Question ID
2022_6529
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Market risk
Article
384
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
Not applicable
Type of submitter
Consultancy firm
Subject matter
Maturity floor in Standard Method for CVA
Question

Shall a floor equal to 1 - according to Article 162(2)(b)CRR- be applied also for derivatives that are not subject to a master netting agreement?

For example, if you have an exposure to a counterparty consisting of a single derivative not subject to a master netting agreement and expiring in 6 months, is the effective maturity to be entered equal to 0.5 or 1?

Background on the question

For institutions which do not use internal models for the compute the EAD, the effective maturity in the standard method formula for CVA is calculated as an average notional weighted maturity as described in Article 162(2)(b)CRR.

This last Article provides for a floor equal to 1 and must be applied only for derivatives subject to a master netting agreement. For derivatives that are not subject to a master netting agreement, it is unclear whether the same must be applied and using a floor equal to 1.

Article 384 CRR reports that for an institution that is not using any internal model the effective maturity is the average notional weighted maturity as referred to in point (b) of Article 162(2) CRR.

This last article reports that effective maturity shall be the weighted average remaining maturity of the exposure, where it shall be at least 1 year, and the notional amount of each exposure shall be used for weighting the maturity.

Submission date
Final publishing date
Final answer

In accordance with Article 384 of Regulation (EU) No 575/2013 (CRR), for an institution not using the method set out in Section 6 of Title II, Chapter 6, the term Mi is the average notional weighted maturity as referred to in point (b) of Article 162(2) of the CRR. That provision applies also to derivatives not subject to a master netting agreement.

Hence, also in those cases, the effective maturity Mi is to be floored at 1 year for the purpose of Article 384 of the CRR. Accordingly, in the example provided of an exposure to a counterparty consisting of a single derivative not subject to a master netting agreement and expiring in 6 months, the effective maturity Mi to be considered is 1 year.

Status
Final Q&A
Answer prepared by
Answer prepared by the EBA.

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