2014_798 Netting of Perfectly Matching Contracts under the Mark-to-Market Method

Question ID:: 2014_798
Legal Act:: Regulation (EU) No 575/2013 (CRR)
Topic:: Market risk
Article:: 298
Paragraph:: 2
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:: Not applicable
Article/Paragraph:: N/A
Disclose name of institution / entity:: No
Type of submitter:: Credit institution
Subject Matter:: Netting of Perfectly Matching Contracts under the Mark-to-Market Method
Question:: In the context of the application of contractual netting under the Mark-to-Market Method outlined in Article 274 of Regulation (EU) No 575/2013 (CRR), Article 298 (2) refers to ‘perfectly matching contracts’ that include “similar contracts in which a notional principal is equivalent to cash flows if the cash flows fall due on the same value date and fully in the same currency”. It is not defined in the CRR is what constitutes "similar" and whether the reference in the Article implies that perfectly matching contracts are limited to FX related contracts.
Background on the question:: Answer will assist in application of the Mark-to-Market Method for counterparty risk capital requirements and leverage calculations which refer to the use of the Mark-to-Market Method. Article 298 (2) states: “2. When carrying out the calculation of the potential future credit exposure in accordance with the formula set out in paragraph 1, institutions may treat perfectly matching contracts included in the netting agreement as if they were a single contract with a notional principal equivalent to the net receipts. In the application of Article 275(1) institutions may treat perfectly matching contracts included in the netting agreement as if they were a single contract with a notional principal equivalent to the net receipts, and the notional principal amounts shall be multiplied by the percentages given in Table 3. For the purposes of this paragraph, perfectly matching contracts are forward foreign-exchange contracts or similar contracts in which a notional principal is equivalent to cash flows if the cash flows fall due on the same value date and fully in the same currency.”
Date of submission:: 30/01/2014
Final Answer:: For the purposes of the third subparagraph of Article 298(2) of Regulation (EU) No 575/2013, two OTC derivative contracts are 'perfectly matching contracts', and within this would be considered similar, when their risk positions are opposite and all their other features are identical. This treatment can be applied to any type of OTC derivative contract.
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 298 to Regulation (EU) No 575/2013 (CRR), applicable from 28.06.2021.