Question ID
2015_2542
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Liquidity risk
Article
417
Paragraph
e
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
not applicable
Type of submitter
Credit institution
Subject matter
Liquid assets underlying sold call options
Question

Should bonds underlying call options (either American or European expiring within 30 days; with exercise mode physical delivery) written by the institution be considered as used in hedging strategies, thus excluding them from the holding of liquid assets in the context of LCR reporting?

Background on the question

The institution writes call options on bonds (American with exercise mode Physical delivery). Underlying bonds are within the holdings of the institution and they are potentially eligible for being included within the buffer (HQLA) in the context of LCR reporting. It is not clear if the sale of such bond options qualify as hedging strategies as per Article 417(e)(i) of the CRR.

Submission date
Final publishing date
Final answer

The use of bonds as a hedge against the potential obligation to deliver these assets due to the sale of a respective bond option is neither a hedging strategy referred to in Article 8(5) of the Commission Delegated Regulation (EU) 2015/61 nor does it violate the general and operational requirements according to its Articles 7(2), 8(2) and 8(3). Hence, the sale of the bond option has no implications for the eligibility of the underlying assets to the stock of liquid assets.

However, the bank must ensure that the potential liquidation of the asset will not conflict with any internal business or risk management strategies. The liquidation of the asset must not lead to a breach of internal limits on open risk positions.

According to Article 30(4) of the Commission Delegated Regulation (EU) 2015/61, the bank shall take into consideration outflows and inflows expected over 30 calendar days from the contracts listed in Annex II of Regulation (EU) No 575/2013.

In the case of sold call options which are exercisable within 30 calendar days an expected outflow should be considered as the positive difference between the market value of the underlying and the strike price of the option, if the option is expected to be cash settled, or as the positive difference between the liquidity value calculated according to Article 9 of the Commission Delegated Regulation (EU) 2015/61 of the underlying asset and the strike price of the option, if the option is expected to be subject to physical delivery. In case those differences resulted negative (strike price is higher than the liquidity value), no inflow should be considered since it would be contingent and not recognisable in the LCR following Article 32(1) of the Commission Delegated Regulation (EU) 2015/61.

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

Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.

Disclaimer

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