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

#### 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.

-#### 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%.

-#### 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?

-#### 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.

-#### 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?

When the structural FX Risk is calculated on a consolidated basis, some trading book positions, such as FX Swap included in the hedging strategy may be considered of a structural nature. The hedging strategy implies that subsidiaries may directly manage their FX exposure in a currency different than their reporting currency, through hedging operations on the market or against the parent company. Such hedging operations employ trading book instruments like FX Swap or Cross Currency Swaps (CCS), which should be considered as structural.#### 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.

-#### 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.

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

The formula for the sensitivity range requires the specification of a target sensitivity, defined by the bank, and employs a predetermined value (5%); we believe that such a formula is too restrictive for two main reasons: first, it is not clear with which frequency such values need to be updated and monitored, secondly, regarding the 5% value, we believe it should be determined separately for each currency as every currency will have different levels of volatility, cost of hedging and sufficient market liquidity to execute hedges.#### 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?

-#### 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?

The main issue resulting from excluding the eligible net open position within the internal model perimeter is procedural rather than methodological. Indeed, we see a misalignment in terms of the reference period for computing:- the sensitivity of the ratio to movements of FX to be hedged together with the maximum open position and;

- the capital charge generated by the exempted structural FX-positions

In the first case, the level is set relying on the current ratio at the reporting date (stand-alone value in T). In the second case, the hedges taken to reduce the volatility for that specific ratio (assessed in T) will be required to be (potentially) capitalised at the end of the following quarter. It is worth noting, moreover, the capital charge for these positions is determined by daily PL data within the quarter.

As a result, this asymmetric mechanism might lead to:

- a non-effective hedge (structural FX positions refer to prior capital ratio)

- the potential exemption of a position higher than the maximum open position (over-hedges will be measured only at the following reporting date)

The above reinforces the argument that the standard methodology would be more reliable for the application of the structural FX (S-FX) provision under Article 352(2).

#### 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?

-#### 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.

In our opinion, a mathematical model to measure Structural FX risk would result in a too rigid framework.Firstly, the EBA’s Guidelines MaxOp formula implies that the optimal position is proportional to the RWAs denominated in the currency for which the waiver is requested. The consequence of this is that the larger the RWAs on a specific currency, the larger would be the resulting waiver that can be granted by the Supervisor. This means that, given a subsidiary operating in a foreign currency, assets with lower risks would be penalised, e.g. assets to which we assign lower weights for capital charge calculation would translate in a lower denominator, thus a smaller optimal position.

The Max Op formula is interpreted as a cap against which the net open position is compared. We believe that this leads to an asymmetry: on the one hand, the net open position includes all assets and liabilities in currency, reported as stated in art. 352 CRR; on the other hand, we consider only RWAs in currency (i.e., only assets multiplied by their weighting factors). This leads to the fact that FX positions, to be exempted, need higher RWAs to immunise the ratio. As an example, consider the case of a swap derivative: this is included in the net open position with its notional, while its contribution to RWAs in currency is reduced to its risk weight.

Secondly, we believe that for the sensitivity formula, as well as for the definition of the sensitivity range (which implies the selection of a sensitivity target for each currency) proposed by EBA’s Guidelines, a grace period would be desirable so that the formulas can be subject to a monitoring process to grasp the correct calibration of such values and their volatility based on historical series.

In particular, as stated in the answer Q12, the formula for the sensitivity range requires the specification of a target sensitivity, defined by the bank, and employs a predetermined value (5%); we believe that such a formula is too restrictive for two main reasons: first, it is not clear with which frequency such values need to be updated and monitored, secondly, regarding the 5% value, we believe it should be determined separately for each currency as every currency will have different levels of volatility, cost of hedging and sufficient market liquidity to execute hedges.

Thirdly the formulas presented in the guidelines provide a quantitative definition of the capital ratio sensitivity concerning a specific FX rate. To this aim, they require some simplifying assumptions and a consistent effort to collect all data. The application mechanism of the obtained values (in particular the MaxOp, against which we compare our Net open position) seems to be excessively rigid, meaning that any change of the quantities due to FX rates fluctuations could imply a change in the optimal position of the bank.

From a mathematical point of view, many of the formulas are derived as approximations. In fact, in the equation of the optimal position, the right-hand side of the equation depends on itself from the optimal position, which makes the equation recursive. It should be clarified if the quantities on the right-hand side of the equation are to be considered as the current values.

In the specifics of the formulas, regarding the definition of Capital Ratio MaxOp, we consider the formulas as mathematically coherent only if the denominator of the following formula may be interpreted the total RWAs of the bank (balance sheet value) excluding the RWA FX for the specific currency; in other words, it can be decomposed in one part which depends on a generic FX rates and another part which does not:

CR_MaxOP=CET1/(RWA_(NoFX_FC ) ).