2013_616 Calculation of EADi(total) for CVA purposes under the standardised method

Question ID:: 2013_616
Legal Act:: Regulation (EU) No 575/2013 (CRR)
Topic:: Market risk
Article:: 384
Paragraph:: 1
Subparagraph:: -
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:: Not applicable
Article/Paragraph:: -
Disclose name of institution / entity:: Yes
Name of institution / submitter:: Bank of Slovenia
Country of incorporation / residence:: Slovenia
Type of submitter:: Credit institution
Subject Matter:: Calculation of EADi(total) for CVA purposes under the standardised method
Question:: How should an institution using Mark-to-market Method for calculating the exposure value for CCR purposes calculate an EADi(total) when calculating the own funds requirements for CVA risk under standardised method? How should collateral be taken into account?
Background on the question:: EADi total is defined as "the total counterparty credit risk exposure value of counterparty "i" (summed across its netting sets) including the effect of collateral in accordance with the methods set out in Sections 3 to 6 of Title II, Chapter 6 as applicable to the calculation of the own funds requirements for counterparty credit risk for that counterparty. An institution using one of the methods set out in Sections 3 (mark-to-market method) and 4 (original exposure method) of Title II, Chapter 6, may use as EADitotal the fully adjusted exposure value in accordance with Article 223(5). As mark to market method (Section 3 of Title II, Chapter 6) does not specify how to take into account collateral (i.e. what should be reduced "current replacement costs" or "the total exposure value – the sum of the current replacement costs and an add on for the potential future exposure") there is no guidance how to calculate the fully adjusted value of exposure (E*). If an institution uses financial collateral simple method for the purposes of calculating capital requirements for credit risk, can it use the financial collateral Comprehensive Method only for CVA purposes (may an institution calculate E* for CVA purposes)? If not, does that mean that effects of collateral (for CVA purposes – when calculating EADitotal) can only be taken into account if an institution generally uses financial collateral comprehensive method?
Date of submission:: 03/12/2013
Final Answer:: Article 384(1) of Regulation (EU) No. 575/2013 (CRR) states: "An institution using one of the methods set out in Sections 3 and 4 of Title II, Chapter 6, may use EADi(total) as the fully adjusted exposure value in accordance with Article 223(5)." This rule does not make it a pre-condition that the institution uses the Financial Collateral Comprehensive Method according to Article 223 of the CRR for calculating the risk weighted exposure amounts for credit risk. Accordingly, an institution that uses one of the methods set out in Sections 3 (mark-to-market method) or 4 (original exposure method) of Title II, Chapter 6, may recognise financial collateral according to the Financial Collateral Comprehensive Method for calculating EADi(total) for calculating the own fund requirement for CVA risk according to the standardised method (Article 384), and it may do so even when it uses the Financial Collateral Simple Method for calculating the risk weighted exposure amounts for credit risk based on the exposure value computed using the mark-to-market method (without taking into account collateral) in accordance with Article 273.
Status:: Archive
Answer prepared by:: Answer prepared by the EBA.
Note to Q&A:: Update 16.09.2021: This Q&A has been archived in light of the change(s) in Article 384 to Regulation (EU) No 575/2013 (CRR), applicable from 28.06.2021.