2023_6775 Clarification on treatment of repurchase agreements and reverse repurchase agreement, as well as securities lending/borrowing of the banking book and of the trading book under the counterparty credit risk and the treatment of these same tra | European Banking Authority Skip to main content
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  2. Single Rulebook Q&A
  3. 2023_6775 Clarification on treatment of repurchase agreements and reverse repurchase agreement, as well as securities lending/borrowing of the banking book and of the trading book under the counterparty credit risk and the treatment of these same tra
Question ID
2023_6775
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Credit risk
Article
'271', '92' and '111'
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
Not applicable
Type of submitter
Individual
Subject matter
Clarification on treatment of repurchase agreements and reverse repurchase agreement, as well as securities lending/borrowing of the banking book and of the trading book under the counterparty credit risk and the treatment of these same transactions under standardised approach of credit risk.
Question

A securities repurchase (repo) is an agreement whereby a transferor agrees to sell securities to a transferee at a specified price and repurchase the securities on a specified date and at a specified price. Since the transaction is regarded as a financing (liability item) of the transferor for accounting purposes, the securities remain on the balance sheet of the transferor. As for the transferee the transaction is treated as a collateralized loan (asset item) for accounting purposes.

When referring to “repurchase agreements” in art. 271 CRR, does it applies both to transferor and transferee exposures (in a manner analogous to securities lending transactions on which specific mention to both parties of a transaction –lending and borrowing- is made)? In essence, counterparty credit risk is a bilateral risk, and as such it seems reasonable to capture the risk of both counterparties, even if a transferor and a securities lender will both have accounted the operation as a liability item.

Shall the institutions include all repurchase agreements and securities lending/borrowing for counterparty credit risk capital requirements purposes regardless of whether they have been accounted for within the trading or the banking book?

According to article 271 (2) an institution shall include the exposure value of repurchase transactions and securities lending/borrowing for counterparty credit risk capital requirements purposes, without making any distinction as to whether they belong to the banking or to the trading book. The exposure value shall be calculated either in accordance with Chapter 4 or Chapter 6 of Title II.

However, article 92 (3) (f) states that only SFT transactions of the trading book exposures are subject to counterparty risk capital requirements. Although it could be also interpreted that SFT transactions and agreements of the banking book are also subject to counterparty risk capital requirements according to article 92 (3) (a) as it refers to the whole Title II (including Chapter 6 –counterparty credit risk-).

To make things even more confusing, according to article 111 (2) and article 166 (7) the exposure value of any repurchase agreements and securities lending/borrowing shall be included for credit risk capital requirements purposes and it shall be calculated either in accordance with Chapter 4 or Chapter 6.

Following the argumentation set out above, the credit risk related to the counterparty in repurchase agreements and securities lending/borrowing of the banking book might be captured twice, once under the standardised approach/IRB method scheme (Chapter 2 or 3) and again under the counterparty credit risk regime (Chapter 6). It does not seem to make sense to ask institutions for capital requirements twice for the same risk concept.

Can you please confirm which is the correct treatment for the credit risk related to the counterparty of repurchase agreements and securities lending/borrowing of the banking book? Or do articles 111(2)/116(7) refer to a risk concept different that article 271(2)? Do both parties of a same transaction –transferor and transferee, lender and borrower- have to capture the credit risk related to the counterparty?

The same argumentation applies to derivatives, long settlement transactions and marging lending transactions of the banking book.

Background on the question

This enquiry might be related to another enquiry (Q&A 2023_6774) sent today in parallel.

Submission date
11/04/2023
Rejected publishing date
27/07/2023
Rationale for rejection

This question has been rejected because the question is not sufficiently clear, or has not sufficiently identified a provision of a legal framework covered by this tool that creates uncertainty and for which an explanation is merited in terms or practical implementation or application. Further, this question has been rejected because it does not fulfil the formal criteria for submission. 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. For further information on the purpose of this tool and on how to submit questions, please see 'Additional background and guidance for asking questions'. 

Status
Rejected question

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