Question ID
2023_6769
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Market risk
Article
104a
Paragraph
1
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
N/A
Type of submitter
Credit institution
Subject matter
Regular buy and sell activity between ALM/Treasury departments and internal market making desks (Trading Book)
Question

Are transactions between ALM/Treasury (identified as Banking Book) and an internal market making desk (Trading Book) in the scope of Article 104a (Re-classification of a position) Regulation (EU) No 575/2013 of the European Parliament and of the Council (CRR), even when such transactions fulfill the following conditions:

  1. They are conducted on an arm’s length basis (the market making desk in the Trading Book is considered as any other client, identical to external counterparties);
  2. The purpose of such transactions is to pursue prudential objectives (such as market testing of the HQLA buffer, inter alia).
Background on the question

Clarification on the scope of application of Article 104a is sought. Generally, credit institutions centralise (usually in an ALM/Treasury department) functions responsible for managing, measuring, monitoring (also via market testing, as required by regulation on the liquidity coverage ratio - LCR) and reporting the credit institution liquidity, funding, interest rate and FX risk. As part of these functions’ activities, regular interaction with certain trading desks is frequent in the day-to-day risk management activities. The Requirements under Article 106 (Internal hedges) CRR2 are not applicable in this context and it is still unclear (both in the CRR2 text and also in the CRR3 proposal) whether Article 104a (Re-classification of a position) applies in such circumstances, taking into account that regular buying and selling activity between ALM/Treasury and  internal market making desks is not considered ‘exceptional’ in nature.

Moreover, in case regular buying and selling activity between ALM/Treasury and internal market making desks would be in the scope of Article 104a (Re-classification of a position), points (b) and (a) in paragraph 3 of Article 104a would be applicable (i.e. permission from competent authorities, public disclosure, own funds impact, inter alia) for each and every transaction performed under conditions 1 and 2 highlighted in the question.

Considering that i) the own funds impact of such transactions as described in the question would not even be noticeable and ii) the process to follow under Article 104a(3)(a) and (b) for each and every transaction, it seems disproportionate and overly burdensome (both to institutions and Competent Authorities) and therefore highly unexpected that the transactions described in the Q&A would be in the scope of Article 104a.

The industry has mentioned similar concerns in the past (before CRR2 finalisation), also considering the very high impact of changing existing processes and organisational structures. Therefore, it would be highly appreciated if clarity on the scope of application of Article 104a (including 104a(3)(a) and (b)) could be provided as soon as possible, also in view of the implementation of the revised boundary between the banking book and the trading book.

Submission date
Rejected publishing date
Rationale for rejection

This question has been rejected because it is considered that EBA guidance or clarification is not needed with regard to the issue that it raises. For example, this can be the case where it is considered that the existing regulatory framework is sufficiently clear and unambiguous, or where different practices may be possible but it is not currently necessary to harmonise these further through the Q&A process.

The Single Rule Book Q&A tool has been established to provide explanations and non-binding interpretations on questions relating to the practical application or implementation of the provisions of legislative acts referred to in Article 1(2) of the EBA’s founding Regulation, as well as associated delegated and implementing acts, and guidelines and recommendations, adopted under these legislative acts.

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Status
Rejected question