Cash settled derivatives may reference an underlying with a defined maturity, for example a cash settled interest rate swaption or a cash settled bond forward. The market value of these derivatives at maturity will be set to Nil as the derivative expires with or without payment to the buyer of the option/forward counterpart. For such contracts, what relevant residual maturity should be used to determine the appropriate percentage ("add-on") from Table 1 in deriving the potential future credit exposure of the contract? Is this the residual maturity of the derivative contract or is it the residual maturity of the underlying instrument?

Article 274(2) of Regulation (EU) No 575/2013 (CRR) refers to residual maturity to determine the applicable add-on from Table 1. However, 'residual maturity' is not defined in the CRR. Therefore, it is unclear whether (e.g. in the case of a cash settled swaption or a cash settled bond forward) this refers to the residual maturity of the option/forward or to the residual maturity of the underlying instrument to the option/forward.

For the purpose of calculating the potential future credit exposure of a cash settled derivative contract, the residual maturity of the derivative contract should be used to determine the percentage as per Table 1 in Article 274(2) of Regulation (EU) No 575/2013. There is no potential future credit exposure after the settlement date of the derivative. For derivative contracts that are not cash settled, the residual maturity of the underlying instrument should be used to determine the applicable add-on.

Update 16.09.2021: This Q&A has been archived in light of the change(s) in Article 274 to Regulation (EU) No 575/2013 (CRR), applicable from 28.06.2021.