Adopted and published on the Official Journal
These Regulatory Technical Standards (RTS) aim at defining the conditions and methodologies used to determine the overall exposure to a client or group of connected clients resulting from a transaction with underlying assets and the risks inherent in the structure of the transaction itself.
The European Banking Authority (EBA) publishes today its final draft Regulatory Technical Standards (RTS) which define the conditions and methodologies used to determine the overall exposure to a client or group of connected clients resulting from an exposure to a transaction with underlying assets and the risks inherent in the structure of the transaction itself. The standards will be part of the Single Rulebook aimed at enhancing regulatory harmonisation in the banking sector in the European Union (EU).
In particular, the draft RTS set out (i) the methodology for the calculation of the value of exposures to transactions with underlying assets, (ii) the procedure used to determine the contribution of underlying exposures to overall exposures to clients and groups of connected clients and (iii) the conditions under which the structure of the transaction does not constitute an additional exposure.
One of the key elements of these RTS is the introduction of a materiality threshold below which institutions would not need to apply the look-through approach and identify the obligors of the underlying assets. The EBA considers this treatment appropriate when the value of the exposure is sufficiently small as to only immaterially contribute to the overall exposure to a certain client or group of connected clients. As such, in cases where the value of the institution's exposure to each underlying asset is smaller than 0.25% of the institution's eligible capital, the immateriality condition would be fulfilled.
These final RTS have been developed in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (colloquially known as Capital Requirements Regulation or CRR).
The final draft standards have been sent today to the European Commission for their adoption as EU Regulations that will be directly applicable throughout the EU.
The EBA’s starting point in setting out the calculation methodology is to require institutions to take all the reasonable steps to look-through to the underlying assets and to identify the obligors of all credit risk exposures underlying the transaction.
In case an institution is not able to identify the obligors of underlying exposures, it is requested to add all these exposures to the same hypothetical ‘unknown client’ and the large exposures limit applies to the ‘unknown client’ in the same way it applies to any other single client. Therefore, all unknown exposures stemming from all transactions should be considered as a single risk and as one hypothetical ‘unknown client’.
An important development compared to the ‘CEBS Guidelines on the implementation of the revised large exposures regime’ is the proposal for a more prudent treatment for securitisation positions whereby all tranches in a securitisation would be treated equally as if they were a first loss tranche and therefore fully exposed to the underlying assets.
The EBA is requested to submit these draft RTS to the European Commission by 1 January 2014.
Background
The final comprise on the Capital Requirements Regulation and Capital Requirements Directive (CRR/CRD) provides a mandate for the EBA to define the conditions and methodologies used to determine the overall exposure to a client or a group of connected clients in respect of exposures through transactions with underlying assets and the conditions under which the structure of the transaction does not constitute an additional exposure.
The EBA has developed these draft RTS building on ‘CEBS Guidelines on the implementation of the revised large exposures regime’ but also considering the experience gathered by national supervisory authorities in the application of these Guidelines as well as other relevant market developments.
Consultation process
Comments to this consultation paper can be sent to the EBA by e-mail to EBA-CP-2013-07@eba.europa.eu by 16 August 2013, indicating the reference EBA/CP/2013/07.
All contributions received will be published following the close of the consultation, unless requested otherwise.