2014_819 Internal Model Method for counterparty credit risk: Determination of the effective expected exposure when the model captures the effect of margining (Article 285(1)(c))

Question ID:

2014_819

Legal Act:

Regulation (EU) No 575/2013 (CRR)

Topic:

Market risk

Article:

284, 285

Paragraph:

5, 1

Subparagraph:

COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:

Not applicable

Article/Paragraph:

285

Disclose name of institution / entity:

Yes

Name of institution / submitter:

BaFin /Deutsche Bundesbank

Country of incorporation / residence:

Germany

Type of submitter:

Competent authority

Subject Matter:

Internal Model Method for counterparty credit risk: Determination of the effective expected exposure when the model captures the effect of margining (Article 285(1)(c))

Question:

Article 285(1)(c) states that 'if the model captures the effects of margining when estimating EE, the institution may, subject to the permission of the competent authority, use the model's EE measure directly in the equation in Article 284(5).'

Does the adverb 'directly' mean that institutions have to calculate their Effective Expected Exposure (EEE) as

1.) EffectiveEEtk = max{EffectiveEEtk-1 , EEtkmargined}, i.e. just insert margined EEs in the equation in Art. 284 (5) or

2.) EffectiveEEtk = EEtkmargined, i.e. substitute the monotony operator by the margined EEs?

Background on the question:

None

Date of submission:

07/02/2014

Published as Final Q&A:

11/07/2014

Final Answer:

If the model captures the effects of margining when estimating expected exposure (EE), the institution may, subject to the permission of the competent authority, calculate the Effective EE according to Article 284(5) of Regulation (EU) No 575/2013 (CRR) in the same way as if the netting sets were not subject to a margin agreement.

The word 'directly' in Article 285(1) of the CRR hence has to be read as set out in variant 1 of the question.

Status:

Final Q&A

Answer prepared by:

Answer prepared by the EBA.

Note to Q&A:

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.