Annex II of ITS for EBA DPM 3.1 requires the original exposure amount and CRM techniques with substitution effects on the exposure are to be reported in reporting template C 07.00. In this template, columns 0010, 0030, 0040 are based on the original exposure, whereas columns 0050 – 0100 are based on substitution effects from CRM (risk weight substitution). There is an EBA validation rule (v0305_m) that checks that (for rows 0010, 0020, 0030, 0040, 0050, 0060, 0070 and 0080) the value in column 0090 should be the sum of columns 0050 + 0060 + 0070 + 0080. Additionally there is an EBA validation rule (v4755_m) that says that the absolute value in column 0090 should be smaller than or equal to the value reported in column 0040. This latter validation rule means institutions cannot report more outflow than the exposure value net of value adjustments and provisions.

On the other hand, for guarantees which are reported in row 0050 of C 07.00, instructions (Annex II) refer to Article 235 CRR and Article 239 (3) CRR, which means that guarantees as eligible unfunded credit protection should be reported in row 0050 with their adjusted values (GA). Article 235 CRR defines (GA) as the amount of credit risk protection as calculated under Article 233 (3) (G*) further adjusted for any maturity mismatch as laid down in Section 5. Article 233 (3) defines (G*) as the amount of credit protection adjusted for foreign exchange risk, and provides with a formula for G*. Article 239 (3) CRR further adjusts G* for any maturity mismatch with a formula which calculates (GA).

In our opinion, the requirement by the instructions (Annex II) on reporting of guarantees in adjusted values (in row 0050) does not match with the requirement of the EBA validation rule (v4755_m). Specifically so, there might be cases where (GA) is greater than the exposure value net of adjustments and provisions, which would mean that (following the EBA validation rule v0305_m) total outflows amount is calculated as greater than the net exposure value. However, this is not in line with the EBA validation rule (v4755_m). In order to clarify this with an example, let’s assume original exposure pre-conversion factors to be EUR 5 million, value adjustments and provisions to be EUR 2 million, net exposure value to be EUR 3 million, where there is EUR 5 million nominal amount of an unfunded credit protection in the form of a guarantee as the sole credit risk mitigant and the (GA) is calculated as EUR 4 million. In this case, given the EBA validation rule (v0305_m), total outflows amount is calculated as EUR 4 million, which is greater than EUR 3 million net exposure value, which would in turn lead to a contradiction with the EBA validation rule (v4755_m).