-17
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Which set of seniority categories shall be utilised and how should they be ranked as the basis for offsetting the gross JTD amounts of short exposures and long exposures within the DRC calculations for non-securitisations?

Background

Pursuant to CRR Article 325x(1) on the net jump-to-default amounts within the DRC calculations for non-securitisations, the gross JTD amounts of short and long exposures to the same obligor may be offset when the short exposures have the same seniority as, or lower seniority than, the long exposures. Yet, this CRR Article does not specify which set of seniority categories shall be utilised as the basis for the offsetting.   It seems that a parallel can be drawn with the seniority categories already used for the assignment of LGDs to the exposures (specified in CRR Articles 325w(3) & 325w(6)) that are prescribed for calculating the gross JTD amounts set out in CRR Articles 325w(1) & (2). That interpretation would imply using the same seniority categories also for the offsetting in the context of Article 325x(1), namely: non-senior, senior, covered bond and equity.  The ranking of the seniority should be done according to the LGD values assigned to the categories, e.g. the category with lowest LGD value ranks highest in the seniority. However, non-senior should rank higher than equity although the same LGD is applied.

Answer

Regulation (EU) No 575/2013 (CRR) does not prescribe the level of granularity at which the seniority of positions is to be assessed in the context of the DRC calculations for non-securitisations. However, a set of categories is used for a similar purpose in the context of Article 325w CRR.

Original source: European Banking Authority, Q&A ID 2024_7233

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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