- Question ID
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2023_6774
- Legal act
- Regulation (EU) No 575/2013 (CRR)
- Topic
- Credit risk
- Article
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111
- Paragraph
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1 and 2
- COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
- Not applicable
- Article/Paragraph
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Not applicable
- Type of submitter
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Individual
- Subject matter
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Treatment of repurchase agreements and reverse repurchase agreement, as well as securities or commodities lending/borrowing of the banking book under standardised approach of credit risk.
- Question
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Shall the transferor of an operation like the one described below include for credit risk capital requirements purposes both the exposure value of the securities sold (asset item) and the financing position (even if it is a liability item), or just the asset item of the securities sold?
According to Article 111(2) CRR the exposure value of any repurchase transaction shall be included and be calculated either in accordance with Chapter 4 or Chapter 6 of Title II: does it also refers to the financing position of the transferor (even if it is a liability item)?
What is the correct treatment for the financing position of the transferor? are securities also to be included as an exposure value in case the Financial Collateral Simple Method is used?
- Background on the question
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A securities repurchase (repo) is an agreement whereby a transferor agrees to sell securities to a transferee at a specified price and repurchase the securities on a specified date and at a specified price. Since the transaction is regarded as a financing (liability item) of the transferor for accounting purposes, the securities remain on the balance sheet of the transferor. As for the transferee the transaction is treated as a collateralized loan (asset item) for accounting purposes.
Let´s assume both transferor and transferee have accounted for their corresponding transactions within the banking book.
it is unclear if the transferor of the operation shall include for credit risk capital requirements purposes both the exposure value of the securities sold (asset item) and the financing position (even if it is a liability item), or just the asset item of the securities sold.
According to paragraph 3 of article 111 (1) transferor on a repurchase agreement shall include the exposure value of the securities sold (net book value increased by the appropriate volatility adjustment in case the institution is using the Financial Comprehensive Method for valuing financial guarantees). In spite of the omission, we have interpreted that securities sold are also to be included as an exposure value in case the Financial Collateral Simple Method is used -without a volatility adjustment-.
It is also our understanding from the above paragraph that the transferee does not include the securities received for credit risk requirements purposes.
After that, according to article 111 (2) the exposure value of any repurchase transaction shall be included and be calculated either in accordance with Chapter 4 or Chapter 6 of Title II. We have no doubt that it refers to the loan position of the transferee, but do we have to conclude that it also refers to the financing position of the transferor (even if it is a liability item)?
It is not clear which is the correct treatment for the financing position of the transferor. Is it our understanding correct that securities sold are only to be included by the transferor (not the transferee) and that securities are also to be included as an exposure value in case the Financial Collateral Simple Method is used.
The same argumentation applies for repurchase agreements and securities lending/borrowing of the banking book under the IRB method (article 166 (7) CRR).
- Submission date
- Final publishing date
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- Final answer
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Where securities or commodities have been sold by a transferor to a transferee with a commitment of the transferor to repurchase them from the transferee on a future date at a specified price (“repurchase agreement” and “reverse repurchase agreement” as defined by Article 4(1)(82) CRR), this transaction constitutes the following exposures for transferor and transferee, respectively.
The transferor has two exposures, one constituted by the repurchase transaction, which is an exposure to the transferee, and another constituted by the securities and commodities which the transferor has committed to repurchase.
- The exposure to the transferee is constituted by the transferee’s obligation to resell the transferred securities to the transferor on a future date at a specified price. Under the standardised approach for credit risk, Article 111(2) CRR permits a choice for determining the exposure value of the repurchase transaction, either in accordance with Chapter 6 or with Chapter 4 of Part Three, Title II CRR.
- In case of applying the methods for counterparty credit risk in accordance with Chapter 6, the counterparty credit risk exposure to the transferee arises from the transferred securities or commodities.
- In case of applying the methods for credit risk mitigation in accordance with Chapter 4, the exposure value is determined by the transferee’s obligation to deliver the securities or commodities against receiving the specified price. According to Article 193(4) CRR, the cash received from the transferee under the repurchase transaction is to be treated as collateral for this exposure. In case of using the financial collateral comprehensive method (FCCM) for recognising the credit risk mitigation by this cash collateral, the third sub-paragraph of Article 111(1) CRR requires increasing the exposure value of the securities or commodities sold to the transferee by the volatility adjustment appropriate to such securities or commodities.
- The exposure constituted by the securities or commodities to be repurchased exists for the transferor already before the repurchase date. This applies even if they don’t remain on the transferor’s balance sheet during the repurchase transaction because, due to the repurchase commitment, it is outside the direct control of the transferor to avoid the repurchase of these securities or commodities anymore.
- Depending on the applicable accounting framework, if the transferred securities or commodities do not remain on the balance sheet before repurchased, Annex I CRR requires assigning the off-balance sheet exposure to the full risk category (according to point (1)(g)), and Article 111(1)(a) CRR determines the exposure value as 100% of the nominal value of the securities or commodities after reduction of specific credit risk adjustments and amounts deducted in accordance with Article 36(1)(m) CRR. In contrast, if they remain on the balance sheet, the exposure value is the accounting value after the adjustments as specified by the first sentence of Article 111(1) CRR.
- The cash received from the transferee when selling the securities or commodities cannot be recognised as collateral for the exposure arising from these securities or commodities, because the transferor is not entitled to retain any of the received cash in case of a default event on the securities or a reduction in value of the commodities, but is obliged to repurchase them at the specified price irrespective of any reduction in value of these securities or commodities. Thus, the principle according to Article 194(4) CRR for recognition of the received cash as funded credit protection is not met.
The transferee also has an exposure constituted by the repurchase transaction, which is an exposure to the transferor.
- The exposure to the transferor is constituted by the transferor’s obligation to repurchase the transferred securities on a future date at a specified price. Under the standardised approach for credit risk, Article 111(2) CRR permits a choice for determining the exposure value of the repurchase transaction, either in accordance with Chapter 6 or with Chapter 4 of Part Three, Title II CRR.
- In case of applying the methods for counterparty credit risk in accordance with Chapter 6, the transferee’s counterparty credit risk exposure arises from the commitment of the transferor to repurchase the securities or commodities.
- In case of applying the methods for credit risk mitigation in accordance with Chapter 4, the exposure value is determined by the transferor’s payment obligation for the specified price. According to Article 193(4) CRR, the securities or commodities received from the transferor under the repurchase transaction are to be treated as collateral for this exposure.
In contrast to the transferor’s perspective, the transferred securities and commodities only constitute an exposure for the transferee if recorded on the transferee’s balance sheet until repurchase (which may depend on whether the transferee is obliged or merely entitled to resell them, e.g. in case the applicable accounting framework treats repurchase transactions in line with Article 12 of Directive 86/635/EEC), whereas as off-balance sheet item they do not constitute an exposure because the transferor is obliged to repurchase them at a specified price irrespective of any deterioration in value.
- Status
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Final Q&A
- Answer prepared by
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Answer prepared by the EBA.
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