Article 382(2) of Regulation (EU) No 575/2013 (CRR) states that ‘an institution shall include securities financing transactions in the calculation of own funds required by paragraph 1 if the competent authority determines that the institution's CVA risk exposures arising from those transactions are material’. Assuming SFTs are included in the CVA Standardised CVA charge, clarification is required on the definition of the 'EAD' and 'M' inputs to the CVA Standardised Formula:
Question 1: What definition of 'EAD' is applied for SFTs under the CVA Standardised Method? i.e. is it only the fully adjusted exposure value in accordance with Article 223(5) or can the exposure value take in account master netting agreements as set out in Articles 220 and 221 of the CRR be used ?
Question 2: What definition of 'M' (the effective maturity of the transactions) is applied for SFTs in the CVA Standardised Formula? i.e. the definition of 'M' in Article 384(1) for non-IMM banks references Article 162(2)(b) which only refers to master netting agreements for derivatives.
Banks with material risk exposures arising from SFTs have asked for clarification on some of the inputs to the CVA Standardised Approach formula when SFTs are included rather than OTC Derivatives. The current CRR references in Article 384 are unclear on what 'EAD' and 'M' inputs should be used in the CVA Standardised formula for SFTs e.g. the definition of 'M' in Article 384(1) refers to Article 162(2)(b) which only refers to master netting agreements for derivatives and the definition of EAD only refers to the fully adjusted exposure value in accordance with Article 223(5).
1) Institutions calculating CVA Own Funds requirements in accordance with Article 384 of Regulation (EU) No 575/2013 (CRR) for securities financing transactions with material CVA risk should calculate the “EADi” corresponding to those transactions using the methods set out in either Article 223 CRR for individual securities financing transactions not contained within an eligible master netting agreement, or Articles 220 or 221 CRR for securities financing transactions subject to a master netting agreement, or where permission has been granted in accordance with Article 283(1)(b) or (c) CRR using the method set out in Section 6 of Title II, Chapter 6 (the Internal Model Method).
2) For SFTs subject to an eligible master netting agreement, institutions should determine the parameter “Mi” in accordance with Article 162(2)(d) CRR instead of Article 162(2)(b) CRR which applies for derivative transactions only.
For SFTs subject to the method set out in Section 6 of Title II, Chapter 6 (the IMM) Article 162(2)(g) CRR applies if the maturity of the longest-dated contract contained in the netting set is greater than one year.
For all other cases, Article 162(2)(f) CRR applies.
Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.