- Regulation
- Regulation (EU) No 575/2013 (CRR)
- Article
- 325u, para. 4
- Topic
- Market risk
- Submitted by
- Competent authority
- Submitted
- 2025-06-10
- Answered
- 2025-10-31
- Answer provided by
- ESAs (EBA, ESMA, EIOPA)
Background
The question concerns the application of the requirement in Art. 325u(4)(c) CRR in cases where there is not a simple 1:1 relationship be-tween instruments in a back-to-back arrangement, including scenarios where the notional amounts are different. The underlying question is whether two perfectly offsetting (‘mirroring’) positions may only be ex-empted if there is a 1:1 relationship between the corresponding instruments, or whether – more generally – also two mirroring positions result-ing from two groups of instruments that are identical in all aspects other than the notional (i.e., the position size) can be (partially) exempted. In the latter case, it concerns a ‘partial’ exemption in regard to the two groups of instruments, since only the ‘overlapping’ notional may be off-set; that is, the offsetting might cover only a fraction of one of the instru-ments involved (as illustrated below). The proposed answer follows the latter idea and concludes that allowing exclusion of the overlapping notional is permissible under the condition that the market risk of the excluded mirroring positions is perfectly offset. This interpretation aligns the treatment under the own funds requirements for residual risks with the economic reality of a back-to-back hedge where the market risk of two groups of positions is perfectly offset.
Answer
According to Art. 325u(4)(c) CRR, the treatment of perfectly offsetting instruments in different constellations is as follows: 1:1 (one-to-one) perfect back-to-back (two positions, each corresponding to precisely one instrument ( the instrument is identical ), perfectly offset the market risk of each other). When there are two instruments and by inference two positions that perfectly offset the market risk of each other on a 1:1 basis, these positions shall be exempted from the own funds requirement for residual risks. m:n (many-to-many) perfect back-to-back (two positions perfectly offset the market risk of each other): In cases where there are two sets of instruments that are identical in all respects other than notional and, accordingly, two positions that, when taken together, perfectly offset each other's market risk, these positions shall also be exempt from the own funds requirement for residual risk. For example, if there are three positions in a structured note that are subject to the residual risk own funds requirements and that are identical in all respects except for the notional amount, e.g. 1. buy 1,000 notional, 2. buy 2,000 notional, 3. sell 3,000 notional, then both the buy position (3,000 notional) and the sell position (3,000 notional) are exempted. m:n (many-to-many) perfect but partial back-to-back (two positions perfectly offset the market risk of each other, but ‘partially’ in the sense that the exemption concerns the ‘overlapping’ notional)* : Assuming there are two sets of instruments that are identical in all respects except for the notional amount and, accordingly, two positions that only partially offset each other's market risk. In this case, only the part of the sets of positions that overlaps and is identical in all respects except for the notional amount shall be exempted from the residual risk own funds requirements. The remaining part that does not overlap is not exempted. For example, if there are three positions in a structured note subject to the residual risk own funds requirements that are identical in all respects except for the notional amount, e.g. 1. buy 1,000 notional, 2. buy 2,000 notional, and 3. sell 2,500 notional, then the sell position (2,500 notional) and the mirroring 2,500 notional of the buy positions (i.e., only part of the entire buy position) are exempted, while the remaining 500 notional of the buy position is subject to the residual risk own funds requirement. This treatment requires that the exempted positions perfectly offset each other's market risk.
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.