Question ID
2015_2394
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Credit risk
Article
220
Paragraph
2
Subparagraph
b
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
-
Type of submitter
Individual
Subject matter
Applying a currency mismatch haircut to OTC derivatives in a netting pool which are in a currency different from settlement currency
Question

For OTC derivative transactions covered by master netting agreements, if the exposure (derivative) currency is different from the settlement currency, should the exposure amount be increased by the currency mismatch haircut?

While calculating the replacement cost of the derivatives, should the exposure amount be increased by the currency mismatch haircut?

Background on the question
Example 1 - A netting agreement has the settlement currency as EUR. The netting agreement has no collateral and all the derivative exposures are denominated in USD. Example 2 - A netting agreement has the settlement currency as EUR and all derivative exposures are also denominated in EUR. If currency mismatch haircuts are not applicable, would the netting agreement in Example 1 have the same risk as netting agreement in Example 2. Implementing a credit risk solution for a client and there are different interpretations for application of currency mismatch haircuts to the exposure side of a transaction. According to Article 220(2)(b), we need to calculate "the net position in each currency, other than the settlement currency of the master netting agreement". However, the sub points (i) and (ii) of that paragraph only mention total value of securities and cash lent or borrowed. It is not clear whether the derivative exposures in different currency than the settlement currency also have to be included in the net position.
Submission date
Final publishing date
Final answer

For OTC derivative transactions the exposure value shall be calculated in accordance with Chapter 6 of Title II of Part Three of Regulation (EU) No 575/2013 (CRR), as stipulated by Article 111(2) or Article 166(5) of that Regulation, respectively. The minimum requirements for and the effects of contractual netting agreements are taken into account as set out in Section 7 of Chapter 6 and depend on the method applied by the institution for the calculation of the minimum capital requirements for counterparty credit risk for derivative instruments.

The CRR does not prescribe a specific capital requirement where the settlement currency of a specific netting agreement differs from the one the derivative exposures included in the netting set are denominated in. Thus there is no requirement to apply a currency mismatch haircut when converting another currency of a derivative exposure into the settlement currency and the exposure at default (EAD) should not be increased by applying a haircut in relation to the potential FX loss. Article 220 CRR sets out the rules for the application of the comprehensive approach to eligible master netting agreements covering repurchase transactions or securities or commodities lending or borrowing transactions or other capital market-driven transactions and cannot be applied to OTC derivative transactions. Please note that Article 223(1) CRR does not apply as it refers to the currency mismatch between settlement and collateral currency as opposed to the currency mismatch between exposure and the settlement currency of the netting agreement (as referred to in the question).
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.

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