Response to discussion on the treatment of structural FX under Article 352(2) of the CRR

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Question 1: What is your current practice regarding the treatment of FX non-monetary items held at the historic FX? In particular, do you include these items in the overall net foreign exchange position pursuant to Article 352 CRR? If you include them, what value (i.e. historic or last FX rate) do you use for the purpose of computing them? How do you manage such positions from an FX point of view?

1. FX non-monetary items held at the historic FX rate should not be included in the net FX position. We support to align the arrangement with accounting practice that currency risk would not arise from financial instruments that are non-monetary items. The general principle is if current FX rate doesn’t affect the P&L of the instrument, it doesn’t create FX position. Regarding paragraph 25 on impairment rule, this approach is too theoretical and not pragmatic. It will create a further misalignment with market practice and accounting practice. If we make use of same token of paragraph 25, banks should look through the FX exposures of a listed equity trading position. In this case, such FX risk identification process will become an unended black hole.

Question 3: Do you consider that the ‘structural nature’ wording in the CRR would limit the application of the structural FX provision to those items held in the banking book? Do you agree with the EBA’s view that the potential exclusion should be acceptable only for long FX positions? If you consider that it should be allowed for short positions please provide rationale and examples.

3. We suggest a holistic approach to identify the trading FX position and structural FX position of a bank.
Firstly, we make use of the response of Q1 to identify the total FX exposure of a bank, i.e. if current FX rate does affect the P&L of the instrument, it will create FX position.
Structural FX position is defined as the oversea investment in branches or subsidiaries. In this case, only long position will be considered.
Structural FX position from oversea branches will be created in the solo position of the bank.
Structural FX position from oversea subsidiaries will be created in the consolidated position of the bank.
The total FX exposure excluding structural FX position will be the trading FX position and non-trading FX position. Trading FX position is with trading intension while the non-trading FX position is the banking book FX position normally generated from the foreign currency P&L.

Question 4: How should firms/regulators identify positions that are deliberately taken in order to hedge the capital ratio? What types of positions would this include? Do you consider that foreign exchange positions stemming from subsidiaries with a different reporting currency can be seen (on a consolidated level) as ‘deliberately taken to hedge against the adverse effect of FX movements’? If yes, how do you argue that this is the case?

Refer to 3.

Question 6: If ‘structural FX’ is used conceptually internally within your organisation (e.g. in risk policies, capital policies, risk appetite frameworks, etc.), how do you define the notion of ‘structural FX position’ and ‘structural hedge’? Please describe how any ratio-hedging strategies are mandated within your organisation. Are ratio-hedging strategies prescribed in risk policies approved by the board? How do you communicate structural FX risk and position taking to your external stakeholders (e.g. in Pillar 3 reports, or reporting to regulators, investors, etc.)?

6. Structural FX position created should be supposed to be long-term and unhedged. The hedging of structural FX position should be subject to market risk capital charge nakedly.

Name of organisation

A bank in Asia