2021/02/19

The European Banking Authority (EBA) published final draft regulatory technical standards (RTS) specifying how institutions should determine exposures arising from derivative and credit derivative contracts not entered directly into with a client but whose underlying debt or equity instrument was issued by a client, as mandated by Art. 390(9) of the Capital Requirements Regulation (CRR). The draft RTS propose a methodology for the calculation of indirect exposures for different categories of derivative contracts and credit derivative contracts with a single underlying debt or equity instrument, namely: options on debt and equity instruments; credit derivative contracts; and other derivatives having as underlying a debt or equity instrument. They also provide a separate methodology for the calculation of exposures stemming from contracts with multiple underlying reference names. The final draft RTS have been developed in a way to ensure that they are compatible with the jump-to-default (JTD) approach under the Fundamental Review of the Trading Book (FRTB) and the CRR and the corresponding draft RTS on JTD that the EBA is currently developing. The basis of both draft RTS is the variation in price that would stem from the default of an issuer. The draft RTS have been amended to align the proposed rules applicable to multi-underlying derivatives with a structure (i.e., an index and collective investment undertakings) or without a structure, as well as the introduction of a partial look-though approach for this type of derivatives.

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