For the purposes of Article 305 (3) is there loss protection if the condition in 305 (2) b) is met but not 305 (2) c)?
In order to use a 2% risk weight for CCP-related exposures, as stated in 305 (3), all four requirements as pointed out in 305 (2) have to be met by the institution. The 4% risk weight is to apply, as stated in 305 (3), if all aforementioned requirements pointed out in 305 (2) are met except the protection from loss. Contrary to 305 (2) c), which directly refers to 305 (2) b) – this can be read in the legislation’s text – 305 (3) only reads “where an institution that is a client is not protected from losses” without clearly mentioning what particular requirement of a), b), c) and d) in 305 (2) had to be met. It seems to be common understanding of various auditors and law firms that the “loss protection” refers to 305 (2) c) (legal opinion) which is connected to b) of the same paragraph. But there are difficulties to figure out how 305 (2) c) could be met without having the means as described in 305 (2) b) in place. Thus, it is not clear to what extent there is a loss protection by meeting 305 (2) b) but not meeting 305 (2) c). There is no authority statement which directly reflects that aspect without any misunderstanding. 305 (3) can be read that “loss protection” is achieved by meeting 305 (2) b) and c). The consequence would be that a 4% risk weight could be applied by only meeting the requirements pointed out in 305 (2) a) and d). A clarification of this question would be highly appreciated. Clarification of this question can be decisive for some market participants, especially those who do not connect to a second clearing broker. The legislative's text is misunderstandable and not sufficiently clear.
Article 305(2) of Regulation (EU) No 575/2013 lists the conditions that need to be met in order for an institution, which is a client, to be able to benefit from applying the treatment laid down in Article 306 of that Regulation to its trade exposures for CCP-related transactions with its clearing member. The institution may apply the treatment in Article 306 only if all those conditions are met.
Article 305(3) of that Regulation covers the case in which the condition laid down in point (a) of Article 305(2) is not fully met (specifically there is no bankruptcy remoteness, and hence the institution is potentially exposed to losses, in the event of the joint default of the clearing member and another client), but the conditions in points (b) to (d) of Article 305(2) are fully met, except for point (c) to the extent that the legal opinion cannot conclude there is protection from losses with regard to the condition provided under point (a). In such case the institution may still benefit from the treatment laid down in Article 306, but must use a 4% risk weight instead of a 2% risk weight under point (a) of the first paragraph of that Article.
This question goes beyond matters of consistent and effective application of the regulatory framework. A Directorate General of the Commission (Directorate General for Financial Stability, Financial services and Capital Markets Union) has prepared the answer, albeit that only the Court of Justice of the European Union can provide definitive interpretations of EU legislation. This is an unofficial opinion of that Directorate General, which the European Banking Authority publishes on its behalf. The answers are not binding on the European Commission as an institution. You should be aware that the European Commission could adopt a position different from the one expressed in such Q&As, for instance in infringement proceedings or after a detailed examination of a specific case or on the basis of any new legal or factual elements that may have been brought to its attention.
Update 26.03.2021: This Q&A has not yet been reviewed by the European Commission in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR).