Response to consultation on Technical Standards on structural foreign exchange under CRR
Q1. Do you agree with the clarification provided in Article 1 of these proposed RTS?
The intention is overall clear. Although we find that the implementation of “Delta” might lead to additional complexity, and worst case to inefficiency in hedging. We find the “Delta” counter intuitive especially when the hedging strategy is targeting a balance sheet containing a broad variety of currencies. Not that this is a significant obstruction to the currency mix and strategy for our institution at current. We interpret the choice between the two standardised approaches as leaving a simple approach and it's reporting requirements to be fairly unchanged, especially when an institution has already implemented the GL on structural FX also for a regular frequent reporting.
Q2. Do you agree with the criteria to identify the significant currencies for an institution? Do you agree with a threshold set at 1% or do you deem that a higher threshold (e.g. 2%) would create more level playing field across institutions If not, what would be alternative criteria? Please elaborate.
Our institution is containing a relatively simple mix of main balance sheet currencies, of a long-term nature. Thus, regardless of a threshold being set at either 1% or 2%, this would not cause any constraint to the relevant currencies in focus.
Setting a threshold at 1% for institutions that have a more complex mix of long-term balance sheet currencies, a such threshold seems difficult to quantify for justification at a fixed minimum of 1 or 2%, and at all. If the relevant institution has a long-term exposure to a currency of historically extreme volatility, such currency should be allowed to find a reasonable hedge qualification anyhow.
Q3. Do you agree that internal trades cannot be considered as taken for hedging the ratio? Please elaborate.
If internal trades are pointing to FX trades, we agree, that a internal trade resulting in a long position for the purpose of treatment as Structural FX hedge in the Banking Book should not be allowed as exempt from calculation of own funds requirements, if at the same time the opposite side of the trade is left behind as open position in the Trading Book. Still, we recommend that the Banking Book is allowed to source its hedge positioning need via the internal Trading Book, if the Trading Book is acting mainly as an intermediary for sourcing the exposure in it's daily access to the interbank market and natural flow of client interests. Even more important so for small currencies. If this method of sourcing the position is not allowed, institutions reporting in small currencies (by nature of market size) will face an unintended higher execution risk and inefficient coverage, if the internal Trading Book is a significant market maker for such currency constituting one leg of the relevant FX-currency-pair.
We would like to have clarified if internal trades are pointing to both funding positions (by nature of loans and deposits) and FX trades. The nature of complexity in an overall currency by currency balanced balance sheet, in a funding perspective, can have a counter-efficient effect if not allowed as a hedge. In such circumstance we do not agree that internal trades should be excluded.
Q4. What do you think should be cases of positions potentially exempted under the provisions included in Article 5(c)? Please elaborate.
Nothing obvious seen as relevant by significance!
Q5. Do you agree with the simplification allowing institutions to use only credit risk RWA in the determination of the MAX_OP? Please elaborate.
We find that a simplification allowed is recommendable, but that the institution should be allowed for the approval period to apply for a simplification pointing not only to credit risk RWA but also operational risk RWA, if the latter is measured for the relevant foreign currency.
Q6. Do you expect that institutions currently using the derogation referred to in Article 6(4) would qualify for the treatment referred to in paragraph 3 of that Article? Please elaborate.
Yes, we expect an institution would also qualify for the treatment referred to under paragraph 3, provided that the treatment allowed under 4 is based on a matched currency by currency balance sheet (i.e. that there is no open FX risk steaming from unfunded currency gaps across assets and liabilities, and hedged by use of FX positions interfering with the determination of the allowed maximum open position).
Q7. Do you agree with the requirements set out in Article 7(1)(j), and in Article 7(3)? Do you see the need to introduce additional safeguards to address, for example, currency crisis? Please elaborate.
Currencies that are an existing part of the S-FX hedge strategy should be allowed a breach of the targeted hedge ratio if the relevant currency is suddenly becoming part of restrictive measures. A such unforeseen situation should not be a source of risk to disqualify the overall hedge strategy as being a general misrepresentation of the approval received from the relevant regulatory authority.
Q8. Did you identify any issues regarding the representation of the RTS policy framework for S-FX in the ITS reporting requirement?
No material issues seen from our currently applied for and future expected strategy and setup!
Q9. Are the scope of application of the reporting requirements, the template itself and instruc-tions clear?
We find that it has to be clarified if, and suggest that, the reporting obligations are only relevant for currencies that are relevant as actual S-FX hedge positions as part of the institutions S-FX hedge strategy, as specified in the relevant application and as approved in the present permission from the relevant Supervisory Authority. Reporting currencies should be consistent with the hedging strategy of the institution.
Q10. Does the reporting of the net reduction in own funds requirements (c0130) by currency, or any other element of the reporting requirement, trigger a particularly high, or in your view dis-proportionate, effort or cost of compliance? If yes, please explain the trigger/source of the cost and offer suggestions on alternative ways to achieve the same/a similar result with lower cost of compliance.
Yes, we find it highly disproportionate if the institution has to report for all currencies regardless of the currencies relevant for the approved hedging strategy! Please also see answer for Q9!