Question ID
2025_7397
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Credit risk
Article
162
Paragraph
2
Subparagraph
d
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
Not applicable
Type of submitter
Credit institution
Subject matter
Maturity floor for SFT transactions under a master netting agreement that does not fulfill the enforceability criteria of CRR Article 206.
Question

Does the EBA recognise that Securities Financing Transactions (SFT) conducted under an industry master netting agreement (MNA) such as GMRA or GMSLA could be subject to the 5-day floor maturity under CRR Article 162(2)(d) to the extend such MNA (i) meets the requirements of CRR Article 207 (2) to (4) on the eligibility of the collateral but (ii) does not necessarily fulfill the close-out netting enforceability criteria of Article 206 due to local law and absence of robust netting legislation for instance? 

Background on the question

CRR Article 162(2)(d) allows for the application of maturity floored at five (5) days to SFTs “which are subject to a master netting agreement” and does not explicitly require the master netting agreement to qualify as an eligible form of credit risk mitigation as specified under CRR Article 206.

CRR Article 206 details the requirements for a master netting agreement to qualify as an eligible form of credit mitigation. The requirements of Article 206 encompass requirements on the eligibility of the collateral (article 207(2) to (4)) and other conditions (article 206 a) to c)). By detailing these requirements, the regulatory framework acknowledges that a master netting agreement could exist, with or without meeting all conditions of Article 206. It means that a master netting agreement could meet the criteria on the eligibility of financial collateral for SFT, but not qualify as an eligible form of credit risk mitigation. 

A master netting agreement not satisfying all the requirements of Article 206 but meeting the requirements on the eligibility of the collateral, remains a valid contract protecting the bank by linking each SFT to its associated collateral. We understand that this interpretation could be extended to Article 162(2)(d), allowing a maturity floored at five (5) days to SFTs conducted under such master netting agreement.

This interpretation would have an impact on the CRR3 Basic approach for CVA risk. Applying a maturity floor of 1 year to SFT that are typically short-term by nature, would lead to particularly non-economic impact. 

Submission date
Final publishing date
Final answer

Article 162(2)(d) CRR is not applicable to a master netting agreement for repurchase transactions or securities or commodities lending or borrowing transactions which does not meet at least one of the following two conditions: (i) all the requirements in Article 206 of the CRR if these transactions are not in scope of the Internal Model Method (IMM) for counterparty credit risk, or (ii) all the requirements in Articles 295 to 297 of the CRR if these transactions are in scope of the IMM.

Where institutions use master netting agreements in relation to repurchase transactions or securities or commodities lending or borrowing transactions, Article 166(2) of the CRR requires calculating the IRB exposure value in accordance with Chapter 4 or 6 of Part Three Title 2 of the CRR.

Under Chapter 4, Article 193(3) of the CRR requires that the provisions in Sections 2 and 3 are met. As consequence, in particular all the requirements according to Article 206 of the CRR must be met for calculating the IRB exposure value in accordance with Chapter 4 for repurchase transactions or securities or commodities lending or borrowing transactions which are not in scope of the IMM.

Under Chapter 6, Articles 295 to 297 of the CRR specify the requirements that must be met for recognising a netting agreement for the respective transactions if their exposures are calculated using the IMM.

If neither all the requirements in Article 206 of the CRR nor all the requirements in Articles 295 to 297 of the CRR are met, the master netting agreement does not fulfil the requirements in Article 166(2) of the CRR for calculating the IRB exposure value. As a consequence, such a master netting agreement cannot be recognised under the IRB approach. Therefore, in particular Article 162(2)(d) of the CRR is not applicable for such master netting agreements

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

Disclaimer

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