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European Savings and Retail Banking Group (ESBG)

ESBG believes the proposed categories are sufficiently clear and comprehensive.
The methodologies are clear and comprehensive, although in some cases overly conservative. Specifically, we believe the approach proposed in Article 6 in the cases where no look through to single underlyings is possible, is overly conservative.

At the same time, it has to be pointed out that the implementation costs associated with the technical standard are significant. Especially for institutions with smaller trading books and/or lesser involvement in derivatives trading with bond and equity underlyings, the incremental impact from including indirect exposures will be negligible in the context of large exposures. Such institutions, however, will have to bear the full implementation cost of the proposed methodology. In our view, for such institutions, thresholds for the applicability of this technical standard should be introduced. The thresholds can be based on a quantification of derivative indirect exposures on a periodic basis, e.g. a quantification methodology similar to the one followed by EBA in the cost-benefit analysis of the RTS can be adopted. Such an approach would alleviate the implementation efforts for institutions where indirect exposures are negligible and would be in line with the proportionality principle.

In addition, as pointed out in Paragraph 40 of the ITS and with reference to implementation costs, the interaction with the gross Jump-to-Default (JTD) framework under Fundamental Review of the Trading Book (FRTB) needs to be carefully considered. In our view, an early adoption of the approaches pro-posed in this technical standard has limited benefits if the methodology will be amended by the JTD framework in 2023.

Furthermore, it would be helpful if the relevant reporting positions in the Large Exposure templates C 28.00 and C 29.00 would be clearly defined for these indirect exposures.
In our opinion, the methodology is sufficiently clear and conceptually sound.
There might be several reasons to use options strategies to hedge banking books as several parts of the balance sheet contain embedded options (e.g. variable mortgages caps, interest rates driven prepayments).
N.A.
Assuming that “market value” refers to the fair value, i.e. theoretical valuation based on models and non-observable risk factors is acceptable, we do not think such cases will be of practical consideration.
ESBG believes the methodology is sufficiently clear and conceptually sound.
Generally, yes. It would be helpful if the EBA could specify if credit default swaps (CDS) indices are in scope of this article, and if yes, detail their treatment. We assume that institutions do not have to consider an indirect exposure where institutions act as buyers of credit protection. We do not see a loss (an exposure) in these cases if the CDS-underlying defaults.
The methodology is clear but a more detailed description of the treatment of the most relevant types of derivatives (e.g. the once listed in Article 5(1) would be helpful.
The fallback approach appears to be equivalent in quantitative terms to the decomposition approach in Article 5 for the relevant instruments in our portfolio.
The proposed treatment is conceptually sound if lookthrough to individual positions in the index/CIU is possible, even if the practical implementation of the approach is challenging (e.g. an out of the money option on a diversified index will result in negligible incremental indirect exposures but will pose significant data and processing requirements). The approach is likely to result in a multitude of individually insignificant exposures, potentially to counterparties with whom the organization does not have any direct exposures.

In our view, the proposed approach is more suited to instruments with limited number of underlyings as detailed in Article 6(3). In the case where no lookthrough is available or practical, the proposed approach is overly conservative. In particular, the requirement that the exposure should be quantified assuming all underlying names default simultaneously is not realistic, especially for diversified indices or CIUs. The effect of this proposal is that exposures towards the unknown client would easily become material since they will reflect the full exposure against underlyings without lookthrough.

In our view, an alternative approach for handling these exposures is needed, e.g. an approach where a certain percentage of the total value of the underlying is assumed to default, or where for diversified indices/CIUs, the 0.25 threshold for assigning to the unknown client is significantly increased.
We believe that the proposed approach is best suited to underlying reference names which do not constitute a structure.
Roberto Timpano
E