Should OTC derivatives counterparties that have Zero EAD and hence Zero CVA charge be included in the count of counterparties required to be reported in template C 25.00, column 100.
Column 100 of the C 25.00 - CVA RISK template required the number of counterparties to be reported. The situation arises whereby some OTC derivatives counterparties have Zero EAD and therefore have no CVA charge. If these counterparties are part of a group, some of the members of which have Non-Zero CVA charges, then it is not clear whether the counterparty with a Zero CVA charge should be included in the count that is required to be reported in column 100 of template C25.00 - CVA Risk. The following guidance in the Annex 2 of Final draft ITS on Supervisory Reporting (EBA-ITS-2017-01), regarding column 100 of the C25.00 is not clear on whether counterparties with Zero EAD and CVA are considered “counterparties included in calculation of own funds for CVA risk”, since their CVA risk is Zero. Annex 2 guidance on C25.00; column 100: “Article 382 of CRR. Number of counterparties included in calculation of own funds for CVA risk. Counterparties are a subset of obligors. They only exist in case of derivatives transactions or SFTs where they are simply the other contracting party.” It could be argued that most likely use of the counterparty count alongside the total corresponding EAD and/or CVA exposure is to get the average EAD and/or CVA charge per counterparty. For example, if the CVA Charge is 100 and there are 4 counterparties in the group, then the average CVA charge per counterparty would be 25. But if one of the counterparties in the group actually had a Zero CVA charge included in this total 100, then the average CVA charge of 25 would be skewed and biased. Therefore, it is more in line with the spirit of the rules that where the EAD is Zero, that that counterparty is excluded from the count. We have seen this in other areas of the rules, such as when calculating the Operational risk charge using the Basic Indicator Approach, where for any given year, the relevant indicator is negative or equal to zero, institutions are required not take into account this figure in the calculation of the yearly average. They shall then calculate the average over three years as the sum of positive figures divided by the number of positive figures. As there is no clear guidance from the EBA on this, aside from the above considerations, it is open to debate as to whether counterparties with Zero CVA should be counted towards the number of counterparties that contributed to the EAD and CVA charge, that is required to be reported in template C25.00 column 100.
Pursuant to Article 382(1) of Regulation (EU) No 575/2013 (CRR): “An institution shall calculate the own funds requirements for CVA risk in accordance with this Title for all OTC derivative instruments in respect of all of its business activities, other than credit derivatives recognised to reduce risk-weighted exposure amounts for credit risk.“
According to Regulation (EU) No 680/2014 (ITS on Supervisory Reporting) template C 25.00 must be completed considering the following:
- In relation to template C 25.00, it is specified that column 010 “Exposure value” will collect “Total EAD from all transactions subject to CVA charge”. The EAD is calculated in accordance to article 271 and linked to article 382 of the CRR.
- Within Memorandum Items, column 100 “Number of counterparties”: “Article 382 of CRR Number of counterparties included in calculation of own funds for CVA risk Counterparties are a subset of obligors. They only exist in case of derivatives transactions or SFTs where they are simply the other contracting party.”.
Taking into account what is specified above, it should be distinguished the two following cases:
- If circumstantially the calculation of the EAD (in accordance to article 271 and linked to article 382 of the CRR) results in an Exposure Value of 0, the counterparty should be reported in column 100 “Number of counterparties” as it is an already started transaction and the entity has derivatives transactions or SFTs with such counterparty.
- On the other hand, article 382(3) and 382(4) specifies transactions which are explicitly excluded from the own funds requirements for CVA risk, in those cases, as these operations are not considered subject to own funds requirements for CVA, those counterparties should not be considered nor reported in column 100 “Number of counterparties”.
For further guidance on the disclosure of number of counterparties, see QA 2014_1542.