Question ID
2024_7276
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Market risk
Article
325b
Paragraph
4
Subparagraph
(a) & (b)
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
-
Type of submitter
Credit institution
Subject matter
Treatment of intragroup transactions in calculation of net positions and own funds requirements for foreign exchange risk
Question

i)When calculating the entity level positions and own funds requirements under Article 325b(4), are intragroup transactions allowed to be included ?

ii)Same question for Article 352(2) determination of consolidated structural position

Background on the question

i)325b

Article 325b(4) refers to the calculation of an own funds requirement at entity ( institution or undertaking) level and then adding the amounts to get the result on a consolidated basis. Ordinarily (apart from banking v trading book) when considering the consolidated basis, any transactions between entities that are part of the regualtory consolidation are excluded as they have been eliminated on consolidation.

Article 325b(4) however refers to performing calculations (positions and own funds requirements) at an entity level and then aggregating the results. The calculation method has been further explained in Q&A 2024_7194 in terms of basing it on the consolidated reporting entity’s currency but there is no specific guidance on what can be included in the entity level calculations.

Where entities which are all within the netting permission (per 325b.4(a)) then it would seem obvious enough that those transactions are excluded as they would have no impact in any event but otherwise (per 325b.4(b) the intragroup transactions are impactful if considering entity level.

However, where the entities are not within the netting permission it does matter whether intragroup transactions are allowed to be included, The example scenarios A) to C) (with numerical examples further below) illustrate the matter.

  • Scenario A) no open positions with IG (intragroup transactions): Each entity in its own right has zero position but the consolidated view is different depending on whether IG transactions are included. 
  • Scenario B) open positions with no intragroup transactions: each entity has open positions and there are no intragroup transactions. The entity level aggregation or consolidated view are the same.
  • Scenario C) closed positions with intragroup transactions: This takes scenario B) but eliminates the open position in each entity by executing intragroup transactions.

Thus the inclusion or not of intragroup transactions in the determination of the open position significantly impacts the outcome and indeed if included, then as per scenario C) they could obviate the need for netting permission in the first place.

ii) Article 352

As regards Article 352(2) the existing guidelines EBA/GL/2020/09 on structural FX, include some examples where at the consolidated level the investment in subsidiary ( “Assets – participation”) and related share capital of the subsidiary are eliminated. We presume this is not intended to be a special treatment of the investment and that other intragroup transactions would also be eliminated on consolidation.

If there is a different treatment of intragroup transactions in the two cases ( Article 325b(4) and Article 352(2) we would appreciate if the rationale could also be clarified.

Numerical Examples of Scenarios

Assumptions for all scenarios
Parent / Subsidiary do not have article 325b netting permission
Parent is a EUR entity and Subsidiary is a GBP Entity
Consolidated Open position is from EUR perspective
TP = Third Party 
IG - Intragroup
Note: for the determination of the max long/short open position used for Own Funds Requirement (OFR) in the below examples, the long and short are the same so either can be taken
  Scenario A) No open positions in each entity
  Parent Transaction ccy EUR equiv  
a) TP Borrowing GBP -100  
b) IG Lending GBP 100  
         
  Subsidiary Transaction ccy EUR equiv  
i) TP Lending GBP 100  
ii) IG Borrowing GBP -100  
         
  Consolidated Transaction ccy EUR equiv  
i) TP Lending GBP 100 (on books of Sub)
a) TP Borrowing GBP -100 (on books of Parent)
         
  Given no netting permission the regulatory view (max long/short) is either:
  1) Entity view taking IG transactions into account
  Parent has a position of 0   
  Subsidiary has position of 0  
  OFR calculation therefore calculated on total position of 0
  or      
  2) Consolidated view with IG transactions eliminated
  Parent has a position of 100  
  Subsidiary has position of 100
  OFR calculation therefore calculated on total  position of 200
  Scenario B) Open Positions in each entity
  Parent Transaction ccy EUR equiv  
a) TP Borrowing GBP -100 Short
b) TP Lending USD 100 Long
         
  Subsidiary Transaction ccy EUR equiv  
i) TP Lending GBP 100 Long
ii) TP Borrowing USD -100 Short
         
  Consolidated Transaction ccy EUR equiv  
i) TP Lending GBP 100 (on books of Sub)
a) TP Borrowing GBP -100 (on books of Parent)
         
b) TP Lending USD 100 (on books of Parent)
ii) TP Borrowing USD -100 (on books of Sub)
         
         
  Given no netting permission the regulatory view (max long/short) is either:
  1) Entity view taking IG transactions into account
  Parent has a position of 100  
  Subsidiary has position of 100  
  OFR calculation therefore calculated on total position of 200
  or      
  2) Consolidated view with IG transactions eliminated
  Parent has a position of 100  
  Subsidiary has position of 100  
  OFR calculation therefore calculated on total  position of 200
  Scenario C) Similar to B) but IG transactions used to close entity open positions
         
  Parent Transaction ccy EUR equiv  
a) TP Borrowing GBP -100  
b) TP Lending USD 100  
c) IG Lending GBP 100  
d) IG Borrowing USD -100  
         
  Subsidiary Transaction ccy EUR equiv  
i) TP Lending GBP 100  
ii) TP Borrowing USD -100  
iii) IG Lending USD 100  
iv) IG Borrowing GBP -100  
         
  Consolidated Transaction ccy EUR equiv  
i) TP Lending GBP 100 (on books of Sub)
a) TP Borrowing GBP -100 (on books of Parent)
         
b) TP Lending USD 100 (on books of Parent)
ii) TP Borrowing USD -100 (on books of Sub)
         
  Given no netting permission the regulatory view (max long/short) is either:
  1) Entity view taking IG transactions into account
  Parent has a position of 0   
  Subsidiary has position of 0  
  OFR calculation therefore calculated on total position of 0
  or      
  2) Consolidated view with IG transactions eliminated
  Parent has a position of 100  
  Subsidiary has position of 100
  OFR calculation therefore calculated on total  position of 200
Submission date
Status
Question under review
Answer prepared by
Answer prepared by the EBA.