Question ID
2016_2735
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Market risk
Article
298
Paragraph
1
Subparagraph
(ii)
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
298
Type of submitter
Consultancy firm
Subject matter
Consideration of collateral in the potential future credit exposure
Question

We seek clarification regarding the potential future credit exposure referred to in Article 274(2) of Regulation (EU) No 575/2013 (CRR) for all contracts included in a netting agreement. Should the collateral (given or received) be considered in the denominator of NGR? Is the proposed calculation of RC gross correct?

Background on the question

Under Article 298 CRR Exposure at default (EAD) = RC net + PCE red where: 1) RC net according to Q&A 2013_206: - equal to 0 If Asset value - Liability value + Guarantee given - Guarantee received <= 0 else - equal to (Asset value - Liability value + Guarantee given - Guarantee received) 2) PCE red = 0,4*PCE gross + 0,6*NGR*PCE gross where: PCE gross = Nominal Value Asset * %(table 1 of article 274 of CRR) NGR = RC net / RC gross.

Q&A 206 specifies how to consider the collateral, in case of master netting agreement applied for the calculation of Net Replacement cost according to article 298 c) i) of CRR. We would like to understand which is the impact in the potential future exposure calculation. Should the collateral (given or received), that is part of the netting agreement which is legally and economically enforceable as all requirements according to Article 296 CRR are fulfilled, be considered in denominator (gross replacement cost) of NGR? which is the difference between the net replacement cost and the gross replacement cost of article 298 c) ii).

Moreover, when the CRR specifies "the net-to-gross ratio calculated as the quotient of the net replacement cost for all contracts included in a legally valid bilateral netting agreement for the computation of quotient of the net replacement cost" does it mean that we have to take into the consideration all the contract (both on asset and liability side) or we have to consider only the asset nominal amount? 

 

Please refer to the following example.

… In case of other netting agreements … (article 298 point c)), It is not clear how the collateral received and posted affect the calculation of PCE as:

Exposure at default (EAD) = RC net + PCE red

where:

1) RC net according to Q&A 2013_206:

- equal to 0 If Asset value - Liability value + Guarantee given - Guarantee received <= 0  else

- equal to (Asset value - Liability value + Guarantee given - Guarantee received)

2) PCE red = 0,4*PCE gross + 0,6*NGR*PCE gross

where:

PCE gross = Nominal Value Asset * %(table 1 of article 274 of CRR)

NGR = RC net /  RC gross.

Is it correct to consider the collateral as follows:

PCE gross = ∑ add-on (asset, exposure in derivative)

RC net = max [0;Asset exposure - Liability exposure + guarantee given - guarantee received]

RC gross = Asset exposure + guarantee given.

Example:

Input: Asset value = 400; Liability value = 550; Nominal Value Asset = 3000; Add on Asset = 0,1; Guarantee Given = 160; Guarantee received = 0

Calculation:

1) RC net = 10 (because Asset value - Liability value + guarantee given - guarantee received = 10 > 0)

2) PCE red = 0,4*300 + 0,6*(10/560)*300 = 123,21

where:

PCE gross = 3000*0,1= 300

RC gross = Asset value + Guarantee given = 400 + 160

NGR = RC net/ RC gross = 10/560 = 0,02

Output: Original Exposure = EAD = RC net + PCE red = 10 + 123,21 = 133,21.

Submission date
Final answer

For the net replacement cost Q&A 2013_206, which refers to Article 298(c)(i) Regulation (EU) No 575/2013 (CRR) states that the net replacement cost shall be obtained by considering all mutual claims subject to the agreement, including those resulting from collateral posted and received that would be netted under the agreement as set out in Article 296(2)(a) and (d) CRR. As the gross replacement cost represents the replacement value of the contract before any adjustment for possible netting agreements have taken place, this would consist of just the asset value and collateral given. Therefore, collateral posted should be considered within the denominator (gross replacement cost) of the net-to-gross ratio, but not collateral received.

Accordingly, the following calculation of RC gross is correct:

PCE red = 0.4*PCE gross + 0.6*NGR*PCE gross

PCE gross = Nominal Value Asset * % (Table 1 of Article 274 of CRR)

NGR = RC net / RC gross.

PCE gross = ∑ add-on (asset, exposure in derivative)

RC net = Asset exposure - Liability exposure + collateral posted - collateral received

RC gross = Asset exposure + collateral posted.

 

Example:

Input: Asset value = 400; Liability value = 550; Nominal Value Asset = 3000; Add on Asset = 0.1; Collateral Given = 160; Collateral received = 0

Calculation:

1) RC net = 10

2) PCE red = 0.4*300 + 0.6*(10/560)*300 = 123.21

where:

PCE gross = 3000*0.1= 300

RC gross = Asset value + Collateral posted = 400 + 160

NGR = RC net/ RC gross = 10/560 = 0.02

Output: Original Exposure = EAD = RC net + PCE red = 10 + 123.21 = 133.21.

Status
Archive
Answer prepared by
Answer prepared by the EBA.
Note to Q&A

Update 16.09.2021: This Q&A has been archived in light of the change(s) in Article 298 to Regulation (EU) No 575/2013 (CRR), applicable from 28.06.2021.