How shall own funds requirement for a CIU be reported in COREP template C07.00 for standardised approach, in case the underlying exposure is a derivative, and the exposure value is calculated in accordance with Article 132a of CRR2 and using the methods laid down in the Chapter 6?
Are institutions allowed to report the underlying derivative exposures in a CIU in rows 0070 – 0080 of template C 07.00 as on- or off-balance sheet exposure subject to credit risk?
Part Three, Title II, Chapter 2, Section 2 of Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2), and specifically Article 132a thereof, refers to the look-through approach for exposures in a CIU.
According to 132a (1), institutions can look through exposures in a CIU to calculate the risk-weighted exposure amount by risk weighting all the underlying exposures as if they were directly held by those institutions. Accordingly, in case the underlying exposure in a CIU is a derivative, methods laid down in Chapter 6 shall be used for calculating the risk-weighted exposure amount for derivative exposures in a CIU.
When the look-through approach is applied for calculating own funds requirement for exposures in a CIU, the CRR2 does not give clear instructions on how the derivative exposures in a CIU should be reported in COREP templates.
Since derivative contracts in CIUs do not give rise to direct counterparty credit risk exposure, reporting derivatives in a CIU in row 0110 of template C07.00 and in accordance with the validation rule v09813_m C07.00.b, C34.02 would extend the purpose of the article 132a (1) of CRR2.
To the best of our understanding, reporting requirement for counterparty credit risk is not limited to C34.02 for derivative contracts. Reporting derivatives in a CIU as counterparty credit risk in COREP would require institutions to collect additional information on derivative contracts in CIUs not necessary for calculating exposure value. Therefore, it can become unduly burdensome for institutions to report such information on derivatives in CIUs. In addition, the information will be misleading, especially in case the institution has not directly entered into derivative contracts.
It is unclear whether institutions using the look-through approach are allowed to report their exposures in a CIU as either on- or off-balance sheet exposure subject to credit risk in rows 0070 – 0080 of template C 07.00 for derivative exposures in a CIU.
Article 132 of Regulation (EU) No 575/2013 as amended by Regulation (EU) No 2019/876 sets out the methods and conditions needed to use each method for calculation of risk-weighted exposure amount for the exposures in the form of units or shares in a CIU.
If the conditions of Article 132, point (3), of Regulation (EU) No 575/2013 (CRR) are met and the entity has the necessary information available to carry out the calculations, the look through approach shall be used. In accordance with Article 132a CRR, the entity has to calculate the risk weighted exposure amount applying the risk weights to the underlying exposures as if they were directly held by the entity. The CRR does not make any exception so exposures of the CIUs to derivatives have to be treated the same way as other kind of exposures and treated as if they were directly held by the entity regarding the calculation of the risk weighted exposure amounts.
Depending on the type of exposure of an ‘exposure in the form of units or shares in a CIU’, which is determined in accordance with Article 111 CRR, such exposures are reported according to this primary classification as “exposures in the form of units or shares in CIU”.
Therefore, only direct derivative exposures shall be reported in rows 0090-0130 of template C 07.00 and in the counterparty credit risk templates (C 34.01 to C 34.11), because the information in these rows and templates is only pertinent in the cases where the institution directly holds the exposure, not indirectly in a CIU.