Response to consultation paper on draft Guidelines on the treatment of structural FX under 352(2) of the CRR

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Q5: Do you deem the provision included in paragraph 25 clear or do you think it could lead to a different interpretation than the one outlined in the text above included in the box? Please elaborate.

In our view paragraph 25 seems to be reasonably clear.

Q6: Are the structural positions for which you plan to ask the permission mainly positions of type A (i.e. meeting the condition in the paragraph above), or positions of type B? Could you please provide a rough estimation of the percentage of positions of type A on the total foreign-exchange position that you will potentially include in the request to the competent authority? For example, if the institution plans to request to exclude a net position = 100, and 80 of such net open position is due to positions of type A, then the percentage of positions of type A on the total foreign-exchange position that the institution will potentially include in the request to the competent authority is 80%.

n.a.

Q7. Could you please provide the percentage of the net open position that you plan to request to exclude with respect to the net open position that your institution has without any waiver?

n.a.

Q8. Do you agree with the exclusion of positions that are not eligible to be structural from the sensitivity that is used for assessing the intention of the institution to hedge the ratio, or would you prefer to have those positions included although they cannot be exempted? Please elaborate.

We agree.

Q9. Are there currently FX-risk positions that you kept open in the trading book for the purpose of hedging the ratio? Why did you not include such positions as part of the banking book since the main purpose of those positions is to hedge the ratio?

n.a.

Q10. Do you think that by excluding positions that are non-eligible to be exempted, it will be easier for institutions to meet the requirement of keeping the sensitivity stable over time? Please elaborate.

We agree that positions that are non-eligible should be exempted from the sensitivity calculation.

Q11. Is your institution currently required to keep the sensitivity of the ratio stable over time where requesting the permission referred to in Article 352(2)? If not, how do you justify the intention of hedging the ratio? Please elaborate.

n.a.

Q12. Do you agree with the definition of the range in paragraph 27(d)? Do you think that 0.05 is an appropriate value?

ESBG thinks that 0.05 is too small. This leads to very tight boundaries and results in an overly sensitive measure where minor variations in the exchange rate, RWA or Equity composition can lead to a breach of the boundaries and henceforth need frequent actions. We think that wider boundaries are consistent with the overall target of Art 353 (2), the institutions hedging strategy and the structural nature of the exposures.

Limit on upper thresholds, i.e. adverse sensitivity development: Art 352 (2) states “… to hedge against the adverse effect of exchange rate on its ratios …”. In our view, this implies that the institutions ratio sensitivity should remain below the upper boundary but on the other hand, a lower sensitivity (reducing the adverse effect) does not need to be limited.

Metric for sensitivity boundary: We propose that boundaries are set in relation to the overall sensitivity in currencies where exemption is approved.

Level of threshold: The efficiency threshold for the target boundary should be set on the overall target range using a multiplier of 25% instead of 5% in alignment with similar thresholds (e. g. threshold of hedge efficiency in hedge accounting).

Q13. Could you provide a description of the risk-management framework within which your institution operates for managing structural positions that have been taken for hedging the ratio (e.g. how your institution currently computes the sensitivity of the ratio to changes in the exchange rate, the level of granularity at which the boundaries referred to in paragraph 27(i)(i) are defined, exc.)? Do you think that these guidelines are in line with the current risk-management within which institution operates for managing SFX positions? If not, which are the differences?

n.a.

Q14. Is it easy for institutions to ‘transfer’ the concept of net open position in the context of the internal model? What are the methodologies that institutions may use for excluding positions for which they may receive the permission referred to in Article 352(2) from their internal models?

In ESBG's view, several issues are related to the application of the framework in the internal market risk model:
- Treatment of exposures from entities which are not included in the internal model;
- Requirements for actual and hypothetical back-testing are not clear;
- Determination and application of the multiplier: back-testing overshootings resulting from Structural-FX positions will impact the capital requirement for trading book. As exposure from Structural-FX positions cannot be managed (reduced or closed) like a trading position the connection should be avoided;
- Identification of positions and changes in the data process require time for implementation;
- Diversification effects between trading book capital charge and capital charge for Structural FX are not stable.

In order to foster a level playing field across institutions we proposed that all calculation for MaxOP and Sensitivities should be based on standardized approach methodology (current STA or FRTB-STA).

Q15. What is the size of non-monetary items that are held at historical costs with respect to the size of institution’s balance sheet?

For some of our members, on a consolidated level the items in FX held at historical costs are not material. On solo level participations in subsidiaries held at historical costs are material (between 5-10% of solo balance sheet).

We propose to explicitly foresee full exemptions of items held at historical costs for the calculation of the net open position. Hedging requirements from consolidated structural positions may be not fully matching the book values on the solo level.

Q16. Do you think that the formulas presented above provide a good estimate of the position that is offsetting the sensitivity of the ratio with respect to changes in the exchange rate? If no, why? Are there any adjustments that you would recommend? Please elaborate.

We believe the formulas in paragraph 31 are appropriate.

Q17. Do you think that is operationally feasible to compute the maximum open position and the sensitivity on a monthly basis?

Due to the structural nature of the position we think that a quarterly process should be sufficient. We think that the reporting frequency should be aligned with regular reporting dates (i.e. quarterly). Due to the structural nature of position are not expected to change frequently.

The current version of the CP requires inclusion of all FX-sensitive RWAs. This implies high operational effort for some parts (e.g. CVA) although the contribution may be immaterial.

We therefore propose to include a paragraph that banks need to include all material contribution. Materiality can be assessed as part of the waiver application and regularly (e.g. yearly) in the validation process.

Q18. Do you currently include Additional Tier 1 instruments, and Tier 2 instruments that are issued in the foreign currency in the net open position referred to in 352(2)? Please elaborate.

n.a.

Q19. What is in percentage the amount of Additional Tier 1 instruments, and Tier 2 instruments that your institution issued in foreign currency with respect to the total amount of own funds of your institution?

n.a.

Q20. What is the percentage of the amount of Additional Tier 1 instruments, and Tier 2 instruments that your institution issued in a foreign currency with respect to the net open position that your institution has in that foreign currency?

n.a.

Q21. Is there anything in the approach outlined in these guidelines that could create issues of compatibility with the treatment foreseen in any non-EU jurisdictions in which EU institutions operate? If so, please elaborate.

We don’t think so.

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Name of organisation

European Savings and Retail Banking Group (ESBG)