2016_2797 Treatment of negative accrued interests in the foreign exchange risk

Question ID:

2016_2797

Legal Act:

Regulation (EU) No 575/2013 (CRR)

Topic:

Market risk

Article:

352

Paragraph:

1(a), 3

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

Not applicable

Article/Paragraph:

n/a

Disclose name of institution / entity:

Yes

Name of institution / submitter:

BearingPoint

Country of incorporation / residence:

Germany

Type of submitter:

Consultancy firm

Subject Matter:

Treatment of negative accrued interests in the foreign exchange risk

Question:

Do negative accrued interests reduce the fx position, where as positive accrued interests increase the fx position?

Background on the question:

Because of the actual interest level, the institutions have to consider negative accrued interests in the foreign exchange risk.

Date of submission:

20/06/2016

Published as Final Q&A:

11/11/2016

Final Answer:

Article 352(1)(a) Regulation (EU) No 575/2013 (CRR) states that accrued interests shall be included in the calculation of the net spot position.

From the perspective of the receiver of the interests, negative interest rates reduce assets since it reduces the amount to be paid to him. Article 327 CRR states: "The absolute value of the excess of an institution's long (short) positions over its short (long) positions in the same equity, debt and convertible issues and identical financial futures, options, warrants and covered warrants shall be its net position in each of those instruments". Therefore, if the overall position is long (the institution expects to receive more than to pay), it indeed reduces the position. If the overall position is short on the contrary, it increases the position.

If the institution uses the net present value, as permitted under the requirements of Article 352(3) CRR, the effect of the negative interest rate is already included in the value.

More generally, since there is no specific statement concerning negative interest rates in the CRR Part III, Title 4, those are to follow the exact same treatment as positive ones, and therefore have the exact opposite effects.

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.