Question ID:
2013_321
Legal Act:
Regulation (EU) No 575/2013 (CRR)
Topic:
Supervisory reporting - FINREP (incl. FB&NPE)
Article:
Art 99
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Regulation (EU) No 680/2014 - ITS on supervisory reporting of institutions (as amended)
Article/Paragraph:
-
Disclose name of institution / entity:
No
Type of submitter:
Consultancy firm
Subject Matter:
Changes in fair value due to credit risk
Question:

What methodology should be used to calculate “Accumulated changes in fair value due to credit risk” required in EBA-ITS-2013-02, Annex III, Table 4.1 “Financial assets held for trading”?

Background on the question:

Many financial institutions have risk monitoring system to observe the levels of different risks (including credit risk) in their trading books and the related sensitivities. However the approaches and the methods to calculate the exposures and the unrealized effect of different risks can vary among reporting institutions. Current IFRS frameworks (See below the extract from IFRS 7 Financial Instruments: disclosures) requires information of changes in fair value due to changes in credit risk for assets and liabilities carried at fair value through profit or loss. However securities in trading portfolios are not in the scope of the IFRS7 requirements related to changes in fair value due to credit risk. In EBA-ITS-2013-02, Annex III, Table 4.1 EBA requires information related to accumulated changes in fair value due to credit risk. However, no methodology is described on how this should be calculated. There can be several methodologies on how to assess the changes in fair value due to credit risk in a trading portfolio. When different methods are used among financial institutions the comparability between different FINREP reporters is mined. The following are examples of methodologies which might not result in inconsistent results. Especially in cases where the very same security is bought and sold frequently (i.e. it is typical in a trading portfolio that the very same security is bought and sold several times during the reporting period), these methodologies might give results which might vary significantly: - Accumulated changes in fair value due to credit risk for one security calculated based on first-in first-out basis - Accumulated changes in fair value due to credit risk for one security is calculated based on last-in first-out basis - Accumulated changes in fair value due to credit risk for one security is calculated based on a weighted average changes in fair value due credit risk - Accumulated changes in fair value due to credit risk is assessed at portfolio level (e.g. calculation is made for the total exposures against Oil&Gas security issuers) Extract from IFRS 7 - Financial Instrument: disclosures 9 If the entity has designated a loan or receivable (or group of loans or receivables) as at fair value through profit or loss, it shall disclose: (a) the maximum exposure to credit risk (see paragraph 36(a)) of the loan or receivable (or group of loans or receivables) at the end of the reporting period. (b) the amount by which any related credit derivatives or similar instruments mitigate that maximum exposure to credit risk. (c) the amount of change, during the period and cumulatively, in the fair value of the loan or receivable (or group of loans or receivables) that is attributable to changes in the credit risk of the financial asset determined either: (i) as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk; or (ii) using an alternative method the entity believes more faithfully represents the amount of change in its fair value that is attributable to changes in the credit risk of the asset. Changes in market conditions that give rise to market risk include changes in an observed (benchmark) interest rate, commodity price, foreign exchange rate or index of prices or rates. (d) the amount of the change in the fair value of any related credit derivatives or similar instruments that has occurred during the period and cumulatively since the loan or receivable was designated.

Date of submission:
03/10/2013
Published as Final Q&A:
21/03/2014
Final Answer:

When reporting the "Accumulated changes in fair value due to credit risk ", institutions have to apply the same methodology used for the publication of their financial statements. The EBA is not going to issue further methodological prescriptions in this matter.
 

For those entities applying IFRS in their financial statements, the provisions in IFRS 7.9.c shall be applied in the calculation, for each financial instrument, of changes induced by variations in market conditions (credit risk). They give option to use the approaches described:

 

  • either in § (i): "as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk"
  • or in § (ii) : "using an alternative method the entity believes more faithfully represents the amount of change in its fair value that is attributable to changes in the credit risk of the asset".
Status:
Final Q&A
Answer prepared by:
Answer prepared by the EBA.
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