Question ID
2015_1812
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Market risk
Article
327
Paragraph
1
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
None
Type of submitter
Competent authority
Subject matter
Treatment of equity, equity index and commodity futures/forward contracts under Part three, Title IV of Regulation (EU) No 575/2013 (CRR)
Question

Shall equity, equity index and commodity futures/forward contracts be treated as exposure in an underlying instrument or should they be treated as combination of long and short position (holding of the underlying and borrowing maturing on the delivery date of the futures/forward contract)?

Background on the question

Treatment of equity, equity index and commodity futures/forward contracts is not described in Article 327(1) of CRR, although treatment of the other derivative categories is described (Articles 328-330). Taking into account the rationale of the Basel provisions set out in the footnote to the article 718 (xii) of Basel II document (http://www.bis.org/publ/bcbs128.pdf), which inclines that "Where equities are part of a forward contract, a future or an option (quantity of equities to be received or to be delivered), any interest rate or foreign currency exposure from the other leg of the contract should be reported as set out in paragraphs 709 to 718(xviii) and 718(xxx) to 718(xLii)" (and footnote to article 718(xLv) in case of commodities), and lack of such explicit treatment set out in the CRR, it is not clear how they should be treated. The clarification of this issue is needed as it may have a significant impact on the value of capital requirements for general interest rate risk and foreign exchange risk.

Submission date
Final publishing date
Final answer

For the purposes of own funds requirements for market risk in the standardized approaches according to Part three, Title IV, Chapters 1, 2, 3 and 4 of Regulation (EU) No 575/2013 (CRR) financial equity, equity index and commodity futures/forward contracts should be treated as a combination of long and short positions. In the case of a long futures/forward position, this consists of the holding of the underlying and borrowing (in the relevant currency) which matures on the delivery date of the futures/forward contract. In the case of a short futures/forward position, this consists of the selling of the underlying and lending which matures on the delivery date of the futures or forward contract.

Additional information:

Article 358 CRR specifies the own funds requirements for commodities risk only, thus it does not contradict the treatment for the interest rate risk component of commodity futures and forwards.
Interest rate risk inherent in futures and forwards gives rise to own funds requirements. This is clarified via Q&A 1356 for FX derivatives.

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 updated in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR).

Disclaimer

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