In the context of the consolidated level calculation, paragraphs 25 and 26 of the EBA Guidelines on the treatment of structural FX under Article 352(2) of Regulation (EU) No 575/2013 (CRR) (EBA/GL/2020/09, Structural FX GLs) specify that positions forming a net short position at the level of one entity in the group, can be part of the waiver when they are taken with the sole purpose of hedging the ratio.

The provisions included in Article 325b CRR forbids the offsetting of positions between entities in a group for the purpose of computing the own funds requirement for market risk, unless a specific permission has been granted by the competent authority.

The Structural FX GLs do not prohibit the offsetting between positions among entities of the group in absence of the permission referred to in Article 325b, as the hedging effect of those positions do not depend on the permission itself. However, they include the condition referred to in paragraphs 25, 26 (and the condition referred to in paragraph 29(h)(iv) deriving from them).

Accordingly, when assessing the hedge, or when identifying the positions that are actually to be removed as a result of the waiver, the institution is allowed to net those positions that meet the conditions in the GLs for being waived, regardless of the permission referred to in Article 325b CRR.

In practice, once the positions meeting the conditions in the GLs have been identified, they can be netted across entities of the group (regardless of the permission). The institution should then compare the resulting net position against the maximum open position that can be waived. It therefore can remove some or all the position, from the net open position in the foreign currency referred to in Article 352(1). In particular, Where the net open position at group level that may be waived (because meeting all conditions in the GLs) is lower than the maximum open positions, then all positions can be removed. Where the net open position at group level that may be waived (because meeting all conditions in the GLs) is higher than the maximum open positions, then the institution should remove some positions. The net excluded position should equal the maximum open position.

Once, the exclusion is performed, the institution should compute the own funds requirements for FX risk without offsetting positions across entities, unless it has the approval referred to in Article 325b.

Example 1:

Take an institution with a parent bank A and a subsidiary B. Assume that the group does not have the permission referred to in Article 325b.

Let us assume that all positions in USD meet the conditions of the GLs for being waived. Let us assume that A has a net short position in USD of 30, and B a long position in USD of 100. Let us assume that the maximum open position is 80 USD.

The net open position in USD at group level is 70 USD long (100-30). The maximum open position is 80. Hence, the institution can remove all positions that constituted the 70 USD long (i.e. they can remove 100 USD from the subsidiary and 30 USD from the parent bank).

Example 2:

Take an institution with a parent bank A and a subsidiary B. Assume that the group does not have the permission referred to in Article 325b.

Let us assume that all positions in USD meet the conditions of the GLs for being waived. Let us assume that A has a net short position in USD of 30, and B a long position in USD of 100. Let us assume that the maximum open position is 50 USD.

The net open position in USD at group level is 70 USD long (100-30 USD). The maximum open position is 50 USD. Hence, the institution can remove a net position of 80 USD from the subsidiary, and the whole short position (30 USD) from the parent bank. In total, the bank removes a net open position of 50 USD (80 - 30 USD), i.e. the maximum net open position that can be removed.

In principle the institution could also remove a net position of 50 USD directly from the subsidiary, and not remove any position from the parent bank. The net open position removed would still be 50. As a result, the bank would remain with a 50 USD net long position at subsidiary level, and a 30 USD net short position at parent bank level. When computing the own funds requirement for FX risk the 50 net long and 30 net short position remaining in the subsidiary and in the parent bank cannot be offset.

This second choice is more conservative than that presented in the previous paragraph - however, the institution is not obliged to implement this more conservative choice. Instead, the institution is required to remove a position that on a net basis (upon all other conditions in the GLs being met) is lower in size than the maximum open position. In addition the institution should, in compliance with paragraph 15(b), to specify the methodology that it uses to calculate the own funds requirements for foreign exchange risk and the methodology it intends to use for removing the position for which they seek the exemption from the net open position, where they compute the own funds requirements of Regulation (EU) No 575/2013 for market risk on a consolidated basis without having the permission to offset positions in some institutions or undertakings in the group in accordance with Article 325 of that Regulation.