- Question ID
-
2025_7478
- Legal act
- Regulation (EU) No 575/2013 (CRR)
- Topic
- Credit risk
- Article
-
274
- Paragraph
-
3
- COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
- Not applicable
- Article/Paragraph
-
N/A
- Type of submitter
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Credit institution
- Subject matter
-
Determination of exposure value cap for netting sets subject to a margin agreement.
- Question
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Article 274(3) states "The exposure value of a netting set that is subject to a contractual margin agreement shall be capped at the exposure value of the same netting set not subject to any form of margin agreement". This wording has slightly diverged from Basel CRE52.2 which stated "The EAD for a margined netting set is capped at the EAD of the same netting set calculated on an unmargined basis".
Basel focused on applying the unmargined methodology in the wording not that it should be treated as if there were no margin agreement. This nuance in wording is leading to a misinterpretation of the CRR which is exacerbated by EBA Q&A 2023_6962 which has allowed for firms to apply SA-CCR in a manner which significantly underestimates capital requirements vs economic exposure.
In situations where firms are posting excess variation margin which has a real economic credit risk to the counterparty the wording of the CRR and the Q&A implies that this can be fully disregarded from the exposure calculation. This would therefore mean that firms are able to arbitrage the capital rules and avoid capital charges by lending money to counterparties by posting it as variation margin under a CSA and then disregarding that exposure by applying the "unmargined" cap.
This needs to be resolved by a clarification to the EBA Q&A to the effect that any collateral posted/received under a variation margin CSA should still be included in the exposure calculation, albeit using the unmargined rather than margined formulation to achieve the effect that the cap is designed to do per Basel CRE52.2 FAQ1. i.e. this could easily be interpreted that if you are not subject to a margin agreement then anything which was variation margin should now just be characterized as NICA as it still economically exists as collateral.
This would satisfy both the purpose of the rule and avoid the risk of understatement of capital requirements.
- Background on the question
-
Basel CRE52.2 FAQ1: "The capping of the exposure at default (EAD) at the otherwise unmargined EAD is motivated by the need to ignore exposure from a large threshold amount that would not realistically be hit by some small (or non-existent transactions)". - i.e provides a clear purpose to the cap which does not include ignoring large exposures on excess posted collateral
Basel CRE52.10 FAQ2: "As set out in CRE52.2, netting sets that include a one-way margin agreement in favou of the bank's counterparty (i.e. the bank posts, but does not receive variation margin) are treated as unmargined for the purposes of SA-CCR. For such netting sets, C, also includes, with a negative sign, the variation margin amount posted by the bank to the counterparty" - i.e. provides a clear view that even though C should be calculated in accordance with the NICA methodology when applying the unmargined treatment collateral which is technically variation margin can still be included within C.
- Submission date
- Rejected publishing date
-
- Rationale for rejection
-
This question has been rejected because the matter it refers to has been answered in Q&A 6962.
- Status
-
Rejected question