Question ID:
2015_2491
Legal Act:
Regulation (EU) No 575/2013 (CRR)
Topic:
Leverage ratio
Article:
429d
Paragraph:
3
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Delegated Regulation (EU) 2015/62 - DR with regard to the leverage ratio
Article/Paragraph:
429a (5)
Disclose name of institution / entity:
No
Type of submitter:
Individual
Subject Matter:
Written Credit Derivatives Add-On MR/NR Netting
Question:

Under Article 429a(5) 429d(3) of the Regulation (EU) No 575/2013 (CRR), as modified by Commission Delegated Regulation (EU) 2015/62, is it allowable to reduce the Add-On exposure of a written credit derivative (CDS) which has a Modified-Restructuring clause by a purchased credit derivative (CDS) which has No-Restructuring clause (where both CDS contracts have the same maturity, seniority and underlying reference entity)?

Background on the question:

Via pricing, many market participants assign the same probability of a credit event to a CDS with a Modified-Restructuring clause as to a CDS with No-Restructuring clause. Therefore, it may be considered that a CDS with No-Restructuring clause and a CDS with a Modified-Restructuring clause rank pari-passu.

Date of submission:
29/11/2015
Published as Final Q&A:
30/06/2017
Final Answer:

The effective notional amount of a written credit derivative that commits to pay in a restructuring event should not be reduced by the effective notional amount of a purchase credit derivative that does not offer the same protection. In other words, the purchased credit derivative should always offer at least the same protection.

Therefore, if a written credit derivative commits to pay in a number of  credit events (e.g. restructuring), and with all other terms being the same, a purchased credit derivative should also cover at least the same credit events in order to be considered subject to the same or more conservative material terms ranking pari passu for the purpose of Article 429a(5)(a) 429d(3)(b) CRR, as further described in. Article 429d(4) CRR.

Conversely, if a written credit derivative does not commit to pay in a given credit event (e.g. restructuring) , and with all other terms being the same, a purchased credit derivative may (but does not need to) commit to pay in this given credit event to be considered subject to the same or more conservative material terms ranking pari passu for the purpose of Article 429a(5)(a) 429d(3)(b) CRR. 

Status:
Final Q&A
Answer prepared by:
Answer prepared by the EBA.
Note to Q&A:

Update 26.03.2021: This Q&A has not yet been reviewed by the EBA in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR).

Update 28.10.2021: This Q&A has been amended in light of the change(s) in Part Seven to Regulation (EU) No 575/2013 (CRR), applicable from 28.06.2021.

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