- Question ID
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2023_6839
- Legal act
- Regulation (EU) No 575/2013 (CRR)
- Topic
- Credit risk
- Article
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305, 306
- COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
- Not applicable
- Article/Paragraph
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Not applicable
- Type of submitter
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Credit institution
- Subject matter
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CCR treatment of exposures arising from centrally cleared transactions - indirect clearing flows
- Question
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Does an institution which is a client of a clearing member or a lower-level client in a multi-level client structure (institution > intermediary/higher-level client > clearing member > central counterparty) need to verify that Art. 305 (2) or (3) conditions are met at every level of the structure to apply Art. 306 (1) CRR, which might also entail zeroing out the exposure value arising from the transaction between the institution and the clearing member or the higher-level client if the institution is acting as a financial intermediary between a client and a CCP?
Guidance is sought on 4 possible clearing flows:
Indirect clearing flows (clients’ transactions and institution’s own transactions)
- Client > institution > clearing member > CCP
- Institution > clearing member > CCP
Multi-level indirect clearing flows (clients’ transactions and institution’s own transactions)
- Client > institution > intermediary/higher-level client > clearing member > CCP
- Institution > intermediary/higher-level client > clearing member > CCP
- Background on the question
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Interplay between Article 305 and Article 306 CRR – EAD/RWAs
According to Article 305 (2), an institution which is a client may calculate the own funds requirements for its trade exposures for CCP-related transactions with its clearing member in accordance with Article 306 provided that all the conditions (a to d) set out therein are met (segregation and bankruptcy remoteness, portability, legal review and QCCP).
According to Article 305 (3) where an institution that is a client fails to meet the condition set out in point (a) of paragraph 2, it may calculate the own funds requirements for its trade exposures for CCP-related transactions with its clearing member in accordance with Article 306, subject to replacing the 2 % risk weight set out in point (a) of Article 306(1) with a 4 % risk weight.
According to Article 305 (4), in the case of a multi-level client structure, an institution that is a lower-level client accessing the services of a CCP through a higher-level client may apply the treatment set out in Article 305 (2) or (3) only where the conditions set out therein are met at every level of that structure.
Based on the provisions above, it seems that an institution that is either a client of a clearing member or a higher-level client, must first look at Article 305 before it can apply the provisions set out in Article 306.
However, in the case of a clearing flow involving clients’ transactions (1 and 3 above), the institution acts as a financial intermediary, hence it could be argued that the institution could calculate its own funds requirements by applying Article 306 directly.
- Submission date
- Final publishing date
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- Final answer
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According to Article 305(4) of Regulation (EU) No 575/2013 (CRR), in the case of a multi-level client structure, an institution that is a lower-level client accessing the services of a CCP through a higher-level client may apply the treatment set out in Article 305(2) or (3) of the CRR only where the conditions set out therein are met at every level of that structure.
This should apply also to the case of a clearing flow involving clients’ transactions, where the institution acts as a financial intermediary, i.e. the institution should verify that Article 305(2) or (3) safeguards are met at every level of the structure before applying Article 306(1) of the CRR.
On the 4 possible clearing flows, the application of Art. 305(4) of the CRR to the proposed examples is as follows (always from the perspective of the institution):
1. Client > institution > clearing member > CCP
EADs/RWAs:
Client leg: bilateral exposure and client’s risk weight (RW)
Clearing member leg:
- If the conditions under Art. 305(2) or (3) are not met, bilateral exposure and clearing member’s RW
- If the conditions under Art. 305(2) are met
- Art. 306(1), point (a): 2% RW for QCCPs
- Art. 306(1), point (c): the institution may set the exposure value to zero, where the institution is not required to reimburse the client for any losses in case the CCP defaults, in accordance with Art. 306(1), point (c), or the clearing member defaults in accordance with Art. 305(2), point (a)
- If the conditions under Art. 305(3) are met
- Art. 306(1), point (a): 4% RW for QCCPs
- Art. 306(1), point (c): the institution may set the exposure value to zero, where the institution is not required to reimburse the client for any losses in case the CCP defaults, in accordance with Art. 306(1), point (c), or the clearing member defaults in accordance with Art. 305(2), point (a)
2. Institution > clearing member > CCP
EADs/RWAs:
Clearing member leg:
- If the conditions under Art. 305(2) or (3) are not met, bilateral exposure and clearing member’s RW
- If the conditions under Art. 305(2) are met
- Art. 306(1), point (a): 2% RW for QCCPs
- If the conditions under Art. 305 (3) are met
- Art. 306(1), point (a): 4% RW for QCCPs
3. Client > institution > intermediary/higher-level client > clearing member > CCP
EADs/RWAs:
Client leg: bilateral exposure and client’s RW
Intermediary/higher-level client leg:
- If the conditions under Art. 305(2) or (3) are not met at every level of the structure, bilateral exposure and intermediary/higher-level client’s RW
- If the conditions under Art. 305(2) are met at every level of the structure
- Art. 306(1), point (a): 2% RW for QCCPs
- Art. 306(1), point (c): the institution may set the exposure value to zero, where the institution is not required to reimburse the client for any losses in case the CCP defaults, in accordance with Art. 306(1), point (c), or the clearing member or the intermediary/higher-level client default, in accordance with Art. 305(2), point (a), and Art. 305(4)
- If the conditions under Art. 305(3) are met at every level of the structure
- Art. 306(1), point (a): 4% RW for QCCPs
- Art. 306(1), point (c): the institution may set the exposure value to zero, where the institution is not required to reimburse the client for any losses in case the CCP defaults, in accordance with Art. 306(1), point (c), or the clearing member or the intermediary/higher-level client default, in accordance with Art. 305(2), point (a), and Art. 305(4)
4. Institution > intermediary/higher-level client > clearing member > CCP
EADs/RWAs:
Intermediary/higher-level client leg:
- If the conditions under Art. 305(2) or (3) are not met at every level of the structure, bilateral exposure and intermediary/higher-level client’s RW
- If the conditions under Art. 305(2) are met at every level of the structure
- Art. 306(1), point (a): 2% RW for QCCPs
- If the conditions under Art. 305(3) are met at every level of the structure
- Art. 306(1), point (a): 4% RW for QCCPs
- Status
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Final Q&A
- Answer prepared by
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Answer prepared by the EBA.