Is there any exemption for the calculation of "add ons" when using Mark-to-market method for determining the exposure value for Regulation (EU) No. 575/2013 (CRR)? What is the right treatment of a single transaction that is not subject to legally enforceable netting agreement, if the contract has a negative value?
In the case of a single transaction that is not subject to a netting agreement, is the exposure value (for CCR) of a contract listed in Annex II the greater of "zero" and "the difference between the exposure value of that transaction and the CVA for that counterparty being recognised as an incurred write down". When using Mark-to-market Method (Article 274) for determining the exposure value the institution sums up the current replacement cost and potential future credit exposure. In a case of a contract with a positive value an institution attaches current market value to the contract in order to determine the current replacement cost, and then adds the potential future exposure (notional amounts multiplied with %). The Article is unclear about the treatment of contracts with negative replacement costs. Are contracts with negative replacement costs (which are not subject to legally enforceable netting agreement - single transactions) also subject to add-ons for potential future exposure?
There is no exception for contracts listed in Annex II of Regulation (EU) No. 575/2013 (CRR) with a negative market value for the calculation of add-ons using the Market-to-market Method under Article 274 of the CRR.
The exposure value under the Mark-to market Method is "[t]he sum of current replacement cost and the potential future credit exposure..." (Article 274(4) of the CRR). For determining current replacement costs, institutions only consider contracts with a positive market value (Article 274(1)). Replacement costs for contracts with a negative market value is floored at zero.
In contrast, the add-on for the potential future credit exposure defined in Article 274(2) of the CRR has to be calculated for all contracts regardless of the current market value.
Update 16.09.2021: This Q&A has been archived in light of the change(s) in Article 274 to Regulation (EU) No 575/2013 (CRR), applicable from 28.06.2021.