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  1. Home
  2. Single Rulebook Q&A
  3. 2023_6840 CVA treatment of exposures arising from centrally cleared transactions - indirect clearing flows
Question ID
2023_6840
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Market risk
Article
305, 382
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
Not applicable
Type of submitter
Credit institution
Subject matter
CVA treatment of exposures arising from centrally cleared transactions - indirect clearing flows
Question

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 exclude the transaction from the own funds requirements for CVA risk in accordance with Art. 382 (3) CRR?

Guidance is sought on 4 possible clearing flows:

Indirect clearing flows (clients’ transactions and institution’s own transactions)

  1. Client > institution > clearing member > CCP
  2. Institution > clearing member > CCP

Multi-level indirect clearing flows (clients’ transactions and institution’s own transactions)

  1. Client > institution > intermediary/higher-level client > clearing member > CCP
  2. Institution > intermediary/higher-level client > clearing member > CCP

Moreover, would the determination around the exemption from the CVA risk charge change under a scenario where the clearing member (indirect clearing flow) or the intermediary/higher-level client (multi-level client clearing flow) are intragroup entities established in a third country which has not been deemed equivalent under Article 13(2) of Regulation (EU) No 648/2012?

This question has been submitted jointly with Q&A 2023_6839

Background on the question

CVA risk charge

 

According to Art. 382(3) CRR, transactions with a qualifying central counterparty and a client's transactions with a clearing member, when the clearing member is acting as an intermediary between the client and a qualifying central counterparty and the transactions give rise to a trade exposure of the clearing member to the qualifying central counterparty, are excluded from the own funds requirements for CVA risk.

 

Q&A 2016_3009 clarifies that transactions cleared at a qualifying central counterparty “centrally cleared clients’ trades should be exempted from both the perspective of the clearing member and the client”.

 

Based on the above, it seems that an institution that is a client can exempt the “client leg” and the “clearing member leg” under the ‘indirect clearing flow’ 1) above, as well as the “clearing member leg” under the ‘indirect clearing flow’ 2) above, as long as the transaction is centrally cleared at a QCCP.

 

However, it is not clear how an institution which is a client should treat the “client leg” and the “intermediary/higher-level client leg” under the ‘multi-level indirect clearing flow 3) above and the “intermediary/higher-level client leg” under the ‘multi-level indirect clearing flow 4) above.

 

It is noted that – compared to the Basel Framework (CRE54.17 capital requirements for bank exposures to central counterparties) – the CRR does not require an institution which is a client to verify that Art. 305 (2) or (3) conditions (equivalent to CRE54.14 to CRE54.16) are met before waiving the calculation of CVA risk charge. Therefore, applying EBA Q&A 2016_3009 also in the context of multi-level indirect clearing flows seems consistent with the prudential framework applicable in the EU.

 

Furthermore, it is not clear how to treat centrally cleared transactions from a CVA perspective in the case where the institution is a client and the clearing member (clearing flows 1 and 2) or the intermediary/higher-level client (clearing flows 3 and 4) are affiliates established in a third country.

 

Concerning ‘indirect clearing flows’, on the back of the combined reading of Art. 382(3) and Q&A 2016_3009, it could be argued that – as long as the transaction is cleared at a QCCP – both the “client leg”

and the “clearing member leg” under the ‘indirect clearing flow’ 1) above can be exempt from the own funds requirements for CVA risk, regardless of the location where the clearing member is established .

 

Concerning ‘multi-level indirect clearing flows’ a certain level of ambiguity remains; given that Art. 382(3) doesn’t explicitly mention the exclusion of the “intermediary/higher-level client leg”, it could be argued that – if the ‘intermediary/higher-level client’ is an affiliate and the conditions set out in Art. 305 (2) or (3) are not met – the transaction should be treated as an intragroup transaction, which might still be excluded from the own funds requirements for CVA risk in accordance with Art. 382(4) point (b).

 

However, Q&A 2022_6495 clarifies that “where the Commission has adopted an equivalence decision in relation to only some of the requirements set out in Article 13(2) of Regulation (EU) No 648/2012 for a given third country, institutions cannot exclude transactions with an intragroup entity established in that third country from the own funds requirements for CVA in accordance with Article 382(4)(b)”.

Submission date
14/07/2023
Status
Question under review
Answer prepared by
Answer prepared by the European Commission because it is a matter of interpretation of Union law.

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