EBA · 2026_7911 Rejected question

Treatment of the Right Way Risk in Call Warrant

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
273
Topic
Credit risk
Submitted by
Credit institution
Submitted
2026-06-10
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Question

Is a call warrant issued by the counterparty  that is also the issuer of the underlying shares exempt from counterparty credit risk requirements?

Background

This is the option to get from the counterparty shares of its own equity, that is exercisable if the equity value (expressed share price) is higher than a fixed level (the exercise price) at a future date. In the event of counterparty´s default the option will not be exercised. The option is only exercised in cases when the counterparty is performing because only in this case the value of the equity can be high enough to exercise the option.  Also, in the case considered here, settlement will be done delivering the net shares and the shares are already authorized and reserved specifically to settle the warrant.  Other jurisdictions, such as Canada, exclude these issuer warrant transactions from counterparty credit risk requirements on the basis that the future exposure to a specific counterparty is highly inversely correlated with the counterparty's probability of default. This is the case for equity warrants, where the EAD is zero due to this right way risk.
No answer published yet.

Original source: European Banking Authority, Q&A ID 2026_7911

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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