2016_2634 Mark-to-Market Method: Residual Maturity for Physically Settled Contracts

Question ID:

2016_2634

Legal Act:

Regulation (EU) No 575/2013 (CRR)

Topic:

Market risk

Article:

274

Paragraph:

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

Not applicable

Article/Paragraph:

n/a

Disclose name of institution / entity:

Type of submitter:

Credit institution

Subject Matter:

Mark-to-Market Method: Residual Maturity for Physically Settled Contracts

Question:

Which maturity should be used to determine the percentage as per Table 1 in Article 274(2) of Regulation (EU) No 575/2013 for derivative instruments that are settled with cash instruments for which a maturity can be determined, e.g. a cash debt security?

Background on the question:

In the answer to Question 2015_1701, the EBA already clarifies that '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.' Derivative contracts that are physical settled with cash instruments (e.g. cash debt securities) also result in no potential future credit exposure after the settlement date of the derivative. Accordingly the same principle should be applied, i.e. the relevant maturity is determined by the derivative maturity.

However, for a physical settled derivative that is settled by means of entering into a derivative, e.g. a 3 months option to enter into a 10 year interest rate swap, the maturity of the underlying derivative should be used.

Should, e.g. in case of a 3 month forward on a debt instrument with a remaining maturity of 10 years, the derivate maturity (3 months) be used or should the maturity of the underlying cash instrument (10 years) be used?

Date of submission:

18/02/2016

Final Answer:

This question is a special case of Q&A 1701. For the purpose of calculating the potential future credit exposure of a derivative contract, which is physically settled with a cash instrument, 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, and not that of the underlying such as a cash instrument, as there is no potential future credit exposure from the derivative contract after the settlement date of it.

Status: