We appreciate the EBA’s intention to achieve a level playing field in terms of how the S-FX provisions are applied across the EU, within the applicable regulatory and accounting framework. We suggest that limiting the S-FX provisions to CET1 would not create level playing field benefits as the key concern being addressed is a bank specific capital structure, binding capital constraint, currency footprint and legal entity structure.
While most institutions may be hedging the CET1 ratio in practice, limiting the S-FX provision to hedge the CET1 ratio would represent an undue regulatory provision that would override the Level 1 text, exceeding the role of an EBA Guideline. There are no elements on the Level 1 CRR text that would justify limiting the S-FX provision only to hedging the CET1 ratio.
It should be said that under the current prudential regime, there is not one single accounting framework required, where the accounting framework is a driver of how FX exposures are impacting P&L. This as well as other reasons, like how the bank operates in terms of its legal structure is why banks can opt for different strategies when dealing with the FX risk, and the amount of the structural position to be excluded depends on the strategy followed by the bank. We believe that the firm specific current or target value of the capital ratio (whether risk or leverage based) at a consolidated level could be considered by the institution. For example, firms may prefer to calculate their position with respect to a target ratio to avoid monthly fluctuations they may see in their current ratio. This approach would broadly neutralize the sensitivity of FX on the current ratio provided the current ratio and the target ratio are not too dissimilar, while providing a more stable foundation for S-FX management.
We recommend that the article 92 CRR, as amended by the CRR2 (including leverage ratio) should provide the relevant ratios that can be used for the formulas. Additionally, firms should be free to hedge a combination of two or more ratios simultaneously, which calls for more flexible framework than the EBA proposal. The waiver should be granted when this hedging strategy is properly documented in the internal S-FX management policy and meets all other regulatory waiver requirements.
The overall objective of achieving a harmonised EU interpretation and implementation of treatment of structural FX positions can be achieved by placing greater emphasis on articulation of an entity’s risk management strategy and internal governance framework around monitoring and ongoing management of structural FX risk. The CP in our opinion is focussed on an overly prescriptive and formulaic approach around management of structural FX risk. As pointed out in BIS MAR11.3(5) the pre-approved risk management policy should ideally cover the process to establish the bank’s S-FX risk position and define the framework for any acceptable changes in this position.
Institution specific question.
However, most institutions tend to hedge the most binding constraint – typically the CET1 ratio but could be other ratios and hence this flexibility should be preserved. We also note that within the formulaic approach, simultaneous management of several ratios with a predefined proportion within the provided risk appetite framework would not be possible.
Institution specific question.
As a generic comment, we note that the Level 1 text does not limit the scope of the exemption of article 352(2) to only the most material currencies. AFME believes that firms should be provided with the flexibility of including currencies beyond the most material currencies based on their geographical footprints and activities without a requirement to extend the scope of currencies as there is no prudential basis for such limitation. The S-FX policy should form the basis for supervisory discussion on what is the most sensible approach for the bank.
Institution specific question.
See the answer to question 5 below.
AFME and our members believe translation risk of Type A positions should not be included in the scope of this policy that relates to exemption. Instead, the aim of the framework and paragraph 25 should be to assess transaction risk and the validity of the firm specific S-FX management policy and methods. This should be assessed at the initiation and in ongoing basis when changes are made to the group structure and or S-FX management policy, subject to supervisory monitoring. The currencies in scope should be determined within the S-FX policy. Furthermore, the exclusion of an currency from the scope of potential exemption has no legal or prudential basis and could prevent the prudential framework from recognizing actual S-FX management. We believe that institutions should be provided with the flexibility of deciding the currencies for which they would like to have Article 352(2) exemption in their S-FX management policy, without any prejudice.
Restricting exemptions to the top few currencies calculated based on the methods set out without a separate supervisory approval to extend the scope of material currencies to the requirements and footprint of the institution appears counterintuitive and does not serve a prudential or legal purpose. In our view, a structural position deliberately taken in a currency and a hedge to protect the ratios against adverse effect of exchange rate move is unrelated to whether the currency is material. We recommend that instead of limiting the number of currencies, a categorisation of currencies (into active/passive/not used for structural FX management) could be provided under the structural FX risk management policy/strategy and considered relevant to the institution. This would avoid the potential inefficiency created by a separate approval process.
With regard to position eligibility, in a complex international group, regulatory reporting and ratio measurement takes place on a number of levels: solo entity level (which includes branches as well as associates and joint ventures), overall group consolidated level, and sub-group consolidated level. The structural exposure could be also impacted by:
1) historical accounting or net asset value treatment of underlying value of investments on the balance sheet of the parent; and
2) historical performance of the subsidiary within the firm (e.g. accumulated losses in some subsidiaries and branches may result in net liabilities, which are still of structural nature).
Hence, the exemption regime should accommodate hedges that an institution may put in place to counter structural FX risk at all points in the reporting hierarchy, regardless of the position being net long or short.
Example:
Consider a business combination where P (EUR reporting currency) is the parent entity within the regulated Group 1. S1 (USD reporting currency) and S2 (GBP reporting currency) are subsidiaries of P. Simultaneously, S1 is a parent of the regulated Group 2 (which is a subset of Group1) and B (GBP reporting currency) is its branch. In cases where the firm choses to manage/neutralize only the capital ratio for Group 1, the capital ratio of Group 2 may not be possible to neutralize simultaneously (e.g. due to accumulated losses and therefore the net liability position in B). Based on the proposed regulations, Group 2 will have to capitalize the short GBP position even though it is 100% structural in its nature.
We submitted our response under Q4 as this field is too short for our response.
Please see our full response in the attached document.
Institution specific questions. Please refer to the comments on question 6 in the attached.
Please see our full response in the attached.
Institution specific question. See our full response in the attached.
Please see our response to Q8 in the attached.
Institution specific question. Please also refer to comments on question 8.
Please see our response to this question in the attached.
Please see our response to this question in the attached.
Institution specific question
Institution specific question
Please see our response to this question in the attached.
Please see our response to this question in the attached.
Please see our response to this question in the attached.
Please see our response to this question in the attached.
Institution specific question.
Please see our response to this question in the attached.
