Procedure : 2016/0360A(COD)
Document stages in plenary
Document selected : A8-0242/2018

Texts tabled :

A8-0242/2018

Debates :

PV 15/04/2019 - 17
CRE 15/04/2019 - 17

Votes :

PV 16/04/2019 - 8.11
Explanations of votes

Texts adopted :

P8_TA(2019)0369

REPORT     ***I
PDF 2829kWORD 1039k
28.6.2018
PE 613.409v04-00 A8-0242/2018

on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements and amending Regulation (EU) No 648/2012

(COM(2016)0850 – C8‑0480/2016 – 2016/0360A(COD))

Committee on Economic and Monetary Affairs

Rapporteur: Peter Simon

AMENDMENTS
DRAFT EUROPEAN PARLIAMENT LEGISLATIVE RESOLUTION
 PROCEDURE – COMMITTEE RESPONSIBLE
 FINAL VOTE BY ROLL CALL IN COMMITTEE RESPONSIBLE

DRAFT EUROPEAN PARLIAMENT LEGISLATIVE RESOLUTION

on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements and amending Regulation (EU) No 648/2012

(COM(2016)0850 – C8‑0480/2016 – 2016/0360A(COD))

(Ordinary legislative procedure: first reading)

The European Parliament,

–  having regard to the Commission proposal to Parliament and the Council (COM(2016)0850),

–  having regard to Article 294(2) and Article 114 of the Treaty on the Functioning of the European Union, pursuant to which the Commission submitted the proposal to Parliament (C8‑0480/2016),

-  having regard to Article 294(3) of the Treaty on the Functioning of the European Union,

–  having regard to the reasoned opinion submitted, within the framework of Protocol No 2 on the application of the principles of subsidiarity and proportionality, by the Swedish Parliament, asserting that the draft legislative act does not comply with the principle of subsidiarity,

–  having regard to the opinion of the European Central Bank of 8 November 2017(1),

–  having regard to the opinion of the European Economic and Social Committee of 30 March 2017(2),

–  having regard to the decision by the Conference of Presidents on 18 May 2017 to authorise the Committee on Economic and Monetary Affairs to split the above-mentioned Commission proposal and to draw up two separate legislative reports on the basis thereof,  

–  having regard to Rule 59 of its Rules of Procedure,

–  having regard to the report of the Committee on Economic and Monetary Affairs (A8-0242/2018),

1.  Adopts its position at first reading hereinafter set out;

2.  Calls on the Commission to refer the matter to Parliament again if it replaces, substantially amends or intends to substantially amend its proposal;

3.  Instructs its President to forward its position to the Council, the Commission and the national parliaments.

Amendment    1

AMENDMENTS BY THE EUROPEAN PARLIAMENT(3)*

to the Commission proposal

---------------------------------------------------------

2016/0360 (COD)

Proposal for a

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements and amending Regulation (EU) No 648/2012

(Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 114 thereof,

Having regard to the proposal from the European Commission,

After transmission of the draft legislative act to the national parliaments,

Having regard to the opinion of the European Central Bank(4),

Having regard to the opinion of the European Economic and Social Committee(5),

Acting in accordance with the ordinary legislative procedure,

Whereas:

(1)  In the aftermath of the financial crisis that unfolded in 2007-2008 the Union implemented a substantial reform of the financial services regulatory framework to enhance the resilience of its financial institutions. That reform was largely based on internationally agreed standards. Among its many measures, the reform package included the adoption of Regulation (EU) No 575/2013 of the European Parliament and of the Council(6) and Directive 2013/36/EU of the European Parliament and of the Council(7), which strengthened the prudential requirements for credit institutions and investment firms.

(2)  While the reform has rendered the financial system more stable and resilient against many types of possible future shocks and crises, it did not address all identified problems. An important reason for that was that international standard setters, such as the Basel Committee on Banking Supervision (Basel Committee) and the Financial Stability Board (FSB), had not finished their work on internationally agreed solutions to tackle those problems at the time. Now that work on important additional reforms has been completed, the outstanding problems should be addressed.

(3)  In its Communication of 24 November 2015, the Commission recognised the need for further risk reduction and committed bringing forward a legislative proposal that would build on internationally agreed standards. The need to take further concrete legislative steps in terms of reducing risks in the financial sector has also been recognised also by the Council in its Conclusions of 17 June 2016 and by the European Parliament in its resolution of 10 March 2016(8).

(4)  Risk reduction measures should not only further strengthen the resilience of the European banking system and the markets' confidence in it, but also provide the basis for further progress in completing the Banking Union. Those measures should also be considered against the background of broader challenges affecting the Union economy, especially the need to promote growth and jobs at times of uncertain economic outlook. In that context, various major policy initiatives, such as the Investment Plan for Europe and the Capital Markets Union, have been launched in order to strengthen the economy of the Union. It is therefore important that all risk reduction measures interact smoothly with those policy initiatives as well as with broader recent reforms in the financial sector.

(5)  The provisions of this amending Regulation should be equivalent to internationally agreed standards and ensure the continued equivalence of Directive 2013/36/EC and this Regulation with the Basel III framework. The targeted adjustments in order to reflect Union specificities and broader policy considerations should be limited in terms of scope or time in order not to impinge on the overall soundness of the prudential framework.

(6)  Existing risk reduction measures and, in particular, reporting and disclosure requirements should also be improved to ensure that they can be applied in a more proportionate way and that they do not create an excessive compliance burden, especially for smaller and less complex institutions.

(6a)  A precise definition of small and non-complex institutions is necessary for targeted simplifications of requirements with respect to the application of the principle of proportionality. To create or specify an appropriate definition and classification of small and non-complex institutions and in order to properly determine the risks of such institutions, it is also necessary to consider the size and risk profile of a small and non-complex institution in relation to the overall size of the national economy in which that institution primarily operates. By itself, a single absolute threshold does not take this requirement into account. It is therefore necessary for existing supervisory authorities be able to use their discretion to bring the threshold in line with domestic circumstances and adjust it down as appropriate by integrating a relative component calculated on the basis of the economic output of a Member State. Since the size of an institution is not in itself the defining factor for its risk profile, it is also necessary to apply additional qualitative criteria to ensure that an institution is only considered to be a small and non-complex institution and able to benefit from the relevant rules for increased proportionality where it fulfils all the relevant criteria.

(7)  Leverage ratios contribute to preserving financial stability by acting as a backstop to risk based capital requirements and by constraining the building up of excessive leverage during economic upturns. Therefore, a leverage ratio requirement should be introduced to complement the current system of reporting and disclosure of the leverage ratio.

(8)  In order not to unnecessarily constrain lending by institutions to corporates and private households and to prevent unwarranted adverse impacts on market liquidity, the leverage ratio requirement should be set at a level where it acts as a credible backstop to the risk of excessive leverage without hampering economic growth.

(9)  The European Banking Authority (EBA) concluded in its report to the Commission(9) that a Tier 1 capital leverage ratio calibrated at 3% for any type of credit institution would constitute a credible backstop function. A 3% leverage ratio requirement was also agreed upon at international level by the Basel Committee. The leverage ratio requirement should therefore be calibrated at 3%.

(10)  A 3% leverage ratio requirement would however constrain certain business models and lines of business more than others. In particular, public lending by public development banks and officially guaranteed export credits would be impacted disproportionally. The leverage ratio should therefore be adjusted for these types of exposures. Clear criteria should therefore be set out to help ascertain the public mandate of such credit institutions and to cover aspects such as their establishment, the type of activities to be undertaken by them, their goal, the guarantee arrangements by public bodies and limits to deposit taking activities. However, the form and ways of establishment of the bank should remain at the discretion of Member State's central government, regional government or local authority and might consist of the establishment of a new credit institution, or the acquisition or take-over, including through concessions and in the context of resolution proceedings, of an already existing entity by such public authorities.

(11)  A leverage ratio should also not undermine the provision of central clearing services by institutions to clients. Therefore, the initial margins on centrally cleared derivative transactions received by institutions in cash from their clients and that they pass on to central counterparties (CCP), should be excluded from the leverage ratio exposure measure.

(12)  The Basel Committee has revised the international standard on the leverage ratio in order to specify further certain aspects of the design of that ratio. Regulation (EU) No- 575/2013 should be aligned with the revised standard so as to enhance the international level playing field for EU institutions operating outside the Union, and to ensure the leverage ratio remains an effective complement to risk-based own funds requirements.

(13)  For institutions that are designated globally systemically important institutions (G-SIIs) because of their size, connectivity, complexity, irreplaceable nature or global relevance, a leverage ratio surcharge should be introduced, since G-SIIs in financial distress permanently weaken the entire financial system and this could cause a new credit crunch in the Union. Because of that danger to the financial system and to the financing of the real economy, an implicit guarantee for G-SIIs emerges based on the expectation that the state will rescue them. This can mean that G-SIIs reduce their market discipline and accept too much risk, which in turn makes future distress for the G-SII even more probable. European legislation should take into account the strict leverage ratios which already exist in other jurisdictions in order to effectively counteract those negative externalities. Taking into account the final outcome of the Basel Committee’s calibration work on the leverage ratio, the leverage ratio for G-SIIs should therefore be raised by 50% of a G-SII’s higher-loss absorbency risk-weighted requirements, in addition to the minimum threshold of 3%.

(14)  On 9 November 2015, the FSB has published the Total Loss-Absorbing Capacity (TLAC) Term Sheet (TLAC standard') which was endorsed by the G-20 at the November 2015 summit in Turkey. The TLAC standard requires global systemically important banks (G-SIBs), to hold a sufficient amount of highly loss absorbing (bail-in-able) liabilities to ensure smooth and fast absorption of losses and recapitalisation in resolution. In its Communication of 24 November 2015, the Commission committed to bringing forward a legislative proposal by the end of 2016 that would enable the TLAC standard to be implemented by the internationally agreed deadline of 2019.

(15)  The implementation of the TLAC standard in the Union needs to take into account the existing minimum requirement for own funds and eligible liabilities (MREL), set out in Directive 2014/59/EU of the European Parliament and of the Council(10). As TLAC and MREL pursue the same objective of ensuring that institutions have sufficient loss absorbing capacity, the two requirements are complementary elements of a common framework. Operationally, the harmonised minimum level of the TLAC standard should be introduced into Regulation (EU) No 575/2013 through a new requirement for own funds and eligible liabilities, while the firm-specific add-on for global systemically important institutions (G-SIIs) and the firm-specific requirement for non-G-SIIs should be introduced through targeted amendments to Directive 2014/59/EU and Regulation (EU) No 806/2014 of the European Parliament and of the Council(11). The relevant provisions introducing the TLAC standard in this Regulation (EU) should be read together with those in the aforementioned legislation and with Directive 2013/36/EU.

(16)  In accordance with the TLAC standard that only covers G-SIBs, the minimum requirement for a sufficient amount of own funds and highly loss absorbing liabilities introduced in this Regulation should only apply in the case of G-SIIs. However, the rules concerning eligible liabilities introduced in this Regulation should apply to all institutions, in line with the complementary adjustments and requirements in Directive 2014/59/EU.

(17)  In line with the TLAC standard, the requirement on own funds and eligible liabilities should apply to resolution entities which are either themselves G-SIIs or are part of a group identified as a G-SII. The requirement on own funds and eligible liabilities should apply on either an individual basis or a consolidated basis, depending on whether such resolution entities are stand-alone institutions with no subsidiaries, or parent undertakings.

(18)  Directive 2014/59/EU allows for resolution tools to be used not only for institutions but also for financial holding companies and mixed financial holding companies. Parent financial holding companies and parent mixed financial holding companies should therefore have sufficient loss absorption capacity in the same way as parent institutions.

(19)  To ensure the effectiveness of the requirement on own funds and eligible liabilities, it is essential that the instruments held for meeting that requirement have a high capacity of loss absorption. Liabilities that are excluded from the bail-in tool referred to in Directive 2014/59/EU do not have that capacity, and neither do other liabilities that, although bail-in-able in principle might raise difficulties for being bailed in in practice. Those liabilities should therefore not be considered eligible for the requirement on own funds and eligible liabilities. On the other hand, capital instruments, as well as subordinated liabilities have a high loss absorption capacity. Also, the loss absorption potential of liabilities that rank pari passu with certain excluded liabilities should be recognised up to a certain extent, in line with the TLAC standard.

(19a)  When transposing the TLAC standard into Union law, it should be ensured that institutions fulfil the requirements set for own funds and eligible liabilities as quickly as possible in order to ensure a smooth absorption of losses and recapitalisation in resolution. With this in mind, it is necessary to introduce a grandfathering provision for debt instruments which fulfil certain criteria. Therefore, certain eligibility criteria should not be used for liabilities issued before … [date of entry into force of this Regulation]. Such a grandfathering clause should apply to liabilities in the subordinated part of the TLAC requirement and the subordinated part of the MREL requirement in accordance with Directive 2014/59/EU, as well as to the non-subordinated parts of the TLAC requirements and the non-subordinated part of the MREL requirements in accordance with Directive 2014/59 EU.

(20)  To avoid double counting of liabilities for the purposes of the requirement on own funds and eligible liabilities, rules should be introduced for the deduction of holdings of eligible liabilities items that mirror the corresponding deduction approach already developed in Regulation (EU) No 575/2013 for capital instruments. Under that approach, holdings of eligible liabilities instruments should first be deducted from eligible liabilities and, to the extent there are no sufficient liabilities, they should be deducted from Tier 2 capital instruments.

(21)  The TLAC standard contains some eligibility criteria for liabilities that are stricter than the current eligibility criteria for capital instruments. To ensure consistency, eligibility criteria for capital instruments should be aligned as regards the non-eligibility of instruments issued through special purpose entities as of 1 January 2022.

(22)  Since the adoption of Regulation (EU) No 575/2013, the international standard on the prudential treatment of institutions' exposures to CCPs has been amended in order to improve the treatment of institutions' exposures to qualifying CCPs (QCCPs). Notable revisions of that standard included the use of a single method for determining the own funds requirement for exposures due to default fund contributions, an explicit cap on the overall own funds requirements applied to exposures to QCCPs, and a more risk-sensitive approach for capturing the value of derivatives in the calculation of the hypothetical resources of a QCCP. At the same time, the treatment of exposures to non-qualifying CCPs was left unchanged. Given that the revised international standards introduced a treatment that is better suited to the central clearing environment, Union law should be amended to incorporate those standards.

(23)  In order to ensure that institutions adequately manage their exposures in the form of units or shares in collective investment undertakings (CIUs), the rules spelling out the treatment of those exposures should be risk sensitive and should promote transparency with respect to the underlying exposures of CIUs,. The Basel Committee has therefore adopted a revised standard that sets a clear hierarchy of approaches to calculate risk-weighted exposure amounts for those exposures. That hierarchy reflects the degree of transparency over the underlying exposures. Regulation (EU) No 575/2013 should be aligned with those internationally agreed rules.

(24)  For calculating the exposure value of derivative transactions under the counterparty credit risk framework, Regulation (EU) No 575/2013 currently gives institutions the choice between three different standardised approaches: the Standardised Method ('SM'), the Mark-to-Market Method ('MtMM') and the Original Exposure Method ('OEM').

(25)  Those standardised approaches however do not recognise appropriately the risk-reducing nature of collateral in the exposures. Their calibrations are outdated and they do not reflect the high level of volatility observed during the financial crisis. Neither do they recognise appropriately netting benefits. To address those shortcomings, the Basel Committee decided to replace the SM and the MtMM with a new standardised approach for computing the exposure value of derivatives exposures, the so-called Standardised Approach for Counterparty Credit Risk ('SA-CCR'). Given that the revised international standards introduced a new standardised approach that is better suited to the central clearing environment, Union law should be amended to incorporate those standards.

(26)  The SA-CCR is more risk-sensitive than the SM and the MtM and should therefore lead to own funds requirements that better reflect the risks related to institutions' derivatives transactions. At the same time, the SA-CCR is more complex for institutions to implement. For some of the institutions which currently use the MtM method the SA-CCR may prove to be too complex and burdensome to implement. For ▌institutions, and institutions that are part of a consolidated group with medium-scale derivatives activities, a simplified version of the SA-CCR should be introduced. Since such a simplified version will be less risk sensitive than the SA-CCR, it should be appropriately calibrated in order to ensure that it does not underestimate the exposure value of derivatives transactions.

(27)  At present, the majority of institutions use the MtMM - replaced by the SA-CCR - to calculate the exposure value of their derivatives. However, the calibration of the MtMM derives from the regulations adopted in Basel I, based on market conditions at the end of the 1980s, and is not precise enough to properly capture the risks of derivative activities. For institutions which have limited derivative positions and which currently use the MtMM or the OEM, both the SA-CCR and the simplified SA-CCR could be too complex to implement. The OEM should therefore be reserved as an alternative for those institutions, but should be revised. This revised OEM should present a suitable alternative to the MtMM for institutions and institutions that are part of a consolidated group with limited derivative activities without retaining the shortcomings of this outdated method.

(28)  To guide an institution in its choice of permitted approaches clear criteria should be introduced. Those criteria should be based on the size of the derivative activities of an institution which indicates the degree of sophistication an institution should be able to comply with to compute the exposure value.

(29)  During the financial crisis, trading book losses for some institutions established in the Union were substantial. For some of them, the level of capital required against those losses proved insufficient, leading them to seek extraordinary public financial support. Those observations led the Basel Committee to remove a number of weaknesses in the prudential treatment for trading book positions which are the own fund requirements for market risks.

(30)  In 2009, a first set of reforms were finalised at international level and transposed in the Union law with Directive 2010/76/EU of the European Parliament and of the Council(12).

(31)  The 2009 reform did however not address the structural weaknesses of the own fund requirements for market risk standards. The lack of clarity about the boundary between the trading and banking books gave opportunities for regulatory arbitrage while the lack of risk sensitivity of the own fund requirements for market risks did not allow to capture the full range of risks to which institutions were exposed.

(32)  The Basel Committee therefore initiated the Fundamental review of the trading book (FRTB) to address those weaknesses. This work was concluded in January 2016. The FRTB standards enhance the risk-sensitivity of the market risk framework by setting an amount of own fund requirements that is more proportionate to the risks of trading book positions and they clarify the definition of the boundary between banking and trading books.

(33)  The implementation of the FRTB standards in the Union needs to preserve the good functioning of financial markets in the Union. Recent impact studies about the FRTB standards show that the implementation of the FRTB standards is expected to lead to a steep increase in the overall own fund requirement for market risks. To avoid a sudden contraction of trading businesses in the Union, a phase-in period should therefore be introduced so that institutions can recognise the overall level of own fund requirements for market risks generated by the transposition of the FRTB standards in the Union. This phase-in period must ensure that the Basel standards are introduced gradually in order to mitigate uncertainty amongst the institutions about future own fund requirements for market risks. A suitable phase-in period should, on the one hand, ensure that the implementation of the FRTB Standards does not lead to an abrupt rise in the total own funds requirement for market risks, whilst also ensuring that the phase-in period cannot lead to insufficient own funds requirements for market risks as compared to the status quo. Particular attention should also be paid to European trading specificities and adjustments to the own funds requirements for sovereign and covered bonds, and simple, transparent and standardised securitisations.

(34)  A proportional treatment for market risks should also apply to institutions with limited trading book activities, allowing more institutions with small trading activities to apply the credit risk framework for banking book positions as set out under a revised version of the derogation for small trading book business. In addition, institutions with medium-sized trading book should be allowed to use a simplified standardised approach for calculating the own fund requirements for market risks in line with the approach currently in use under Regulation (EU) 575/2013. These relaxed requirements should also apply to institutions that are part of a consolidated group, provided that they meet the above requirements as stand-alone institutions.

(35)  The large exposures framework should be strengthened to improve the ability of institutions to absorb losses and to better comply with international standards. To that end, a higher quality of capital should be used as a capital base for the calculation of the large exposures limit and exposures to credit derivatives should be calculated with the SA-CCR. Moreover, the limit on the exposures that G-SIBs may have towards other G-SIBs should be lowered to reduce systemic risks related to interlinks among large institutions and the probability that the default of G-SIBs counterparty may have on financial stability.

(36)  While the liquidity coverage ratio (LCR) ensures that credit institutions and systemic investment firms will be able to withstand severe stress on a short-term basis, it does not ensure that those credit institutions and investment firms will have a stable funding structure on a longer-term horizon. It became thus apparent that a detailed binding stable funding requirement should be developed at EU level which should be met at all times with the aim of preventing excessive maturity mismatches between assets and liabilities and overreliance on short-term wholesale funding.

(37)  Consistent with the Basel Committee's stable funding standards, rules should therefore be adopted to define the stable funding requirement as a ratio of an institution's amount of available stable funding to its amount of required stable funding over a one-year horizon. This is the binding net stable funding ratio ('NSFR'). The amount of available stable funding should be calculated by multiplying the institution's liabilities and regulatory capital by appropriate factors that reflect their degree of reliability over the one-year horizon of the NSFR. The amount of required stable funding should be calculated by multiplying the institution's assets and off-balance sheet exposures by appropriate factors that reflect their liquidity characteristics and residual maturities over the one-year horizon of the NSFR.

(38)  The NSFR should be expressed as a percentage and set at a minimum level of 100%, which indicates that an institution holds sufficient stable funding to meet its funding needs during a one-year period under both normal and stressed conditions. Should its NSFR falls below the 100% level, the institution should comply with the specific requirements laid down in Article 414 of Regulation (EU) No 575/2013 for a timely restoration of its NSFR to the minimum level. The supervisory measures in case of non-compliance should not be automatic, competent authorities should instead assess the reasons for non-compliance with the NSFR requirement before defining potential supervisory measures.

(39)  In accordance with the recommendations made by EBA in its report of 15 December 2015 prepared pursuant to paragraphs 1 and 2 of Article 510 of Regulation (EU) No 575/2013, the rules for calculating the NSFR should be closely aligned with the Basel Committee's standards, including developments in those standards regarding the treatment of derivatives transactions. The necessity to take into account some European specificities to ensure that the NSFR does not hinder the financing of the European real economy however justifies adopting some adjustments to the Basel NSFR for the definition of the European NSFR. Those adjustments due to the European context are recommended by the NSFR report prepared by EBA and relate mainly to specific treatments for i) pass-through models in general and covered bonds issuance in particular; ii) trade finance activities; iii) centralised regulated savings; iv) residential guaranteed loans; and v) credit unions. These proposed specific treatments broadly reflect the preferential treatment granted to these activities in the European LCR compared to the Basel LCR. Because the NSFR complements the LCR, those two ratios should indeed be consistent in their definition and calibration. This is in particular the case for required stable funding factors applied to LCR high quality liquid assets for the calculation of the NSFR that shall reflect the definitions and haircuts of the European LCR, regardless of compliance with the general and operational requirements set out for the LCR calculation that are not appropriate in the one-year frame of the NSFR calculation.

(40)  Beyond European specificities, the stringent treatment of derivative transactions in the Basel NSFR could have an important impact on institutions’ derivatives activities and, consequently, on European financial markets and on the access to some operations for end-users. Derivative transactions and some interlinked transactions, including clearing activities, could be unduly and disproportionately impacted by the introduction of the Basel NSFR without having been subject to extensive quantitative impact studies and public consultation. The additional requirement to hold 20 % of stable funding against gross derivatives liabilities is very widely seen as a rough measure that overestimates additional funding risks related to the potential increase of derivative liabilities over a one year horizon. It therefore seems reasonable to adopt an alternative more risk-sensitive measure not to hinder the good functioning of the European financial markets and the provision of risk hedging tools to institutions and end-users, including corporates, to ensure their financing as an objective of the Capital Market Union. For unmargined derivatives transactions, the Basel Committee has recently reviewed the 2014 provisions on the treatment of derivative transactions within the NSFR, recognising that the standard as it stood was inadequate for determining the refinancing requirement, and that the 20% required stable funding (‘RSF’) was too conservative. The Basel Committee has come to an agreement that, at national discretion, jurisdictions may lower the value of this factor, with a floor of 5%.

(41)  The Basel asymmetric treatment between short term funding, such as repos (stable funding not recognised) and short term lending, such as reverse repos (some stable funding required – 10% if collateralised by Level 1 high quality liquid assets - HQLA - as defined in the LCR and 15% for other transactions) with financial customers aims at discouraging extensive short term funding links between financial customers which are a source of interconnection and make it more difficult to resolve a particular institution without a contagion of risk to the rest of the financial system in case of failure. However, the calibration of the asymmetry is overly conservative and may affect the liquidity of securities usually used as collateral in short term transactions, in particular sovereign bonds, as institutions will probably reduce the volume of their operations on repo markets. It could also undermine market-making activities, as repo markets facilitate the management of the necessary inventory, thereby contradicting the objectives of the capital market union. Furthermore, this would make it more difficult to transform these securities into cash rapidly at a good price, which could endanger the effectiveness of the LCR whose logic is to have a buffer of liquid assets that can be easily transformed into cash in case of liquidity stress. Eventually, the calibration of this asymmetry may affect the liquidity of interbank funding markets, in particular for liquidity management purposes, as it will become more expensive for banks to lend to each other on a short term basis. The asymmetrical treatment should be maintained but RSF factors be reduced to 5% and 10% respectively (instead of 10% and 15%).

(42)  In addition to the recalibration of the Basel RSF factor that applies to short term reverse repo transactions with financial customers secured by sovereign bonds (5% RSF factor instead of 10%), some other adjustments have proven to be necessary to ensure that the introduction of the NSFR does not hinder the liquidity of sovereign bonds markets. The Basel 5% RSF factor that applies to Level 1 HQLA, including sovereign bonds, implies that institutions would need to hold ready available long-term unsecured funding in such percentage regardless of the time during which they expect to hold such sovereign bonds. This could potentially further incentivise institutions to deposit cash at central banks rather than to act as primary dealers and provide liquidity in sovereign bond markets. Moreover, it is not consistent with the LCR that recognises the full liquidity of these assets even in time of severe liquidity stress (0% haircut). The RSF factor of HQLA Level 1 as defined in the EU LCR, excluding extremely high quality covered bonds, should therefore be reduced from 5% to 0%.

(43)  Furthermore, all HQLA Level 1 as defined in the EU LCR, excluding extremely high quality covered bonds, received as variation margins in derivatives contracts should offset derivatives assets while the Basel standard only accepts cash respecting the conditions of the leverage framework to offset derivatives assets. This broader recognition of assets received as variation margins will contribute to the liquidity of sovereign bonds markets, avoid penalizing end-users that hold high amounts of sovereign bonds but few cash (like pension funds) and avoid adding additional tensions on the demand for cash on repo markets.

(44)  The NSFR should apply to institutions both on an individual and a consolidated basis, unless competent authorities waive the application of the NSFR on an individual basis. This duplicates the scope of application of the LCR that the NSFR complements. Where the application of the NSFR at individual level has not been waived, transactions between two institutions belonging to the same group or to the same institutional protection scheme should in principle receive symmetrical available and required stable funding factors to avoid a loss of funding in the internal market and to not impede the effective liquidity management in European groups where liquidity is centrally managed. Such preferential symmetrical treatments should only be granted to intragroup transactions where all the necessary safeguards are in place, on the basis of additional criteria for cross-border transactions, and only with the prior approval of the competent authorities involved as it may not be assumed that institutions experiencing difficulties in meeting their payment obligations will always receive funding support from other undertakings belonging to the same group or to the same institutional protection scheme.

(44a)  Likewise, small and non-complex institutions should be given the opportunity to use a simplified version of the NSFR. A simplified, less granular version of the NSFR should involve collecting a limited number of data points, which on the one hand, reduces the complexity of the calculation for small and non-complex institutions in accordance with proportionality, while ensuring that small and non-complex institutions still maintain a sufficient stable funding factor by means of a more rigorous calibration.

(45)  The consolidation of subsidiaries in third countries should take due account of the stable funding requirements applicable in those countries. Accordingly, consolidation rules in the Union should not introduce a more favourable treatment for available and required stable funding in third country subsidiaries than the treatment which is available under the national law of those third countries.

(46)  In accordance with Article 508(3) of Regulation (EU) No 575/2013, the Commission is to report on an appropriate regime for the prudential supervision of investment firms and submit, where appropriate, a legislative proposal. Until that provision starts applying, investment firms other than systemic investment firms should remain subject to the national law of Member States on the net stable funding requirement. However, investment firms other than systemic investment firms should be subject to the NSFR laid down in Regulation (EU) No 575/2013 on a consolidated basis, where they form part of banking groups, to allow an appropriate calculation of the NSFR at consolidated level.

(47)  Institutions should be required to report to their competent authorities in the reporting currency the binding detailed NSFR for all items and separately for items denominated in each significant currency to ensure an appropriate monitoring of possible currencies mismatches. The NSFR should not subject institutions to any double reporting requirements or to reporting requirements not in line with the rules in force and institutions should be granted sufficient time to get prepared to the entry into force of new reporting requirements.

(48)  As the provision of meaningful and comparable information to the market on institutions' common key risk metrics is a fundamental tenet of a sound banking system, it is essential to reduce information asymmetry as much as possible and facilitate comparability of credit institutions’ risk profiles within and across jurisdictions, The Basel Committee on Banking Supervision (BCBS) published the revised Pillar 3 disclosure standards in January 2015 to enhance the comparability, quality and consistency of institutions' regulatory disclosures to the market. It is, therefore, appropriate to amend the existing disclosure requirements to implement those new international standards.

(49)  Respondents to the Commission's Call for Evidence on the EU regulatory framework for financial services regarded current disclosure requirements as disproportionate and burdensome for smaller institutions. Without prejudice to aligning disclosures more closely with international standards, smaller and less complex institutions should be required to produce less frequent and detailed disclosures than their larger peers, thus reducing the administrative burden to which they are subject.

(50)  Financial institutions should apply gender neutral remuneration policies, according to the principle laid down in Article 157 of the Treaty on the Functioning of the European Union. Some clarifications should be made to the remuneration disclosures. The disclosure requirements relating to remuneration set out in in this Regulation should be compatible with the aims of the remuneration rules, namely to establish and maintain, for categories of staff whose professional activities have a material impact on the risk profile of credit institutions and investment firms, remuneration policies and practices that are consistent with effective risk management. Furthermore, institutions benefitting from a derogation from certain remuneration rules should be required to disclose information concerning such derogation.

(52)  Small and medium-sized enterprises (SMEs) are one of the pillars of the Union's economy as they play a fundamental role in creating economic growth and providing employment. Given the fact that SMEs carry a lower systematic risk than larger corporates, capital requirements for SME exposures should be lower than those for large corporates to ensure an optimal bank financing of SMEs. Currently, SME exposures of up to EUR 1,5 million are subject to a 23,81% reduction in risk weighted exposure amount. The threshold should be raised to EUR 3,0 million. The reduction in capital requirements should be extended to SME exposures beyond the threshold of EUR 3,0 million and for the exceeding part should amount to a 15 % reduction of a risk-weighted exposure amount.

(53)  Investments in infrastructure are essential to strengthen Europe's competitiveness and to stimulate job creation. The recovery and future growth of the Union economy depends largely on the availability of capital for strategic investments of European significance in infrastructure, notably broadband and energy networks, as well as transport infrastructure and electromobility infrastructure, particularly in industrial centres; education, research and innovation; and renewable energy and energy efficiency. The Investment Plan for Europe aims at promoting additional funding to viable infrastructure projects through, inter alia, the mobilization of additional private source of finance. For a number of potential investors the main concern is the perceived absence of viable projects and the limited capacity to properly evaluate risk given their intrinsically complex nature.

(54)  In order to encourage private and public investments in infrastructure projects it is therefore essential to lay down a regulatory environment that is able to promote high quality infrastructure projects and reduce risks for investors. In particular capital charges for exposures to infrastructure projects should be reduced provided they comply with a set of criteria able to reduce their risk profile and enhance predictability of cash flows. The Commission should review the provision by ... [three years after the entry into force of this Regulation] in order to assess a) its impact on the volume of infrastructure investments▌; and b) its adequacy from a prudential standpoint. The Commission should also consider whether the scope should be extended to infrastructure investments by corporates.

(55)  Article 508(3) of Regulation (EU) No 575/2013 of the European Parliament and of the Council2 requires the Commission to report to the European Parliament and to the Council on an appropriate regime for the prudential supervision of investment firms and of firms referred to in points (2)(b) and (c) of Article 4(1) of that Regulation, to be followed, where appropriate, by a legislative proposal. That legislative proposal may introduce new requirements for those firms. In the interest of ensuring proportionality and to avoid unnecessary and repetitive regulatory changes, investment firms which are not systemic should therefore be precluded from complying with the new provisions amending Regulation (EU) No 575/2013. Investment firms that pose the same systemic risk as credit institutions should however be subject to the same requirements as those that apply to credit institutions.

(55a)  As recommended by EBA, ESMA and the ECB, due to their distinct business model, financial markets infrastructure in the form of Central Counterparties and Central Securities Depositories should be exempted from the Leverage Ratio, the Minimum Requirement for Own Funds and the Net Stable Funding Ratio. Such institutions are required to obtain a banking licence simply for the reason of being granted access to overnight central bank facilities and to fulfil their roles as key vehicles for the achievement of important political and regulatory objectives in the financial sector. The Commission should in this regard ensure compliance with the EBA, ESMA and ECB recommendations by granting the relevant exemptions.

(56)  In light of the strengthened group supervision resulting from the reinforcement of the prudential regulatory framework and the establishment of the Banking Union, it is desirable that institutions take ever more advantage of the benefits of the single market, including for ensuring an efficient management of capital and liquidity resources throughout the group. Therefore the possibility to waive the application of requirements on an individual level for subsidiaries or parents should be available to cross-border groups, provided there are adequate safeguards to ensure that sufficient capital and liquidity will be at the disposal of entities subject to the waiver. Where all the safeguards are met, it will be for the competent authority to decide whether to grant such waivers. Competent authorities' decisions should be duly justified.

(56a)  In line with the fundamental review of the trading book (FRTB) that the Basel Committee proposed in order to introduce the risk factor modellability assessment framework based on real price criteria, banks should be able to assess their required threshold for a risk factor based on reliable price data that reflects the market reality. Transaction data originated only from the bank may not suffice for a reliable risk assessment. This regulation should allow banks the use of data aggregators, that can also be provided by third parties, as an instrument that pools and sources real prices across the markets, broadens the view of the bank’s risk assessment and improves there liability of the data used to model the risk factor threshold.

(57)  In order to facilitate institutions' compliance with rules set out in this Regulation and in Directive 36/2013/EU, as well as with regulatory technical standards, implementing technical standards, guidelines and templates adopted to implement those rules, the EBA should develop an IT tool aimed at guiding institutions' through the relevant provisions, standard and templates in relation to their size and business model.

(58)  To facilitate the comparability of disclosures, the EBA should be mandated to develop standardised disclosure templates covering all substantial disclosure requirements set out in Regulation (EU) 575/2013 of the European Parliament and the Council. When developing these standards the EBA should take into account the size and complexity of institutions, as well as the nature and level of risk of their activities.

(59)  In order to ensure an appropriate definition of some specific technical provisions of Regulation (EU) No 573/2013 and to take into account possible developments at international level, the power to adopt acts in accordance with Article 290 of the Treaty on the Functioning of the European Union should be delegated to the Commission in respect of the list of products or services whose assets and liabilities can be considered as interdependent and in respect of the definition of the treatment of derivatives, secured lending and capital market driven transactions and of unsecured transactions of less than six months with financial customers for the calculation of the NSFR.

(60)  The Commission should adopt draft regulatory technical standards developed by EBA in the areas of own funds requirements for market risk for non-trading book positions, instruments exposed to residual risks, jump to default calculations, permission to use internal models for market risk, internal model back testing, P&L attribution, non-modellable risk factors and default risk in the internal model approach for market risk by means of delegated acts pursuant to Article 290 TFEU and in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. It is of particular importance that the Commission carry out appropriate consultations during its preparatory work, including at expert level. The Commission and EBA should ensure that those standards and requirements can be applied by all institutions concerned in a manner that is proportionate to the nature, scale and complexity of those institutions and their activities.

(61)  For the purposes of applying large exposures rules, the Commission should specify, through the adoption of acts in accordance with Article 290 of the Treaty on the Functioning of the European Union, in which circumstances the conditions for the existence of a group of connected clients are met and how to calculate the value of exposures arising from contracts referred to in Annex II and credit derivatives not directly entered into with a client but underlying a debt or equity instrument issued by that client and the cases and the time limit within which competent authorities might allow the exposure limit to be exceeded. The Commission should also issue regulatory technical standard to specify the format and frequency of reporting related to large exposures, as well as the criteria for identifying shadow banks to which reporting obligations on large exposures refer.

(61a)  Sovereign bonds play a crucial role in providing high-quality liquid assets for investors and stable funding sources for governments. However, in some Member States financial institutions have overly invested in bonds issued by their own governments, resulting in excessive ‘home bias’. Whereas one of the main objectives of the banking union is to break the bank-sovereign risk nexus and the Union regulatory framework on prudential treatment of sovereign debt should remain consistent with the international standard, banks should continue their effort towards more diversified sovereign bond portfolios.

(62)  On counterparty credit risk, the power to adopt acts in accordance with Article 290 of the Treaty on the Functioning of the European Union should be delegated to the Commission in respect of the definition of aspects related to the material risk driver of transactions, the supervisory delta and the commodity risk category add-on.

(63)  Before the adoption of acts in accordance with Article 290 of the Treaty on the Functioning of the European Union it is of particular importance that the Commission carry out appropriate consultations during its preparatory work, including at expert level, and that those consultations be conducted in accordance with the principles laid down in the Inter-institutional Agreement on Better Law-Making of 13 April 2016. In particular, to ensure equal participation in the preparation of delegated acts, the European Parliament and the Council receive all documents at the same time as Member States' experts, and their experts systematically have access to meetings of Commission expert groups dealing with the preparation of delegated acts.

(64)  To react more efficiently to developments over time in disclosure standards at international and Union levels, the Commission should have a mandate to amend the disclosure requirements laid down in Regulation (EU) 575/2013 through a delegated act.

(65)  The EBA should report on where proportionality of the Union supervisory reporting package could be improved in terms of scope, granularity or frequency and, at least, submit concrete recommendations as to how the average compliance costs for small institutions can be reduced by ideally 20% or more and at least 10% by means of appropriate simplification of requirements.

(65a)  In addition, within two years of the entry into force of this Regulation, and in cooperation with the other competent authorities, particularly the ECB, the EBA should compile a comprehensive report on the necessary revision to the reporting system. This should form the basis of a legislative proposal from the European Commission. The purpose of this report should be the creation of an integrated and standardised system for reporting obligations as regards statistical and regulatory data for all institutions situated within the Union. Such a system should, amongst other things, use consistent definitions and standards for the data to be collected, guarantee a reliable and permanent exchange of information between the competent authorities, and establish a central location for statistical and regulatory data which administers, pools and distributes data requests and collected data. By centralising and harmonising data collection and requests in such a way, the goal is to prevent multiple requests for similar or identical data from different authorities and thereby to significantly reduce the administrative and financial burden, both for the competent authorities and for the institutions.

(66)  For the purpose of applying own funds requirements for exposures in the form of units or shares in CIUs, the Commission should specify, through the adoption of a regulatory technical standard, how institutions shall calculate the risk weighted exposure amount under the mandate-based approach where any of the inputs required for that calculation are not available.

(67)  Since the objectives of this Regulation, namely to reinforce and refine already existing Union legislation ensuring uniform prudential requirements that apply to credit institutions and investment firms throughout the Union, cannot be sufficiently achieved by the Member States but can rather, by reason of their scale and effects, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality, as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve those objectives. This Regulation should not require institutions to provide information based on accounting frameworks differing from those applicable to them pursuant to other acts of Union and national law.

(67a)  The completion of the banking union is an important step forward to create well-functioning cross-border markets and to ensure that bank customers can benefit from positive effects that result from a harmonised and integrated European banking market providing a level playing field for European banks. Major progress has been made regarding the completion of the Banking Union, but some obstacles - such as in the area of options and discretions (ONDs) - remain. The harmonisation of rules remains particularly difficult in the area of large cross-border intragroup exposures as the Single Supervisory Mechanism has no single competence in this area. Furthermore, cross-border activities within the Banking Union are fully subject to the methodology used by the Basel Committee on Banking Supervision (BCBS), making it less attractive for a bank located in a Euro area country to expand its activity to another Euro area country than in its domestic market. As a consequence, the Commission should, after consulting closely with the ECB, ESRB and EBA, review the current framework, while maintaining a balanced and prudentially sound approach towards home and host countries and taking into account potential benefits and risks for Member States and regions.

(68)  In view of the amendments to the treatment of exposures to QCCPs, specifically to the treatment of institutions' contributions to QCCPs' default funds, the relevant provisions in Regulation (EU) No 648/2012 which were introduced in that Regulation by Regulation (EU) No 575/20136 and which spell out the calculation of the hypothetical capital of CCPs that is then used by institutions to calculate their own funds requirements should also be amended.

(69)  The application of certain provisions on new requirements for own funds and eligible liabilities that implement the TLAC standard should be 1 January 2019 as agreed at international level.

(70)  Regulation (EU) No 575/2013 should therefore be amended accordingly,

HAVE ADOPTED THIS REGULATION:

Article 1

Regulation (EU) No 575/2013 is amended as follows:

(1)  Article 1 is replaced by the following:

"Article 1Scope

This Regulation lays down uniform rules concerning general prudential requirements that institutions, financial holding companies and mixed financial holding companies supervised under Directive 2013/36/EU shall comply with in relation to the following items:

(a)  own funds requirements relating to entirely quantifiable, uniform and standardised elements of credit risk, market risk, operational risk and settlement risk;

(b)  requirements limiting large exposures;

(c)  liquidity requirements relating to entirely quantifiable, uniform and standardised elements of liquidity risk;

(d)  reporting requirements related to points (a), (b) and (c) and to leverage;

(e)  public disclosure requirements.

This Regulation lays down uniform rules concerning the own funds and eligible liabilities requirements that resolution entities that are global systemically important institutions (G-SIIs) or part of G-SIIs and material subsidiaries of non-EU G-SIIs shall comply with.

This Regulation does not govern publication requirements for competent authorities in the field of prudential regulation and supervision of institutions as set out in Directive 2013/36/EU.".

(2)  Article 2 is replaced by the following:

"Article 2Supervisory powers

1.  For the purposes of ensuring compliance with this Regulation, competent authorities shall have the powers and shall follow the procedures set out in Directive 2013/36/EU and in this Regulation.

2.  For the purposes of ensuring compliance with this Regulation, resolution authorities shall have the powers and shall follow the procedures set out in Directive 2014/59/EU and in this Regulation.

3.  For the purposes of ensuring compliance with the requirements concerning own funds and eligible liabilities competent authorities and resolution authorities shall cooperate.

4.  For the purposes of ensuring compliance within their respective competences the Single Resolution Board established by Article 42 of Regulation (EU) No 806/2014, and the ECB shall ensure a regular and reliable exchange of relevant information and shall grant each other access to their respective data base.".

(3)  Article 4 is amended as follows:

(a)  in paragraph 1, point (7) is replaced by the following:

“(7)  'collective investment undertaking' or 'CIU' means a UCITS as defined in Article 1(2) of Directive 2009/65/EC of the European Parliament and of the Council(13) or an AIF as defined in point (a) of Article 4(1) of Directive 2011/61/EU of the European Parliament and of the Council(14);”;

(b)  in paragraph 1, point (20) is replaced by the following:

"(20) 'financial holding company' means a financial institution, the subsidiaries of which are exclusively or mainly institutions or financial institutions, and which is not a mixed financial holding company.

The subsidiaries of a financial institution are mainly institutions or financial institutions where at least one of them is an institution and where more than 50% of the equity, consolidated assets, revenues, personnel or other indicator considered relevant by the competent authority of the financial institution are associated with subsidiaries that are institutions or financial institutions.";

(c)  in paragraph 1, point (26) is replaced by the following:

"(26) 'financial institution' means an undertaking other than an institution and other than a pure industrial holding company, the principal activity of which is to acquire holdings or to pursue one or more of the activities listed in points (2) to (12) and point (15) of Annex I to Directive 2013/36/EU, including a financial holding company, a mixed financial holding company, a payment institution within the meaning of Directive 2007/64/EC of the European Parliament and of the Council(15), and an asset management company, but excluding insurance holding companies and mixed-activity insurance holding companies as defined, respectively, in points (f) and (g) of Article 212(1) of Directive 2009/138/EC;";

(ca)  in point (27) of paragraph 1, point (e) is replaced by the following:

"(e) a third-country (non-EU) insurance undertaking;"

(cb)  in point (27) of paragraph 1, point (g) is replaced by the following:

"(g) a third-country (non-EU) reinsurance undertaking;"

(cc)  in point (27) of paragraph 1, the following subparagraph is added after point (l):

  “For the purposes of this Regulation, the undertakings referred to in points (d), (f) and h), shall be qualified as financial sector entities, where one of the following conditions are met:

  a) the shares of such undertakings are not listed in a EU regulated market;

  b) such undertakings do not act according to a low financial risk insurance business model;

  c) the institution owns more than 15% of the voting rights or capital of that undertaking.

  Notwithstanding the foregoing, Member States competent authorities retain the power to qualify such entities as financial sector entities if they are not satisfied with the level of risk control and financial analysis procedures specifically adopted by the institution in order to supervise the investment in the undertaking or holding company.

(d)  in point (39) of paragraph 1, the following subparagraph is inserted:

"Two or more natural or legal persons who fulfil the conditions set out in points (a) or (b) because of their direct exposure to the same CCP for clearing activities purposes are not considered as constituting a group of connected clients.";

(da)  the following point 39a is inserted:

  ““related party” means either a natural person or a close member of that person’s family or a legal person that is related to the management body of an institution;”

(e)  in point (71) of paragraph 1, the introductory sentence in point (b) is replaced by the following:

"(b) for the purposes of Article 97 it means the sum of the following:";

(f)  in point (72) of paragraph 1, point (a) is replaced by the following:

“(a) it is a regulated market or a third-country market that is considered to be equivalent to a regulated market in accordance with the procedure set out in Article 25(4)(a) of Directive 2014/65/EU;”;

(g)  in paragraph 1, point (86) is replaced by the following:

"(86) 'trading book' means all positions in financial instruments and commodities held by an institution either with trading intent, to hedge either positions held with trading intent or positions referred to in Article 104(2), excluding positions referred to in Article 104(3);".

(h)  in paragraph 1, point (91) is replaced by the following:

“(91) 'trade exposure' means a current exposure, including a variation margin due to the clearing member but not yet received, and any potential future exposure of a clearing member or a client, to a CCP arising from contracts and transactions listed in points (a), (b) and (c) of Article 301(1), as well as initial margin;”.

(i)  in paragraph 1, point (96) is replaced by the following:

"(96) 'internal hedge' means a position that materially offsets the component risk elements between a trading book position and one or more non-trading book position or between two trading desks;".

(ia)  in paragraph 1, point (a) of point (127) is replaced by the following:

“(a)  the institutions fall within the same institutional protection scheme as referred to in Article 113(7) or are permanently affiliated with a network to a central body;

(j)  in paragraph 1, the following points are added:

(129) 'resolution authority' means a resolution authority as defined in point (18) of Article 2(1) of Directive 2014/59/EU;

(130) 'resolution entity' means a resolution entity as defined in point (83a) of Article 2(1) of Directive 2014/59/EU;

(131) 'resolution group' means a resolution group as defined in point (83b) of Article 2(1) of Directive 2014/59/EU;

(132) 'global systemically important institution' (G-SII) means a G-SII that has been identified in accordance with Article 131(1) and (2) of Directive 2013/36/EU;

(133) 'non-EU global systemically important institution' (non-EU G-SII) means global systemically important banking groups or banks (G-SIBs) that are not G-SIIs and that are included in the list of G-SIBs published by the Financial Stability Board, as regularly updated;

(134) 'material subsidiary' means a subsidiary that on an individual or consolidated basis meets any of the following conditions:

(a)  the subsidiary holds more than 5% of the consolidated risk-weighted assets of its original parent undertaking;

(b)  the subsidiary generates more than 5% of the total operating income of its original parent undertaking;

(c)  the total leverage exposure measure of the subsidiary is more than 5% of the consolidated leverage exposure measure of its original parent undertaking's;

(135)'G-SII entity' means an entity with legal personality that is a G-SIIs or is part of an G-SII or of a non-EU G-SII;

(136) 'bail-in tool' means the bail-in tool as defined in point (57) of Article 2(1) of Directive 2014/59/EU;

(137) 'group' means a group of undertakings of which at least one is an institution and which consists of a parent undertaking and its subsidiaries, or of undertakings linked to each other by a relationship as set out in Article 22 of Directive 2013/34/EU of the European Parliament and of the Council(16);

(138) 'securities financing transaction' or 'SFT' means a repurchase transaction, a securities or commodities lending or borrowing transaction, or a margin lending transaction;

(139) 'systemic investment firm' means an investment firm that has been identified as a G-SII or an O-SII in accordance with Article 131(1), (2) or (3) of Directive 2013/36/EU";

(140) 'initial margin' or 'IM' means any collateral, other than variation margin, collected from or posted to an entity to cover the current and potential future exposure of a transaction or of a portfolio of transactions in the time period needed to liquidate those transactions, or to re-hedge their market risks, following the default of the counterparty to the transaction or portfolio of transactions;

(141) 'market risk' means the risk of losses arising from movements in market prices;

(142) 'foreign exchange risk' means the risk of losses arising from movements in foreign exchange rates;

(143) 'commodity risk' means the risk of losses arising from movements in commodity prices;

(144) 'trading desk' means a well-identified group of dealers set up by the institution to jointly manage a portfolio of trading book positions in accordance with a well-defined and consistent business strategy and operating under the same risk management structure.";

(144a) "small and non-complex institution" means an institution that meets all of the following conditions, provided that it is not a large institution as defined in point (144b):

(a)  the total value of its assets on an individual basis or, where applicable, on a consolidated basis in accordance with this Regulation and Directive 2013/36/EU is on average equal to or less than the threshold of EUR 5 billion over the four-year period immediately preceding the current annual disclosure period;

(b)  the institution is subject to no obligations or is subject to simplified obligations in relation to recovery and resolution planning in accordance with Article 4 of Directive 2014/59/EU;

(c)  its trading book business is classified as small within the meaning of Article 94;

(d)  the total value of its derivative positions is less than or equal to 2% of its total on- and off-balance sheet assets, whereby only derivatives which qualify as positions held with trading intent are included in calculating the derivative positions;

(e)  the institution does not use internal models for calculating its own funds requirements;

(f)  the institution has not communicated to the competent authority an objection to being classified as a small and non-complex institution;

(g)  the competent authority has not decided that the institution is not to be considered a small and non-complex institution based on an analysis of its size, interconnectedness, complexity or risk profile;

By way of derogation from point a and provided that the competent authority considers this to be necessary, the competent authority may at its discretion lower the threshold value from EUR 5 billion to as low as EUR 1,5 billion or to as low as 1% of the gross domestic product of the Member State in which the institution is established, provided that the amount equalling 1% of the gross domestic product of the Member State in question is smaller than EUR 1,5 billion;

By way of derogation from point (e) the competent authority may allow the limited use of internal models for calculating the own funds requirements for subsidiaries using the internal models developed at group level, provided that the group is subject to the disclosure requirements laid down in Article 433a or in Article 433c at consolidated level.

(144b) ‘large institution’ means an institution that meets any of the following conditions:

(a)  the institution has been identified as a global systemically important institution (G-SII) in accordance with Article 131(1) and (2) of Directive 2013/36/EU;

(b)  the institution has been identified as another systemically important institution (O-SII) in accordance with Article 131(1) and (3) of Directive 2013/36/EU;

(c)  the institution is, in the Member State in which it is established, one of the three largest institutions in terms of total value of assets;

(d)  the total value of the institution's assets on the basis of its consolidated situation is equal to or larger than EUR 30 billion;

(e)  the ratio of its total assets relative to the GDP of the Member State in which it is established is on average equal to or larger than 20 % over the four-year period immediately preceding the current annual disclosure period;

(144c) ‘large subsidiary’ means a subsidiary that qualifies as a large institution;

(144d) ‘non-listed institution’ means an institution that has not issued securities that are admitted to trading on a regulated market of any Member State, within the meaning of point 21 of Article 4(1) of Directive 2014/65/EU.

(144e) "central securities depository" or "CSD" means a CSD as defined in point (1) of Article 2 paragraph 1 and authorised in accordance with Article 16 of Regulation (EU) No 909/2014.

(144f) "CSD-bank" means a credit institution designated under point (b) of Article 54(2) of Regulation (EU) No 909/2014 to provide banking-type ancillary services as set out in Section C of the Annex of Regulation (EU) No 909/2014.

(144g) "financial markets infrastructure credit institution" or "FMI-credit institution" means a CCP authorised in accordance with Article 14 of Regulation (EU) No 648/2012 or a CSD being also authorised as a credit institution or a CSD-bank;

(144h) “massive disposals” means the ones implemented by institutions in the context of a multi-year program which aim to materially reduce the amount of defaulted exposures in their balance sheets and which has been previously notified by institutions to their competent authority. They shall cover at least 15% of all observed defaults in the sense of Article 181(1)(a) during the program implementation period.”.

(k)  the following paragraph 4 is added:

"4. EBA shall develop draft regulatory technical standards specifying in which circumstances the conditions set out in points (a) or (b) of the first subparagraph of point (39) are met.

EBA shall submit those draft regulatory technical standards to the Commission by [one year after the entry into force of the Regulation].

Power is conferred on the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.".

(4)  Article 6 is amended as follows:

(a)  Paragraph 1 is replaced by the following:

"Institutions shall comply with obligations laid down in Parts Two to Five, Seven and Eight on an individual basis.";

(b)  The following paragraph 1a is inserted:

"1a.   By way of derogation from paragraph 1, only institutions identified as resolution entities, that are also G-SII or are part of a G-SII and that do not have subsidiaries shall comply with the requirement laid down in Article 92a on an individual basis.

Only material subsidiaries of a non-EU G-SII that are not subsidiaries of an EU parent institution, that are not resolution entities and that do not have subsidiaries shall comply with Article 92b on an individual basis..

(ba)  Paragraph 4 is replaced by the following:

"4. Credit institutions and investment firms that are authorised to provide the investment services and activities listed in points (3) and (6) of Section A of Annex I to Directive 2004/39/EC shall comply with the obligations laid down in Part Six on an individual basis. FMI-credit institutions that do not perform significant maturity transformation shall not be required to comply with the obligations laid down in Article 413(1) on an individual basis. Pending the report from the Commission in accordance with Article 508(3), competent authorities may exempt investment firms from compliance with the obligations laid down in Part Six taking into account the nature, scale and complexity of the investment firms' activities."

(bb)  Paragraph 5 is replaced by the following:

"5. Institutions, except for investment firms referred to in Article 95(1) and Article 96(1) and institutions for which competent authorities have exercised the derogation specified in Article 7(1) or (3), shall comply with the obligations laid down in Part Seven on an individual basis. FMI-credit institutions shall not be required to comply with the obligations laid down in Part Seven on an individual basis."

(5)  In Article 7, paragraphs 1 and 2 are replaced by the following:

"1. Competent authorities may waive the application of Article 6(1) to any subsidiary, where both the subsidiary and the parent undertaking have their head office situated in the same Member State and the subsidiary is included in the supervision on a consolidated basis of the parent undertaking, which is an institution, a financial holding company or a mixed financial holding company, and all of the following conditions are satisfied, in order to ensure that own funds are distributed adequately between the parent undertaking and the subsidiary:

(a)  there is no current or expected material practical or legal impediment to the prompt transfer of own funds or repayment of liabilities by the parent undertaking to the subsidiary;

(b)  either the parent undertaking satisfies the competent authority regarding the prudent management of the subsidiary and has declared, with the permission of the competent authority, that it guarantees the commitments entered into by the subsidiary, or the risks in the subsidiary are of negligible interest;

(c)  the risk evaluation, measurement and control procedures of the parent undertaking cover the subsidiary;

(d)  the parent undertaking holds more than 50 % of the voting rights attached to shares in the capital of the subsidiary or has the right to appoint or remove a majority of the members of the management body of the subsidiary.

2. After having consulted the consolidating supervisor, the competent authority may waive the application of Article 6(1) to a subsidiary having the head office situated in a different Member State than the head office of its parent undertaking and included in the supervision on a consolidated basis of that parent undertaking, which is an institution, a financial holding company or a mixed financial holding company, provided that all of the following conditions are satisfied:

(a)  the conditions laid down in points (a) to (c) of paragraph 1;

(aa)  the amount of the own funds requirement which is waived does not exceed 25% of the minimum own funds requirement;

(ab)  the parent undertaking holds 100% of the voting rights attached to shares in the capital of the subsidiary or has the right to appoint or remove a majority of the members of the management body of the subsidiary;

(b)  the institution grants a guarantee to its subsidiary, which at all times fulfils the following conditions:

(i)  the guarantee is provided for at least an amount equivalent to the amount of the own funds requirement of the subsidiary which is waived;

(ii)  the guarantee is triggered when the subsidiary is unable to pay its debts or other liabilities as they fall due or a determination has been made in accordance with Article 59(3) of Directive 2014/59/EU in respect of the subsidiary, whichever is the earliest;

(iii)  the guarantee is fully collateralised for at least 50% of its amount through a financial collateral arrangement as defined in point (a) of Article 2(1) of Directive 2002/47/EC of the European Parliament and of the Council(17);

(iv)  the guarantee and financial collateral arrangement are governed by the laws of the Member State where the head office of the subsidiary is situated, unless otherwise specified by the competent authority of the subsidiary;

(v)  the collateral backing the guarantee is an eligible collateral as referred to in Article 197 , which, following appropriately conservative haircuts, is sufficient to fully cover the amount referred to in point (iii);

(vi)  the collateral backing the guarantee is unencumbered and is not used as collateral to back any other guarantee;

(vii)  there are no legal, regulatory or operational barriers to the transfer of the collateral from the parent undertaking to the relevant subsidiary.

2a.  Paragraph 2 shall not apply to a subsidiary which exceeds the threshold for significance as set out in Article 6(4) of Regulation (EU) No 1024/2013.

2b.  The EBA shall, with the cooperation of all competent authorities:

(a)  investigate the possibility of increasing the threshold referred to in point (b) of paragraph 2 and;

(b)  investigate the effects of the waivers from the application of the prudential requirements on an individual basis according to paragraph 2.

This assessment shall cover inter alia the following matters:

(a)  possible adjustments with respect to the contractual and legal conditions which could improve the existing regulations;

(b)  possible current or future legal, regulatory or practical impediments to the activation of the guarantee and the transfer of collateral from the institution granting the guarantee to the institution or group of institutions for which the waiver applies and which benefit from the guarantee and the potential remedial measures;

(c)  the handling of large exposures which are provided as a guarantee in the form of internal group credits and which are not already exempt from the existing supervisory rules in accordance with point (c) of Article 400(2) or point c of Article 493(3).

The EBA shall report its findings to the Commission by ... [1 year after the application of this Regulation]. [Note - to be seen in conjunction with new Amendment providing that Article 7(2) would apply only three years after the entry into force of this Regulation].

Based on the findings of that report, the EBA can either work on draft technical regulatory standards or recommend that the Commission submit one or more legislative proposals. The draft technical regulatory standards shall specify the requirements laid down in Article 7(2), in particular the conditions and guarantees upon which the competent authority may grant a waiver.

Power is conferred on the Commission to amend this Regulation through delegated acts in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. Alternatively, the Commission may amend the technical regulatory standards up to... [three years after the report has come into force] or, if necessary, submit one or more legislative proposals for implementing the recommendations by EBA.".

(6)  Article 8 is replaced by the following:

"Article 8Waiver from the application of liquidity requirements on an individual basis

1.  Competent authorities may waive in full or in part the application of Part Six to an institution and to all or some of its subsidiaries having their head offices situated in the same Member State as the institution's head office and supervise them as a single liquidity sub-group, where all of the following conditions are satisfied:

(a)  the parent institution on a consolidated basis or a subsidiary on a sub-consolidated basis complies with Part Six;

(b)  the parent institution on a consolidated basis or the subsidiary institution on a sub-consolidated basis monitors at all times the liquidity positions of all institutions within the liquidity sub-group that are subject to the waiver in accordance with this paragraph and ensures a sufficient level of liquidity for all of those institutions;

(c)  the institutions within the liquidity sub-group have entered into contracts that, to the satisfaction of competent authorities, provide for the free movement of funds between them to enable them to meet their individual and joint obligations as they become due;

(d)  there is no current or expected material practical or legal impediment to the fulfilment of the contracts referred to in point (c).

2.  Competent authorities may waive in full or in part the application of Part Six to an institution and to all or some of its subsidiaries having their head offices situated in different Member States than the institution's head office and supervise them as a single liquidity sub-group, only after following the procedure laid down in Article 21 and only to the institutions whose competent authorities agree about the following elements:

(a)  their assessment of the compliance with the conditions referred to in paragraph 1;

(b)  their assessment of the compliance of the organisation and treatment of liquidity risk with the criteria set out in Article 86 of Directive 2013/36/EU across the single liquidity sub-group;

(c)  the distribution of amounts, location and ownership of the required liquid assets to be held within the single liquidity sub-group;

(d)  the determination of minimum amounts of liquid assets to be held by institutions for which the application of Part Six will be waived;

(e)  the need for stricter parameters than those set out in Part Six;

(f)  unrestricted sharing of complete information between competent authorities;

(g)  a full understanding of the implications of such a waiver.

3.  An authority that is competent for supervising on an individual basis an institution and all or some of its subsidiaries having their head offices situated in different Member States than the institution's head office may waive in full or in part the application of Part Six to that institution and to all or some of its subsidiaries and supervise them as a single liquidity sub-group, provided that all of the following conditions are satisfied:

(a)  the conditions referred to in paragraph 1 and in point (b) of paragraph 2;

(b)  the parent institution on a consolidated basis or a subsidiary institution on a sub-consolidated basis grants to the institution or group of institutions having their head office situated in another Member State a guarantee that fulfils all of the following conditions:

(i)  the guarantee is provided for an amount at least equivalent to the amount of the net liquidity outflows that the guarantee substitutes and that is calculated in accordance with Commission Delegated Regulation (EU) 2015/61(18) on an individual basis for the institution or on a sub-consolidated basis for the group of institutions subject to the waiver and benefitting from the guarantee, without taking into account any preferential treatment;

(ii)  the guarantee is triggered when the institution or group of institutions subject to the waiver and benefitting from the guarantee is unable to pay its debts or other liabilities as they become due or a determination has been made in accordance with Article 59(3) of Directive 2014/59/EU in respect of the institution or group of institutions subject to the waiver, whichever is the earliest;

(iii)  the guarantee is fully collateralised through a financial collateral arrangement as defined in point (a) of Article 2(1) of Directive 2002/47/EC;

(iv)  the guarantee and the financial collateral arrangement are governed by the laws of the Member State where the head office of the institution or group of institutions subject to the waiver and benefitting from the guarantee is situated, unless otherwise specified by the competent authority of those institutions;

(v)  the collateral backing the guarantee is eligible as high quality liquid asset as defined in Articles 10 to 13 and 15 of Commission Delegated Regulation (EU) 2015/61 and, following the application of the haircuts referred to in Chapter 2 of Title II of that Regulation, covers at least 50% of the amount of the net liquidity outflows calculated in accordance with that Regulation on an individual basis for the institution or on a sub-consolidated basis for the group of institutions subject to the waiver and benefitting from the guarantee, without taking into account any preferential treatment;

(vi)  the collateral backing the guarantee is unencumbered and is not used as collateral to back any other transaction;

(vii)  there are no current or expected legal, regulatory or practical impediments to the transfer of the collateral from the institution granting the guarantee to the institution or group of institutions subject to the waiver and benefitting from the guarantee.

4.  Competent authorities may also apply paragraphs 1, 2 and 3 to one or some of the subsidiaries of a financial holding company or mixed financial holding company and supervise as a single liquidity sub-group the financial holding company or mixed financial holding company and the subsidiaries that are subject to a waiver or the subsidiaries that are subject to a waiver only. References in paragraphs 1, 2 and 3 to the parent institution shall be understood as covering the financial holding company or the mixed financial holding company.

5.  Competent authorities may also apply paragraphs 1, 2 and 3 to institutions which are members of the same institutional protection scheme referred to in Article 113(7), provided that those institutions meet all the conditions laid down therein, and to other institutions linked by a relationship as referred to in Article 113(6), provided that those institutions meet all the conditions laid down therein. Competent authorities shall in that case determine one of the institutions subject to the waiver to meet Part Six on the basis of the consolidated situation of all institutions of the single liquidity sub-group.

6.  Where a waiver has been granted under paragraphs 1 to 5, competent authorities may also apply Article 86 of Directive 2013/36/EU, or parts thereof, at the level of the single liquidity sub-group and waive the application of Article 86 of Directive 2013/36/EU, or parts thereof, on an individual basis.

Where a waiver has been granted under paragraphs 1 to 5, for the parts of Part Six that are waived, competent authorities shall apply the reporting obligations set out in Article 415 of this Regulation at the level of the single liquidity sub-group and waive the application of Article 415 on an individual basis.

7.  Where a waiver is not granted under paragraphs 1 to 5 to institutions to which a waiver was previously granted on an individual basis, competent authorities shall take into account the time needed for those institutions to get prepared for the application of Part Six or part thereof and provide for an appropriate transitional period before applying those provisions to those institutions.".

(6a)  The following Article 8a is inserted:

“Article 8a

1. Every year on 31 March, the competent authorities shall notify EBA of those cases where they have granted a waiver in respect of the application of the prudential requirements on an individual basis in accordance with Article 7 and in respect of the application of the liquidity requirements on an individual basis in accordance with Article 8 and shall provide the following information:

(a) the name and/or legal entity identifier of the subsidiary and the parent institution which are benefiting from the waiver;

(b) the Member State in which the subsidiary and the parent institution are located;

(c) the legal basis for the waiver and the date on which the waiver was granted;

(d) the details of the prudential waiver which was granted and the accompanying justification for this.

2. EBA shall monitor the use and granting of the waivers within the Union and shall report to the Commission thereon by 1 September each year. EBA shall develop a standard format for reporting the waivers granted and the detailed information.

3. The Commission shall report to the European Parliament and the Council on the granting of waivers from prudential and liquidity requirements by competent authorities in particular in cross-border situations.”

(7)  Article 11 is replaced by the following:

"Article 11General treatment

1.  For the purpose of applying the requirements of this Regulation on a consolidated basis, the terms 'institutions', 'parent institutions in a Member State', 'EU parent institution' and 'parent undertaking', as the case may be, shall also refer to financial holding companies and mixed financial holding companies authorised in accordance with Article 21a of Directive 2013/36/EU.

2.  Parent institutions in a Member State shall comply, to the extent and in the manner prescribed in Article 18, with the obligations laid down in Parts Two to Four and Part Seven on the basis of their consolidated situation. The parent undertakings and their subsidiaries subject to this Regulation shall set up a proper organisational structure and appropriate internal control mechanisms in order to ensure that the data required for consolidation are duly processed and forwarded. In particular, they shall ensure that subsidiaries not subject to this Regulation implement arrangements, processes and mechanisms to ensure a proper consolidation.

3.  By way of derogation from paragraph 2, only parent institutions identified as resolution entities that are G-SIIs or part of G-SIIs or part of non-EU G-SIIs shall comply with Article 92a on a consolidated basis, to the extent and in the manner prescribed by Article 18.

Only EU parent undertakings that are a material subsidiary of non-EU G-SIIs and are not resolution entities shall comply with Article 92b on a consolidated basis to the extent and in the manner prescribed by Article 18.

4.  EU parent institutions shall comply with Part Six on the basis of their consolidated situation, where the group comprises one or more credit institutions or investment firms that are authorised to provide the investment services and activities listed in points (3) and (6) of Section A of Annex I to Directive 2004/39/EC. Pending the report from the Commission referred to in Article 508(2) of this Regulation, and where the group comprises only investment firms, competent authorities may exempt the EU parent institutions from compliance with Part Six on a consolidated basis, taking into account the nature, scale and complexity of the investment firm's activities.

Where a waiver has been granted under paragraphs 1 to 5 of Article 8, the institutions and, where applicable, the financial holding companies or mixed financial holding companies that are part of a liquidity sub-group shall comply with Part Six on a consolidated basis or on the sub-consolidated basis of the liquidity sub-group."

5.  Where Article 10 is applied, the central body referred to in that Article shall comply with the requirements of Parts Two to Eight on the basis of the consolidated situation of the whole as constituted by the central body together with its affiliated institutions.

6.  In addition to the requirements in paragraphs 1 to 4, and without prejudice to other provisions of this Regulation and Directive 2013/36/EU, when it is justified for supervisory purposes by the specificities of the risk or of the capital structure of an institution or where Member States adopt national laws requiring the structural separation of activities within a banking group, competent authorities may require the institution to comply with the obligations laid down in Parts Two to Four and Parts Six to Eight of this Regulation and in Title VII of Directive 2013/36/EU on a sub-consolidated basis.

Applying the approach set out in the first subparagraph shall be without prejudice to effective supervision on a consolidated basis and shall neither entail disproportionate adverse effects on the whole or parts of the financial system in other Member States or in the Union as a whole nor form or create an obstacle to the functioning of the internal market.

6a.  Competent authorities may waive the application of paragraphs 1 and 3 of this Article in regard to a parent institution in the meaning of an institution which belongs to a group of cooperative credit institutions permanently affiliated to a central body meeting the requirements of Article 113(6) and where all of the conditions laid down in Article 7(3) or 8(1) are satisfied.".

(8)  Article 12 is replaced by the following:

“Article 12Consolidated calculation for G-SIIs with multiple resolution entities

Where more than one G-SII entity belonging to the same G-SII is a resolution entities, the EU parent institution of that G-SII shall calculate the amount of own funds and eligible liabilities referred to in point (a) of Article 92a(1). That calculation shall be undertaken based on the consolidated situation of the EU parent institution as if it were the only resolution entity of the G-SII.

Where the amount calculated in accordance with the first sub-paragraph is lower than the sum of the amounts of own funds and eligible liabilities referred to in Article 92a(1)(a) of all resolution entities belonging to that G-SII, the resolution authorities shall act in accordance with Article 45d(3) and 45h(2) of Directive 2014/59/EU.

Where the amount calculated in accordance with the first sub-paragraph is higher than the sum of the amounts of own funds and eligible liabilities referred to in Article 92a(1)(a) of all resolution entities belonging to that G-SII, the resolution authorities may act in accordance with Article 45d(3) and 45h(2) of Directive 2014/59/EU.”.

(9)  Article 13 is replaced by the following:

“Article 13Application of disclosure requirements on a consolidated basis

1.  EU parent institutions shall comply with Part Eight on the basis of their consolidated situation.

Large subsidiaries of EU parent institutions shall disclose the information specified in Articles 437, 438, 440, 442, 450, 451, 451a, 451d and 453 on an individual basis or, where applicable in accordance with this Regulation and Directive 2013/36/EU, on a sub-consolidated basis,.

2.  Institutions identified as resolution entities that are a G-SII or are part of a G-SIIs shall comply with Part Eight on the basis of their consolidated financial situation.

3.  The first subparagraph of paragraph 1 shall not apply to EU parent institutions, EU parent financial holding companies, EU parent mixed financial holding companies or resolution entities where they are included in equivalent disclosures on a consolidated basis provided by a parent undertaking established in a third country.

The second subparagraph of paragraph 1 shall apply to subsidiaries of parent undertakings established in a third country where those subsidiaries qualify as large subsidiaries.

4.  Where Article 10 is applied, the central body referred to in that Article shall comply with Part Eight on the basis of the consolidated situation of the central body. Article 18(1) shall apply to the central body and the affiliated institutions shall be treated as subsidiaries of the central body.”.

(9a)  Article 14 is replaced by the following:

“Article 14

Application of requirements of Article 5 of Regulation (EU) No 2017/2402 on a consolidated basis

1.  Parent undertakings and their subsidiaries subject to this Regulation shall meet the obligations laid down in Article 5 of Regulation (EU) No 2017/2402 on a consolidated or sub-consolidated basis, to ensure that their arrangements, processes and mechanisms required by those provisions are consistent and well-integrated and that any data and information relevant to the purpose of supervision can be produced. In particular, they shall ensure that subsidiaries not subject to this Regulation implement arrangements, processes and mechanisms to ensure compliance with those provisions.

2.  Institutions shall apply an additional risk weight in accordance with Article 270a when applying Article 92 on a consolidated or sub-consolidated basis if the requirements of Article 5 of Regulation (EU) No 2017/2402 are breached at the level of an entity established in a third country included in the consolidation in accordance with Article 18 if the breach is material in relation to the overall risk profile of the group.”

(10)  Article 18 is replaced by the following:

Article 18Methods of prudential consolidation

1.  The institutions, financial holding companies and mixed financial holding companies that are required to comply with the requirements referred to in Section 1 of this Chapter on the basis of their consolidated situation shall carry out a full consolidation of all institutions and financial institutions that are their subsidiaries. Paragraphs 3 to 7 of this Article shall not apply where Part Six applies on the basis of the consolidated situation of an institution, financial holding company or mixed financial holding company or on the sub-consolidated situation of a liquidity sub-group as set out in Articles 8 and 10.

Institutions that are required to comply with the requirements referred to in Articles 92a or 92b on a consolidated basis shall carry out a full consolidation of all institutions and financial institutions that are their subsidiaries in the relevant resolution groups.

2.  Where consolidated supervision is required pursuant to Article 111 of Directive 2013/36/EU, ancillary services undertakings shall be included in consolidation in the cases, and in accordance with the methods, laid down in this Article.

3.  Where undertakings are linked by a relationship within the meaning of Article 22(7) of Directive 2013/34/EU, competent authorities shall determine how consolidation is to be carried out.

4.  The consolidating supervisor shall require the proportional consolidation according to the share of capital held of participations in institutions and financial institutions managed by an undertaking included in the consolidation together with one or more undertakings not included in the consolidation, where the liability of those undertakings is limited to the share of the capital they hold.

5.  In the case of participations or capital ties other than those referred to in paragraphs 1 and 4, the competent authorities shall determine whether and how consolidation is to be carried out. In particular, they may permit or require use of the equity method. That method shall not, however, constitute inclusion of the undertakings concerned in supervision on a consolidated basis.

6.  The competent authorities shall determine whether and how consolidation is to be carried out in the following cases:

  where, in the opinion of the competent authorities, an institution exercises a significant influence over one or more institutions or financial institutions, but without holding a participation or other capital ties in these institutions; and

  where two or more institutions or financial institutions are placed under single management other than pursuant to a contract or clauses of their memoranda or articles of association.

In particular, the competent authorities may permit, or require use of, the method provided for in Article 22(7) to (9) of Directive 2013/34/EU. That method shall not, however, constitute inclusion of the undertakings concerned in consolidated supervision.

7.  EBA shall develop draft regulatory technical standards to specify conditions according to which consolidation shall be carried out in the cases referred to in paragraphs 2 to 6 of this Article.

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2016.

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.”.

(11)  Article 22 is replaced by the following

"Article 22Sub-consolidation in case of entities in third countries

1.  Subsidiary institutions shall apply the requirements laid down in Articles 89 to 91 and Parts Three and Four on the basis of their sub-consolidated situation if those institutions have an institution or a financial institution as a subsidiary in a third country, or hold a participation in such an undertaking.

2.  By way of derogation from paragraph 1, subsidiary institutions may not apply the requirements laid down in Articles 89 to 91 and Parts Three and Four on the basis of their sub-consolidated situation where the total assets of their subsidiary in the third country are less than 10 % of the total amount of the assets and off-balance sheet items of the subsidiary institution."

(12)  The title of Part Two is replaced by the following:

" OWN FUNDS AND ELIGIBLE LIABILITIES".

(12a)  In Article 26, the following paragraph is inserted:

"(3a) If the new Common Equity Tier 1 instruments to be issued are identical in the sense that they do not differ regarding the criteria set out in Article 28 or, where applicable, in Article 29, to instruments which the competent authority has already approved, the institution shall be free, by derogation from paragraph 3, to only notify the competent authority of its intention to issue new Common Equity Tier 1 instruments.

Moreover, the institution shall send the competent authority all information which the competent authority requires to assess whether the instruments have been approved by the competent authority."

(12b)  In Article 28(3), the following subparagraph is added:

"The condition laid down in point (h)(v) of paragraph 1 shall be deemed to be met notwithstanding the institution is subject to an obligation to make payments to some or all holders of the instruments, provided the institution has the option to avoid a disproportionate drag on own funds by strengthening its Common Equity Tier 1, in particular via the allocation of profits to the funds for general banking risk or to the retained earnings, before making any payments to their holders."

(13)  In Article 33(1), point (c) is replaced by the following:

"(c) fair value gains and losses on derivative liabilities of the institution that result from changes in the own credit risk of the institution.".

(14)  Article 36 is amended as follows:

(a)  Point (b) of paragraph 1 is replaced by the following:

“(b)  intangible assets with the exception of software;

For the purpose of this Article, EBA shall develop draft regulatory technical standards to specify the term ‘software’. This definition shall ensure a prudentially sound determination of the circumstances where a non-deduction of software from Common Equity Tier 1 items would be justified from a prudential perspective and take due account of the following:

i.  the evolution of the banking sector in an even more digital environment and the opportunities and threats which banks are facing in the era of digitalisation;

ii.  the international differences in the regulatory treatment of investments in software where software is not deducted from capital (e.g. treated as tangible asset) as well as the different prudential rules that apply to banks and insurance companies;

iii.  the diversity of the financial sector in the Union including non-regulated entities such as FinTechs;

EBA shall submit those draft regulatory technical standards to the Commission by [six months after entry into force of this Regulation].

Power is delegated on the Commission to adopt the regulatory technical standards referred to in point (b) in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

(b)  Point (j) is replaced by the following:

"(j) the amount of items required to be deducted from Additional Tier 1 items pursuant to Article 56 that exceeds the Additional Tier 1 items of the institution;".

(15)  Article 37 is amended as follows:

(a)  Point b is replaced by the following:

"(b) the amount to be deducted shall include goodwill included in the valuation of significant investments of the institution. Institutions shall not add back negative goodwill to their Common Equity Tier 1."

(b)  The following point (c) is added:

"(c) the amount to be deducted shall be reduced by the amount of the accounting revaluation of the subsidiaries' intangible assets derived from the consolidation of subsidiaries attributable to persons other than the undertakings included in the consolidation pursuant to Chapter 2 of Title II of Part One.".

(16)  In the first subparagraph of Article 39(2), the introductory phrase is replaced by the following:

"Deferred tax assets that do not rely on future profitability shall be limited to deferred tax assets arising from temporary differences, created prior to [date of adoption by the College of the amending Regulation], where all the following conditions are met:".

(17)  In Article 45, point (i) of point (a) is replaced by the following:

"(i) the maturity date of the short position is either the same as, or later than the maturity date of the long position or the residual maturity of the long position is at least 365 days;"

(18)  Article 49 is amended as follows:

(a)  paragraph 1 is replaced by the following:

“1. For the purposes of calculating own funds on an individual basis, a sub-consolidated basis and a consolidated basis, where the competent authorities require or permit institutions to apply method 1, 2 or 3 of Annex I to Directive 2002/87/EC, institutions shall not deduct the holdings of own funds instruments of a financial sector entity in which the parent institution, parent financial holding company or parent mixed financial holding company or institution has a significant investment, provided that the conditions laid down in points (a) to (d) of this paragraph are met:

(a) the financial sector entity is an insurance undertaking, a re-insurance undertaking or an insurance holding company;

(b) that insurance undertaking, re-insurance undertaking or insurance holding company:

(i)  is included in the same supplementary supervision under Directive 2002/87/EC as the parent institution, parent financial holding company or parent mixed financial holding company or institution that has the holding; or

(ii)  is consolidated by the institution using the net equity method and the competent authorities are satisfied with the level of risk control and financial analysis procedures specifically adopted by the institution in order to supervise the investment in the undertaking or holding company;

(c) the competent authorities are satisfied on a continuing basis that the level of integrated management, risk management and internal control regarding the entities that would be included in the scope of consolidation under method 1, 2 or 3 is adequate;

(d) ▌the holdings in the entity belong to one of the following:

(i) the parent credit institution;

(ii) the parent financial holding company;

(iii) the parent mixed financial holding company;

(iv) the institution;

(v) a subsidiary of one of the entities referred to in points (i) to (iv) that is included in the scope of consolidation pursuant to Chapter 2 of Title II of Part One.

The method chosen shall be applied in a consistent manner over time.

1a. After 31 December 2022 and by way of derogation from paragraph 1, for the purposes of calculating own funds on an individual basis, a sub-consolidated basis and a consolidated basis, where the competent authorities require or permit institutions to apply method 1, 2 or 3 of Annex I to Directive 2002/87/EC, the competent authorities may permit institutions not to deduct the holdings of own funds instruments of a financial sector entity in which the parent institution, parent financial holding company or parent mixed financial holding company or institution has a significant investment, provided that the conditions laid down in points (a) to (c) of this paragraph are met:

(a) the financial sector entity is an insurance undertaking, a re- insurance undertaking or an insurance holding company;

(b) that insurance undertaking, re-insurance undertaking or insurance holding company is included in the same supplementary supervision under Directive 2002/87/EC as the parent institution, parent financial holding company or parent mixed financial holding company or institution that has the holding;

(c) the institution has received the prior permission of the competent authorities;

(d) prior to granting the permission referred to in point (c), and on a continuing basis, the competent authorities are satisfied that the level of integrated management, risk management and internal control regarding the entities that would be included in the scope of consolidation under method 1, 2 or 3 is adequate;

(e) the holdings in the entity belong to one of the following:

(i) the parent credit institution;

(ii) the parent financial holding company;

(iii) the parent mixed financial holding company;

(iv) the institution;

(v) a subsidiary of one of the entities referred to in points (i) to (iv) that is included in the scope of consolidation pursuant to Chapter 2 of Title II of Part One.

The method chosen shall be applied in a consistent manner over time.”

(b)  the following subparagraph is added at the end of paragraph 2:

"This paragraph shall not apply when calculating own funds for the purposes of the requirements in Articles 92a and 92b.".

(19)  Article 52(1) is amended as follows:

(a)  point (a) is replaced by the following

"(a) the instruments are directly issued by an institution and fully paid up";

(aa)  subpoint (i) of point (l) is replaced by the following:

"(i) they are paid out of distributable items, or reserves built under national law;"

(b)  point (p) is replaced by the following:

"(p) where the issuer is established in a third country and has been designated according to Article 12 of the Directive 2014/59/EU as part of a resolution group the resolution entity of which is established in the Union or where it is established in a Member State, the law or contractual provisions governing the instruments require that, upon a decision by the resolution authority to exercise the power referred to in Article 59 of Directive 2014/59/EU, the principal amount of the instruments is to be written down on a permanent basis or the instruments are to be converted to Common Equity Tier 1 instruments;

where the issuer is established in a third country and has not been designated according to Article 12 of Directive 2014/59/EU as part of a resolution group the resolution entity of which is established in the Union, the law or contractual provisions governing the instruments require that, upon a decision by the relevant third country authority, the principal amount of the instruments to be written down on a permanent basis of the instruments converted into Common Equity Tier 1 instruments;";

(c)  ▌ the following points (q) and (r) are added:

"(q) where the issuer is established in a Member State or where it is established in a third country and has been designated according to Article 12 of Directive 2014/59/EU as part of a resolution group the resolution entity of which is established in the Union, the instruments may only be issued under, or be otherwise subject to the laws of a third country where, under those laws, the exercise of the write down and conversion power referred to in Article 59 of Directive 2014/59/EU is effective and enforceable based on statutory provisions or legally enforceable contractual provisions that recognise resolution or other write-down or conversion actions;

(r) the instruments are not subject to any set-off arrangements or netting rights that would undermine their capacity to absorb losses.".

(19a)  In Article 54(1), the following point is added:

  “(da) where the Additional Tier 1 instruments have been issued by a subsidiary undertaking established in a third country, the 5.125% or higher trigger referred to in point (a) shall be calculated in accordance with the third country law or contractual provisions governing the instruments, provided that the competent authority, after consulting EBA, is satisfied that those provisions are at least equivalent to the requirements set out in this Article.”

(20)  In Article 56, point (e) is replaced by the following:

"(e) the amount of items required to be deducted from Tier 2 items pursuant to Article 66 that exceeds the Tier 2 items of the institution;".

(21)  In Article 59, point (i) of point (a) is replaced by the following:

"(i) the maturity date of the short position is the same as, or later than the maturity date of the long position or the residual maturity of the long position is at least 365 days;".

(22)  In Article 62, point (a) is replaced by the following:

"(a) capital instruments and subordinated loans where the conditions laid down in Article 63 are met, and to the extent specified in Article 64;".

(23)  Article 63 is amended as follows:

(a)  point (a) is replaced by the following:

“(a) the instruments are directly issued or the subordinated loans are directly raised, as applicable, by an institution and fully paid-up;”

(b)  point (d) is replaced by the following:

“(d) the claim on the principal amount of the instruments under the provisions governing the instruments or the claim of the principal amount of the subordinated loans under the provisions governing the subordinated loans, as applicable, ranks below any claim from eligible liabilities instruments;”.

(c)  point (n) is replaced by the following:

“(n) where the issuer is established in a third country and has been designated according to Article 12 of Directive 2014/59/EU as part of a resolution group the resolution entity of which establishment in the Union or where it is established in a Member State, the law or contractual provisions governing the instruments require that, upon a decision by the resolution authority to exercise the power referred to in Article 59 of Directive 2014/59/EU, the principal amount of the instruments is to be written down on a permanent basis or the instruments are to be converted to Common Equity Tier 1 instruments;

where the issuer is established in a third country and has not been designated according to Article 12 of Directive 2014/59/EU as a part of a resolution group the resolution entity of which is established in the Union, the law or contractual provisions governing the instruments require that, upon a decision by the relevant third country authority, the principal amount of the instruments is to be written down on a permanent basis or the instruments converted into Common Equity Tier 1 instruments;

(d)  the following points (o) and (p) are added:

“(o) where the issuer is established in a Member State or where it is established in a third country and has been designated according to Article 12 of Directive 2014/59/EU as part of a resolution group the resolution entity of which is established in the Union, the instruments may only be issued under, or be otherwise subject to the laws of a third country where, under those laws, the exercise of the write down and conversion power referred to in Article 59 of Directive 2014/59/EU is effective and enforceable based on statutory provisions or legally enforceable contractual provisions that recognise resolution or other write-down or conversion actions;

(p) the instruments are not subject to any set-off arrangements or netting rights that would undermine their capacity to absorb losses.”.

(24)  Article 64 is replaced by the following:

“Article 64Amortisation of Tier 2 instruments

1.  The full amount of Tier 2 instruments with a residual maturity of more than five years shall qualify as Tier 2 items.

2.  The extent to which Tier 2 instruments qualify as Tier 2 items during the final five years of maturity of the instruments is calculated by multiplying the result derived from the calculation in point (a) by the amount referred to in point (b) as follows:

(a)  the carrying amount of the instruments or subordinated loans on the first day of the final five year period of their contractual maturity divided by the number of calendar days in that period;

(b)  the number of remaining calendar days of contractual maturity of the instruments or subordinated loans.”.

(25)  In Article 66, the following point (e) is added:

“(e) he amount of items required to be deducted from eligible liabilities items pursuant to Article 72e that exceeds the eligible liabilities of the institution.”.

(26)  In Article 69, point (i) of point (a) is replaced by the following:

“(i) the maturity date of the short position is the same as, or later than the maturity date of the long position or the residual maturity of the long position is at least 365 days;”.

(27)  The following Chapter 5a is inserted after Article 72:

“CHAPTER 5aEligible liabilities

Section 1Eligible liabilities items and instruments

Article 72aEligible liabilities items

1.  Eligible liabilities items shall consist of the following, unless they fall into any of the categories of excluded liabilities laid down in paragraph 2:

(a)  eligible liabilities instruments where the conditions laid down in Article 72b are met, to the extent that they do not qualify as Common Equity Tier 1, Additional Tier 1 and Tier 2 items;

(b)  Tier 2 instruments with a residual maturity of at least one year, to the extent that they do not qualify as Tier 2 items in accordance with Article 64.

2.  By way of derogation from paragraph 1, the following liabilities shall be excluded from eligible liabilities items:

(a)  covered deposits;

(b)  sight deposits and short term deposits with an original maturity of less than one year;

(c)  the part of eligible deposits from natural persons and micro, small and medium-sized enterprises which exceeds the coverage level referred to in Article 6 of Directive 2014/49/EU;

(d)  deposits that would be eligible deposits from natural persons, micro, small and medium–sized enterprises if they were not made through branches located outside the Union of institutions established within the Union;

(e)  secured liabilities, including covered bonds and liabilities in the form of financial instruments used for hedging purposes that form an integral part of the cover pool and that according to national law are secured in a way similar to covered bonds, provided that all secured assets relating to a covered bond cover pool remain unaffected, segregated and with enough funding and excluding any part of a secured liability or a liability for which collateral has been pledged that exceeds the value of the assets, pledge, lien or collateral against which it is secured;

(f)  any liability that arises by virtue of the holding of client assets or client money including client assets or client money held on behalf of collective investment undertakings, provided that such a client is protected under the applicable insolvency law;

(g)  any liability that arises by virtue of a fiduciary relationship between the resolution entity or any of its subsidiaries (as fiduciary) and another person (as beneficiary) provided that such a beneficiary is protected under the applicable insolvency or civil law;

(h)  liabilities to institutions, excluding liabilities to entities that are part of the same group, with an original maturity of less than seven days;

(i)  liabilities with a remaining maturity of less than seven days, owed to systems or operators of systems designated in accordance with Directive 98/26/EC or their participants and arising from the participation in such a system;

(j)  a liability to any one of the following:

(i)  an employee, in relation to accrued salary, pension benefits or other fixed remuneration, except for the variable component of remuneration that is not regulated by a collective bargaining agreement, and except for the variable component of the remuneration of material risk takers as referred to in Article 92(2) of Directive 2013/36/EU;

(ii)  a commercial or trade creditor, where the liability arises from the provision to the institution or the parent undertaking of goods or services that are critical to the daily functioning of the institution’s or parent undertaking’s operations, including IT services, utilities and the rental, servicing and upkeep of premises; and the creditor is not itself an institution;

(iii)  tax and social security authorities, provided that those liabilities are preferred under the applicable law;

(iv)  deposit guarantee schemes, where the liability arises from contributions due in accordance with Directive 2014/49/EU.

(k)  liabilities arising from derivatives;

(l)  liabilities arising from debt instruments with embedded derivatives.

(la)  liabilities which are preferred to senior unsecured creditors under the relevant national insolvency law

For the purposes of point (l), embedded derivatives shall not include instruments for which the conditions include an early repayment option for the issuers or the holders of this instrument.

For the purpose of point (l), debt instruments with variable interests derived from a reference rate such as the Euribor or the Libor, shall not be considered as debt instruments with embedded derivatives, solely because of this feature.

Article 72bEligible liabilities instruments

1.  Liabilities shall qualify as eligible liabilities instruments, provided they comply with the conditions laid down in this Article and only to the extent specified in this Article.

2.  Liabilities shall qualify as eligible liabilities instruments provided that all of the following conditions are met:

(a)  the liabilities are directly issued or raised, as applicable, by an institution and are fully paid-up;

(b)  the liabilities are not purchased by any of the following:

(i)  the institution or an entity included in the same resolution group;

(ii)  an undertaking in which the institution has a direct or indirect participation in the form of ownership, direct or by way of control, of 20% or more of the voting rights or capital of that undertaking;

(iii)   retail clients as defined in point (11) of Article 4(1) of Directive 2014/65/EU, unless both of the following conditions are met:

a) they invest an aggregate amount not exceeding 10% of their financial instrument portfolio, and

b) the amount invested is at least EUR 10 000.

(c)  the purchase of the liabilities is not funded directly or indirectly by the resolution entity;

(d)  the claim on the principal amount of the liabilities under the provisions governing the instruments is wholly subordinated to claims arising from the excluded liabilities referred to in Article 72a(2). This subordination requirement shall be considered to be met in any of the following situations:

(i)  the contractual provisions governing the liabilities specify that in the event of normal insolvency proceedings as defined in point 47 of Article 2(1) of Directive 2014/59/EU, the claim on the principal amount of the instruments ranks below claims arising from any of the excluded liabilities referred to in Article 72a(2);

(ii)  the law governing the liabilities specifies that in the event of normal insolvency proceedings as defined in point 47 of Article 2(1) of Directive 2014/59/EU, the claim on the principal amount of the instruments ranks below claims arising from any of the excluded liabilities referred to in Article 72a(2);

(iii) the instruments are issued by a resolution entity which does not have on its balance sheet any excluded liabilities as referred to in Article 72a(2) that rank pari passu or junior to eligible liabilities instruments;

(f)  the liabilities are neither secured, nor subject to a guarantee or any other arrangement that enhances the seniority of the claim by any of the following:

(i)  the institution or its subsidiaries;

(ii)  the parent undertaking of the institution or its subsidiaries;

(iii)  any undertaking that has close links with entities referred to in points (i) and (ii);

(g)  the liabilities are not subject to any set off arrangements or netting rights that would undermine their capacity to absorb losses in resolution;

(h)  the provisions governing the liabilities do not include any incentive for their principal amount to be called, redeemed, repurchased prior to their maturity or repaid early by the institution, as applicable, except for the situation referred to in of Article 72c(2a);

(i)  subject to Article 72c(2), the liabilities are not redeemable by the holders of the instruments prior to their maturity;

(j)  where the liabilities include one or more call options or early repayment options, as applicable, the options are exercisable at the sole discretion of the issuer;

(k)  subject to Article 72c(2) and (2a), the liabilities may only be called, redeemed, repurchased or repaid early where the conditions laid down in Articles 77 and 78 are met;

(m)  the provisions governing the liabilities do not give the holder the right to accelerate the future scheduled payment of interest or principal, other than in case of the insolvency or liquidation of the resolution entity;

(n)  the level of interest or dividend payments, as applicable, due on the liabilities is not be amended on the basis of the credit standing of the resolution entity or its parent undertaking;

(o)  the applicable law or contractual provisions governing the liabilities require that, where the resolution authority exercises write down and conversion powers in accordance with Article 48 of Directive 2014/59/EU, the principal amount of the liabilities be written down on a permanent basis or the liabilities be converted to Common Equity Tier 1 instruments.

For the purposes of point (d), where some of the excluded liabilities referred to in Article 72a(2) are subordinated to ordinary unsecured claims under national insolvency law, inter alia, due to being held by a creditor who has a special relationship with the debtor, by being or having been a shareholder, in a control or group relationship, a member of the management body or related to any of the above mentioned persons, subordination shall not be assessed by reference to claims arising from such excluded liabilities.

3.  In addition to the liabilities referred to in paragraph 2, the resolution authority may permit liabilities to qualify as eligible liabilities instruments up to an aggregate amount that does not exceed 3.5% of the total risk exposure amount calculated in accordance with paragraphs 3 and 4 of Article 92, provided that:

(a)  all the conditions laid down in paragraph 2 except for the condition in point (d) are met;

(b)  the liabilities rank pari passu with the lowest ranking excluded liabilities referred to in Article 72a(2) with the exception of the excluded liabilities subordinated to ordinary unsecured claims under national insolvency law referred to in the last subparagraph of paragraph 2; and

(c)  ▌the resolution authority ensures that the capacity to exclude or partially exclude liabilities from bail-in would not give rise to material risk of successful legal challenge or valid compensation claims.

A resolution authority permits an institution ▌to include in eligible liabilities items the liabilities referred to in the first subparagraph.

4.  Where a resolution authority permits an institution to take a decision to count liabilities as referred to in the second subparagraph of paragraph 3, liabilities shall qualify as eligible liabilities instruments in addition to the liabilities referred to in paragraph 2, provided that:

(a)  the decision by the institution not to include in eligible liabilities items liabilities referred to in the first subparagraph of paragraph 3 is effective, in accordance with paragraph 5;

(b)  all the conditions laid down in paragraph 2, except for the condition in point (d) of that paragraph, are met;

(c)  the liabilities rank pari passu or are senior to the lowest ranking excluded liabilities referred to in Article 72a(2), with the exception of the excluded liabilities subordinated to ordinary unsecured claims under national insolvency law referred to in the last subparagraph of paragraph 2;

(d)  on the balance sheet of the institution, the amount of the excluded liabilities referred to in Article 72a(2) which rank pari passu or below those liabilities in insolvency does not exceed 5% of the amount of the own funds and eligible liabilities of the institution;

(e)  the inclusion of those liabilities in eligible liabilities items does not have a material adverse impact on the resolvability of the institution, as confirmed by the resolution authority after having assessed the elements referred to in points (b) and (c) of Article 45b(3) of Directive 2014/59/EU.

5.  A resolution authority may permit an institution to use the exemption in paragraph 3 or paragraph 4. An institution may not decide to include liabilities referred to in both paragraphs 3 and 4 in eligible liabilities items.

The decision shall be published in the annual report and shall take effect 6 months after the publication of that report. The decision shall be effective for at least one year.

6.  The resolution authority shall consult the competent authority when examining whether the conditions of this Article are fulfilled.

Article 72cAmortisation of eligible liabilities instruments

1.  Eligible liabilities instruments with a residual maturity of at least one year shall fully qualify as eligible liabilities items.

Eligible liabilities instruments with a residual maturity below one year shall not qualify as eligible liabilities items.

2.  For the purposes of paragraph 1, where a eligible liabilities instrument includes a holder redemption option exercisable prior to the original stated maturity of the instrument, the maturity of the instrument shall be defined as the earliest possible date on which the holder can exercise the redemption option and request redemption or repayment of the instrument.

2 a.  For the purposes of paragraph 1, where an eligible liabilities instrument includes an incentive for the issuer to call, redeem, repay or repurchase the instrument prior to the original stated maturity of the instrument, the maturity of the instrument shall be defined as the earliest possible date on which the issuer can exercise the redemption option and request redemption or repayment of the instrument.

Article 72dConsequences of the eligibility conditions ceasing to be met

Where in the case of an eligible liabilities instrument the applicable conditions laid down in Article 72b cease to be met, the liabilities shall immediately cease to qualify as eligible liabilities instruments.

Liabilities referred to in Article 72b(2) may continue to count as eligible liabilities instruments as long as they qualify as eligible liabilities instruments under Article 72b(3) or Article 72b(4).

Section 2deductions from eligible liabilities items

Article 72eDeductions from eligible liabilities items

1.  Institutions identified in accordance with Article 131 of Directive 2013/36 shall deduct the following from eligible liabilities items :

(a)  direct, indirect and synthetic holdings by the institution of own eligible liabilities instruments, including own liabilities that that institution could be obliged to purchase as a result of existing contractual obligations;

(b)  direct, indirect and synthetic holdings by the institution of eligible liabilities instruments of G-SII entities with which the institution has reciprocal cross holdings that the competent authority considers to have been designed to artificially inflate the loss absorption and recapitalisation capacity of the resolution entity;

(c)  the applicable amount determined in accordance with Article 72i of direct, indirect and synthetic holdings of eligible liabilities instruments of G-SII entities, where the institution does not have a significant investment in those entities;

(d)  direct, indirect and synthetic holdings by the institution of eligible liabilities instruments of G-SII entities, where the institution has a significant investment in those entities, excluding underwriting positions held for fewer than five working days.

2.  For the purposes of this Section, all instruments ranking pari passu with eligible liabilities instruments shall be treated as eligible liabilities instruments, with the exception of instruments ranking pari passu with instruments recognised as eligible liabilities pursuant to Article 72b(3) and (4).

3.  For the purposes of this Section, institutions may calculate the amount of holdings of the eligible liabilities instruments referred to in Article 72b(3) as follows:

where

h  = the amount of holdings of the eligible liabilities instruments referred to in Article 72b(3);

I  = the index denoting the issuing institution;

Hi  = the total amount of holdings of eligible liabilities of the issuing institution I referred to in Article 72b(3);

li  = the amount of liabilities included in eligible liabilities items by the issuing institution I within the limits specified in Article 72b(3) according to the latest disclosures by the issuing institution;

Li  = the total amount of the outstanding liabilities of the issuing institution I referred to in Article 72b(3) according to the latest disclosures by the issuer.

4.  Where an EU parent institution or a parent institution in a Member State that is subject to Article 92a has direct, indirect or synthetic holdings of own funds instruments or eligible liabilities instruments of one or more subsidiaries which do not belong to the same resolution group as that parent institution, the resolution authority of that parent institution, in agreement with the resolution authorities of any subsidiaries concerned, may permit the parent institution to derogate from paragraphs 1I, 1(d) and 2 by deducting a lower amount specified by the home resolution authority. That lower amount must be at least equal to the amount (m) calculated as follows:

Where

I  = the index denoting the subsidiary;

Oi   = the amount of own funds instruments issued by subsidiary I which is recognised in consolidated own funds by the parent institution;

Pi   = the amount of eligible liabilities instruments issued by subsidiary I and held by the parent institution;

rRG   = the ratio applicable to the respective resolution group in accordance with point (a) of Article 92a(1) and Article 45d of Directive 2014/59/EU;

Ri   = the total risk exposure amount of the G-SII entity I calculated in accordance with Article 92(3) and (4).

Where the parent institution is allowed to deduct the lower amount in accordance with the first subparagraph, the difference between the amount calculated in accordance with paragraphs 1I, 1(d) and 2 and this lower amount shall be deducted by the subsidiary from the corresponding element of own funds and eligible liabilities.

Article 72fDeduction of holdings of own eligible liabilities instruments

For the purposes of point (a) of Article 72e(1), institutions shall calculate holdings on the basis of the gross long positions subject to the following exceptions:

(a)  institutions may calculate the amount of holdings on the basis of the net long position provided that both the following conditions are met:

(i)  the long and short positions are in the same underlying exposure and the short positions involve no counterparty risk;

(ii)  either both the long and the short positions are held in the trading book or both are held in the non-trading book;

(b)  institutions shall determine the amount to be deducted for direct, indirect and synthetic holdings of index securities by calculating the underlying exposure to own eligible liabilities instruments in those indices;

(c)  institutions may net gross long positions in own eligible liabilities instruments resulting from holdings of index securities against short positions in own eligible liabilities instruments resulting from short positions in underlying indices, including where those short positions involve counterparty risk, provided that both the following conditions are met:

(i)  the long and short positions are in the same underlying indices;

(ii)  either both the long and the short positions are held in the trading book or both are held in the non-trading book.

Article 72gDeduction base for eligible liabilities items

For the purposes of points (b), (c) and (d) of Article 72e(1), institutions shall deduct the gross long positions subject to the exceptions laid down in Articles 72h to 72i.

Article 72hDeduction of holdings of eligible liabilities of other GSII entities

Institutions not making use of the exception set out in Article 72j, they shall make the deductions referred to in points I and (d) of Article 72e(1) in accordance with the following:

(a)  they may calculate direct, indirect and synthetic holdings of eligible liabilities instruments on the basis of the net long position in the same underlying exposure provided that both the following conditions are met:

(i)  the maturity of the short position matches the maturity of the long position or has a residual maturity of at least one year;

(ii)  either both the long position and the short position are held in the trading book or both are held in the non-trading book

(b)  they shall determine the amount to be deducted for direct, indirect and synthetic holdings of index securities by looking through to the underlying exposure to the eligible liabilities instruments in those indices.

Article 72iDeduction of eligible liabilities where the institution does not have a significant investment in G-SII entities

1.  For the purposes of point I of Article 72e(1), institutions shall calculate the applicable amount to be deducted by multiplying the amount referred to in point (a) of this paragraph by the factor derived from the calculation referred to in point (b) of this paragraph:

(a)  the aggregate amount by which the direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1, Additional Tier 1, Tier 2 instruments of financial sector entities and eligible liabilities instruments of G-SII entities in none of which the institution has a significant investment exceeds 10% of the Common Equity Tier 1 items of the institution after applying the following:

(i)  Articles 32 to 35;

(ii)  points (a) to (g), points (k)(ii) to (v) and point (l) of Article 36(1), excluding the amount to be deducted for deferred tax assets that rely on future profitability and arise from temporary differences;

(iii)  Articles 44 and 45;

(b)  the amount of direct, indirect and synthetic holdings by the institution of the eligible liability instruments of G-SII entities in which the institution does not have a significant investment divided by the aggregate amount of the direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1, Additional Tier 1, Tier 2 instruments of financial sector entities and eligible liability instruments of G-SII entities in none of which the resolution entity has a significant investment.

2.  Institutions shall exclude underwriting positions held for five working days or fewer from the amounts referred to in point (a) of paragraph 1 and from the calculation of the factor referred to in point (b) of paragraph 1.

3.  The amount to be deducted pursuant to paragraph 1 shall be apportioned across each eligible liabilities instrument of a G-SII entity held by the institution. Institutions shall determine the amount of each eligible liabilities instrument that is deducted pursuant to paragraph 1 by multiplying the amount specified in point (a) of this paragraph by the proportion specified in point (b) of this paragraph:

(a)  the amount of holdings required to be deducted pursuant to paragraph 1;

(b)  the proportion of the aggregate amount of direct, indirect and synthetic holdings by the institution of the eligible liabilities instruments of G-SII entities in which the institution does not have a significant investment represented by each eligible liability instrument held by the institution.

4.  The amount of holdings referred to in point I of Article 72e(1) that is equal to or less than 10 % of the Common Equity Tier 1 items of the institution after applying the provisions laid down in points (a)(i), (ii) and (iii) of paragraph 1 shall not be deducted and shall be subject to the applicable risk weights in accordance with Chapter 2 or 3 of Title II of Part Three and the requirements laid down in Title IV of Part Three, as applicable.

5.  Institutions shall determine the amount of each eligible liabilities instrument that is risk weighted pursuant to paragraph 4 by multiplying the amount of holdings required to be risk weighted pursuant to paragraph 4 by the proportion resulting from the calculation in point (b) of paragraph 3.

Article 72jTrading book exception from deductions from eligible liabilities items

1.  Institutions may decide not to deduct a designated part of their direct, indirect and synthetic holdings of eligible liabilities instruments, that in aggregate and measured on a gross long basis is equal to or less than 5% of the Common Equity Tier 1 items of the institution after applying Articles 32 to 36, provided that all of the following conditions are met:

(a)  the holdings are in the trading book;

(b)  the eligible liabilities instruments are held for no longer than 30 business days.

2.  The amounts of the items that are not deducted pursuant to paragraph 1 shall be subject to own funds requirements for items in the trading book.

3.  Where in the case of holdings deducted in accordance with paragraph 1 the conditions laid down in that paragraph cease to be met, the holdings shall be deducted in accordance with Article 72g without applying the exceptions laid down in Articles 72h and 72i.

Section 3Own funds and eligible liabilities

Article 72kEligible Liabilities

The eligible liabilities of an institution shall consist of the eligible liabilities items of the institution after the deductions referred to in Article 72e.

Article 72lOwn Funds and eligible liabilities

The own funds and eligible liabilities of an institution shall consist of the sum of its own funds and its eligible liabilities.”.

(28)  In Part Two, Title I, the title of Chapter 6 is replaced by the following:

“General requirements for own funds and eligible liabilities”

(29)  Article 73 is amended as follows:

(a)  the title is replaced by the following:

“ Distributions on instruments”;

(b)  paragraphs 1, 2, 3 and 4 are replaced by the following:

“1. Capital instruments and liabilities for which an institution has the sole discretion to decide to pay distributions in a form other than cash or own funds instruments shall not be capable of qualifying as Common Equity Tier 1, Additional Tier 1, Tier 2 or, eligible liabilities instruments, unless the institution has received the prior permission of the competent authority.

2. Competent authorities shall grant the permission referred to in paragraph 1 only where they consider all the following conditions to be met:

(a)  the ability of the institution to cancel payments under the instrument would not be adversely affected by the discretion referred to in paragraph 1, or by the form in which distributions could be made;

(b)  the ability of the instrument or of the liability to absorb losses would not be adversely affected by the discretion referred to in paragraph 1, or by the form in which distributions could be made;

(c)  the quality of the capital instrument or liability would not otherwise be reduced by the discretion referred to in paragraph 1, or by the form in which distributions could be made.

The competent authority shall consult the resolution authority regarding an institution’s compliance with those conditions before granting the permission referred to in paragraph 1.

3. Capital instruments and liabilities for which a legal person other than the institution issuing them has the discretion to decide or require that the payment of distributions on those instruments or liabilities shall be made in a form other than cash or own funds instruments shall not be capable of qualifying as Common Equity Tier 1, Additional Tier 1, Tier 2 or eligible liabilities instruments.

4. Institutions may use a broad market index as one of the bases for determining the level of distributions on Additional Tier 1, Tier 2 and eligible liabilities instruments.”;

(c)  paragraph 6 is replaced by the following:

“6. Institutions shall report and disclose the broad market indices on which their capital and eligible liabilities instruments rely.”.

(30)  In Article 75 the introductory phrase is replaced by the following:

"The maturity requirements for short positions referred to in point (a) of Article 45, point (a) of Article 59, point (a) of Article 69 and point (a) of Article 72h shall be considered to be met in respect of positions held where all of the following conditions are met:".

(31)  In Article 76, paragraphs 1, 2 and 3 are replaced by the following:

"1. For the purposes of point (a) of Article 42, point (a) of Article 45, point (a) of Article 57, point (a) of Article 59, point (a) of Article 67, point (a) of Article 69 and point (a) of Article 72h, institutions may reduce the amount of a long position in a capital instrument by the portion of an index that is made up of the same underlying exposure that is being hedged, provided that all of the following conditions are met:

(a)  either both the long position being hedged and the short position in an index used to hedge that long position are held in the trading book or both are held in the non-trading book;

(b)  the positions referred to in point (a) are held at fair value on the balance sheet of the institution.

2. Where the competent authority has given its prior permission, an institution may use a conservative estimate of the underlying exposure of the institution to instruments included in indices as an alternative to an institution calculating its exposure to the items referred to in one or several of the following points:

(a)  own Common Equity Tier 1, Additional Tier 1, Tier 2 and eligible liabilities instruments included in indices;

(b)  Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of financial sector entities, included in indices;

(c)  eligible liabilities instruments of institutions, included in indices.

3. Competent authorities shall grant the permission referred to in paragraph 2 only where the institution has demonstrated to their satisfaction that it would be operationally burdensome for the institution to monitor its underlying exposure to the items referred to in one or several of the points of paragraph 2, as applicable.".

(32)  Article 77 is replaced by the following:

“Article 77Conditions for reducing own funds and eligible liabilities

1. An institution shall obtain the prior permission of the competent authority to do either or both of the following:

(a)  reduce, redeem or repurchase Common Equity Tier 1 instruments issued by the institution in a manner that is permitted under applicable national law;

(b)  effect the call, redemption, repayment or repurchase of Additional Tier 1, Tier 2 or eligible liabilities instruments as applicable, prior to the date of their contractual maturity.

1a.  An institution shall obtain the prior permission of the resolution authority to do either or both of the following:

(a)  effect the call, redemption, repayment or repurchase of eligible liabilities instruments that are not covered by paragraph 1, prior to the date of their contractual maturity;

(b)  effect the call, redemption, repayment or repurchase of instruments with a residual maturity below one year that previously qualified as eligible liabilities instruments and that are not covered by paragraph 1, where the institution on an individual basis or the resolution group of which the institution is a subsidiary on a consolidated basis, as applicable, does not comply with the minimum requirement for own funds and eligible liabilities.

1b.  The competent authorities may substitute the prior permission requirement in paragraph 1 by a notification requirement if the reduction of the Common Equity Tier 1 capital, Additional Tier 1 capital and Tier 2 capital as applicable is immaterial.

1c.  Where an institution provides sufficient safeguards to the competent authority as to its capacity to operate with own funds sufficiently above the amount of the requirements laid down in this Regulation and in Directive 2013/36/EU, institutions may take any of the actions under paragraph 1, provided that:

(a)  such action does not lead to a decrease in own funds that would lead to a situation where the own funds of the institution would fall below the requirements laid down in this Regulation and in Directive 2013/36/EU and an additional margin of 2,5% of the total risk exposure amount in accordance with Article 92(3) of this Regulation;

(b)  the institution notifies to the competent authority its intention to take any of the actions under paragraph 1 and submits all information necessary to evaluate whether the conditions set out in the first subparagraph of this paragraph are satisfied.

Where an institution provides sufficient safeguards to the resolution authority as to its capacity to operate with own funds and eligible liabilities sufficiently above the amount of the requirements laid down in this Regulation and in Directive 2013/36/EU and Directive 2014/59/EU, institutions may take any of the actions under paragraph 1 provided that:

(a)  such action does not lead to a decrease in own funds and eligible liabilities that would lead to a situation where the own funds and eligible liabilities of the institution would fall below the requirements in this Regulation, in Directive 2013/36/EU, in Directive 2014/59/EU and an additional margin of 2,5% of the total risk exposure amount in accordance with Article 92(3) of this Regulation;

(b)  the institution notifies to the competent and the resolution authority its intention to make any of the actions under paragraph 1 and submits all information necessary to evaluate whether the conditions set out in the first subparagraph of this paragraph are satisfied.”.

(33)  Article 78 is replaced by the following:

"Article 78Supervisory permission for reducing own funds and eligible liabilities

1.  The competent authority shall grant permission for an institution to reduce, repurchase, call or redeem Common Equity Tier 1, Additional Tier 1, Tier 2 or eligible liabilities instruments where either of the following conditions is met:

(a)  earlier than or at the same time as the action referred to in Article 77, the institution replaces the instruments referred to in Article 77 with own funds or eligible liabilities instruments of equal or higher quality at terms that are sustainable for the income capacity of the institution;

(b)  the institution has demonstrated to the satisfaction of the competent authority that the own funds and eligible liabilities of the institution would, following the action in question, exceed the requirements laid down in this Regulation, in, Directive 2013/36/EU and in Directive 2014/59/EU by a margin that the competent authority considers necessary.

The competent authority shall consult the resolution authority before granting that permission.

Where an institution provides sufficient safeguards as to its capacity to operate with own funds above the amount of the requirements laid down in this Regulation, in Directive 2013/36/EU and in Directive 2014/59/EU, the resolution authority, after consulting the competent authority, may grant a general prior permission to that institution to effect calls, redemptions, repayments or repurchases of eligible liabilities instruments, subject to criteria that ensure that any such future actions will be in accordance with the conditions laid down in points (a) and (b) of this paragraph. This general prior permission shall be granted only for a certain time period, which shall not exceed one year, after which it may be renewed. The general prior permission shall only be granted for a certain predetermined amount, which shall be set by the resolution authority. Resolution authorities shall inform the competent authorities about any general prior permission granted.

Where an institution provides sufficient safeguards as to its capacity to operate with own funds above the amount of the requirements laid down in this Regulation, in Directive 2013/36/EU and in Directive 2014/59/EU, the competent authority, after consulting the resolution authority, may grant that institution a general prior permission to that institution to effect calls, redemptions, repayments or repurchases of eligible liabilities instruments, subject to criteria that ensure that any such future actions will be in accordance with the conditions laid down in points (a) and (b) of this paragraph. This general prior permission shall be granted only for a certain time period, which shall not exceed one year, after which it may be renewed. The general prior permission shall be granted for a certain predetermined amount, which shall be set by the competent authority. In case of Common Equity Tier 1 instruments, that predetermined amount shall not exceed 3% of the relevant issue and shall not exceed 10 % of the amount by which Common Equity Tier 1 capital exceeds the sum of the Common Equity Tier 1 capital requirements laid down in this Regulation, in Directive 2013/36/EU and in Directive 2014/59/EU by a margin that the competent authority considers necessary. In case of Additional Tier 1 instruments or Tier 2 instruments, that predetermined amount shall not exceed 10% of the relevant issue and shall not exceed 3 % of the total amount of outstanding Additional Tier 1 instruments or Tier 2 instruments, as applicable. In case of eligible liabilities instruments, the predetermined amount shall be set by the by the resolution authority after it has consulted the competent authority.

Competent authorities shall withdraw the general prior permission where an institution breaches any of the criteria provided for the purposes of that permission.

2.  When assessing under point (a) of paragraph 1 the sustainability of the replacement instruments for the income capacity of the institution, competent authorities shall consider the extent to which those replacement capital instruments and liabilities would be more costly for the institution than those they would replace.

3.  Where an institution takes an action referred to in point (a) of Article 77 and the refusal of redemption of Common Equity Tier 1 instruments referred to in Article 27 is prohibited by applicable national law, the competent authority may waive the conditions laid down in paragraph 1 of this Article provided that the competent authority requires the institution to limit the redemption of such instruments on an appropriate basis.

4.  Competent authorities may permit institutions to call, redeem, repay or repurchase Additional Tier 1 or Tier 2 instruments during the five years following their date of issuewhere the conditions laid down in paragraph 1 are met and any of the following conditions:

(a)  there is a change in the regulatory classification of those instruments that would be likely to result in their exclusion from own funds or reclassification as a lower quality form of own funds, and both the following conditions are met:

(i)  the competent authority considers such a change to be sufficiently certain;

(ii)  the institution demonstrates to the satisfaction of the competent authority that the regulatory reclassification of those instruments was not reasonably foreseeable at the time of their issuance;

(b)  there is a change in the applicable tax treatment of those instruments which the institution demonstrates to the satisfaction of the competent authority is material and was not reasonably foreseeable at the time of their issuance;

(c)  the instruments are grandfathered under Article 484 of the CRR;

(d)  earlier than or at the same time as the action referred to in Article 77, the institution replaces the instruments referred to in Article 77 with own funds or eligible liabilities instruments of equal or higher quality at terms that are sustainable for the income capacity of the institution and the competent authority has permitted that action based on the determination that it would be beneficial from a prudential point of view and justified by exceptional circumstances;

(e)  the Additional Tier 1 or Tier 2 instruments are repurchased for market making purposes.

The competent authority shall consult the resolution authority on those conditions before granting permission.

5.  EBA shall develop draft regulatory technical standards to specify the following:

(a)  the meaning of 'sustainable for the income capacity of the institution';

(b)  the appropriate bases of limitation of redemption referred to in paragraph 3;

(c)  the process including the limits and procedures for granting approval in advance by competent authorities for an action listed in Article 77, and data requirements for an application by an institution for the permission of the competent authority to carry out an action listed in Article 77, including the process to be applied in the case of redemption of shares issued to members of cooperative societies, and the time period for processing such an application;

(d)  the exceptional circumstances referred to in paragraph 4;

(e)  the meaning of the term 'market making' referred to in paragraph 4.

EBA shall submit those draft regulatory technical standards to the Commission by [3 months after entry into force].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.".

(34)  Article 79 is amended as follows:

(a)  The title is replaced by the following:

“Temporary waiver from deduction from own funds and eligible liabilities”;

(b)  paragraph 1 is replaced by the following:

“1. Where an institution holds capital instruments or liabilities or has granted subordinated loans, as applicable, that qualify temporarily as Common Equity Tier 1, Additional Tier 1, Tier 2 in a financial sector entity or as eligible liabilities instruments in an institution and where the competent authority considers those holdings to be for the purposes of a financial assistance operation designed to reorganise and save that entity or that institution, the competent authority may waive on a temporary basis the provisions on deduction that would otherwise apply to those instruments.”.

(35)  Article 80 is amended as follows:

(a)  The title is replaced by the following:

“Continuing review of the quality of own funds and eligible liabilities”;

(b)  paragraph 1 is replaced by the following:

“1. EBA shall monitor the quality of own funds and eligible liabilities instruments issued by institutions across the Union and shall notify the Commission immediately where there is significant evidence that those instruments do not meet the respective eligibility criteria set out in this Regulation.

Competent authorities shall, without delay and upon request by EBA, forward all information to EBA that EBA considers relevant concerning new capital instruments or new types of liabilities issued in order to enable EBA to monitor the quality of own funds and eligible liabilities instruments issued by institutions across the Union.”;

(c)  in paragraph 3, the introductory phrase is replaced by the following:

“3. EBA shall provide technical advice to the Commission on any significant changes it considers to be required to the definition of own funds and eligible liabilities as a result of any of the following:”.

(36)  In Article 81, paragraph 1 is replaced by the following:

"1. Minority interests shall comprise the sum of Common Equity Tier 1 items of a subsidiary where the following conditions are met:

(a)  the subsidiary is one of the following:

(i)  an institution;

(ii)  an undertaking that is subject by virtue of applicable national law to the requirements of this Regulation and Directive 2013/36/EU;

(iii)  an intermediate financial holding company in a third country that is subject to prudential requirements as stringent as those applied to credit institutions of that third country and where the Commission has decided in accordance with Article 107(4) that those prudential requirements are at least equivalent to those of this Regulation;

(b)  the subsidiary is included fully in the consolidation pursuant to Chapter 2 of Title II of Part One;

(c)  the Common Equity Tier 1 items, referred to in the introductory part of this paragraph, is owned by persons other than the undertakings included in the consolidation pursuant to Chapter 2 of Title II of Part One.".

(37)  Article 82 is replaced by the following:

“Article 82Qualifying Additional Tier 1, Tier 1, Tier 2 capital and qualifying own funds

Qualifying Additional Tier 1, Tier 1, Tier 2 capital and qualifying own funds shall comprise the minority interest, Additional Tier 1 or Tier 2 instruments, as applicable, plus the related retained earnings and share premium accounts, of a subsidiary where the following conditions are met:

(a)  the subsidiary is either of the following:

(i)  an institution;

(ii)  an undertaking that is subject by virtue of applicable national law to the requirements of this Regulation and Directive 2013/36/EU;

(iii)  an intermediate financial holding company in a third country that is subject to prudential requirements as stringent as those applied to credit institutions of that third country and where the Commission has decided in accordance with Article 107(4) that those prudential requirements are at least equivalent to those of this Regulation;

(b)  the subsidiary is included fully in the scope of consolidation pursuant to Chapter 2 of Title II of Part One;

(c)  those instruments are owned by persons other than the undertakings included in the consolidation pursuant to Chapter 2 of Title II of Part One.”.

(38)  In Article 83, the introductory phrase of paragraph 1 is replaced by the following:

“1. Additional Tier 1 and Tier 2 instruments issued by a special purpose entity, and the related share premium accounts, are included until 31 December 2021 in qualifying Additional Tier 1, Tier 1 or Tier 2 capital or qualifying own funds, as applicable, only where the following conditions are met:”.

(38a)  In Article 85, the following paragraph is added:

“4. Where credit institutions permanently affiliated in a network to a central body and institutions established within an institutional protection scheme subject to the conditions laid down in Article 113(7) have set up a cross-guarantee scheme that provides that there is no current or foreseen material, practical or legal impediment to the transfer of the amount of own funds above the regulatory requirements from the counterparty to the credit institution, these institutions are exempted from the provisions of this Article regarding deductions and may recognise any minority interest arising within the cross-guarantee scheme in full.”

(38b)  In Article 87, the following paragraph is added:

“4. Where credit institutions permanently affiliated in a network to a central body and institutions established within an institutional protection scheme subject to the conditions laid down in Article 113(7) have set up a cross-guarantee scheme that provides that there is no current or foreseen material, practical or legal impediment to the transfer of the amount of own funds above the regulatory requirements from the counterparty to the credit institution, these institutions are exempted from the provisions of this Article regarding deductions and may recognise any minority interest arising within the cross-guarantee scheme in full.”

(39)  Article 92 is amended as follows:

(a)  in paragraph 1, the following points are added:

“(d)  a leverage ratio of 3%;

(da)  by derogation from point (d), each G-SII shall add 50% of the G-SII buffer calculated in accordance with Article 131(4) of Directive 2013/36/EU to the 3% leverage requirement.”.

(b)  in paragraph 3, points (b), (c) and (d) are replaced by the following:

“(b)  the own funds requirements for the trading-book business of an institution for the following:

(i)  market risks as determined in accordance with Title IV of this Part;

(ii)  large exposures exceeding the limits specified in Articles 395 to 401, to the extent that an institution is permitted to exceed those limits, as determined in accordance with Part Four.

(c)  the own funds requirements for market risks as determined in Title IV of this Part for all business activities that generate foreign-exchange or commodity risks;

(d)  the own funds requirements determined in accordance with Title V, with the exception of Article 379 for settlement risk.”.

(40)  The following Articles 92a and 92b are inserted:

“Article 92aG-SII Requirement for own funds and eligible liabilities

1.  Subject to Articles 93 and 94 and to the exceptions set out in paragraph 2 of this Article, institutions identified as resolution entities and that are a G-SII or part of a G-SII shall at all times satisfy the following requirements for own funds and eligible liabilities:

(a)  a risk-based ratio of 18%, representing the own funds and eligible liabilities of the institution expressed as a percentage of the total risk exposure amount calculated in accordance with paragraphs 3 and 4 of Article 92(3) and (4);

(b)  a non-risk-based ratio of 6,75%, representing the own funds and eligible liabilities of the institution expressed as a percentage of the total exposure measure referred to in Article 429(4).

2.  The requirement laid down in paragraph 1 shall not apply in the following cases:

(a)  within the three years following the date on which the institution or the group of which the institution is part has been identified as a G-SII ;

(b)  within the two years following the date on which the resolution authority has applied the bail-in tool in accordance with Directive 2014/59/EU;

(c)  within the two years following the date on which the resolution entity has put in place an alternative private sector measure referred to in point (b) of Article 32(1) of Directive 2014/59/EU by which capital instruments and other liabilities have been written down or converted into Common Equity Tier 1 in order to recapitalise the resolution entity without the application of resolution tools.

3.  Where the aggregate resulting from the application of the requirements laid down in point (a) of paragraph 1 to each resolution entity of the same G-SII exceeds the requirement of own funds and eligible liabilities calculated in accordance with Article 12, the resolution authority of the EU parent institution may, after having consulted the other relevant resolution authorities, act in accordance with Articles 45d(3) or 45h(1)of Directive 2014/59/EU.

Article 92bNon-EU G-SII Requirement for own funds and eligible liabilities

1. Institutions that are material subsidiaries of non-EU G-SIIs and that are not resolution entities shall at all times satisfy a requirement for own funds and eligible liabilities between 75% and 90% of the requirements for own funds and eligible liabilities laid down in Article 92a.

For the purposes of compliance with paragraph 1, Additional Tier 1, Tier 2 and eligible liabilities instruments shall only count where they are held by the parent undertaking of the institution in a third country.

2. The requirement for own funds and eligible liabilities within the range laid down in paragraph 1, shall be determined by the host resolution authority of the material subsidiary in consultation with the home authority of the resolution group in consideration of the group's resolution strategy and implications on financial stability.”.

(41)  Article 94 is replaced by the following:

"Article 94Derogation for small trading book business

1.  By way of derogation from point (b) of Article 92(3), institutions may calculate the own funds requirement of their trading-book business in accordance with paragraph 2 provided that the size of the institutions’ on- and off-balance sheet trading-book business is equal to or less than both of the following thresholds on the basis of an assessment carried out on a monthly basis using the data as of the last day of the month:

(a)  5 % of the institution's total assets;

(b)  EUR 50 million.

2.  Where the conditions set out in paragraph 1 are met, institutions may calculate the own funds requirement of their trading-book business as follows:

(a)  for the contracts listed in point 1 of Annex II, contracts relating to equities which are referred to in point 3 of Annex II and credit derivatives, institutions may exempt those positions from the own funds requirement referred to in point (b) of Article 92(3);

(b)  for trading book positions other than those referred to in point (a), institutions may replace the own funds requirement referred to in point (b) of Article 92(3) with the requirement calculated in accordance with point (a) of Article 92(3).

3.  Institutions shall calculate the size of their on- and off-balance sheet trading book business on a given date for the purposes of paragraph 1 in accordance with the following requirements:

(a)  all the positions assigned to the trading book in accordance with Article 104 shall be included in the calculation except for the following:

(i)  positions concerning foreign-exchange and commodities derivatives that are recognised as internal hedges against non-trading book foreign-exchange and commodities risk exposures;

(ii)  credit derivatives that are recognised as internal hedges against non-trading book credit risk exposures or counterparty risk exposures;

(b)  all positions shall be valued at their market prices on that given date; where the market price of a position is not available on that date, institutions shall take the most recent market value for that position.

(c)  the absolute value of long positions shall be summed with the absolute value of short positions.

3a.  Where both conditions set out in Article 94(1) of this Regulation are met, irrespective of the obligations set out in Articles 74 and 83 of Directive 2013/36/EU, the provisions of Articles 102, 103, 104b and 105(3) of Part Three, Title 1, Chapter 3 of this Regulation do not apply.

4.  Institutions shall notify the competent authorities when they calculate, or cease to calculate, the own fund requirements of their trading-book business in accordance with this paragraph 2.

5.  An institution that no longer meets any of the conditions of paragraph 1 shall immediately notify the competent authority thereof.

6.  An institution shall cease to determine the own fund requirements of its trading-book business in accordance with paragraph 2 within three months in one of the following cases:

(a)  the institution does not meet any of the conditions of paragraph 1 for three consecutive months;

(b)  the institution does not meet any of the conditions of paragraph 1 during more than 6 out of the last 12 months.

7.  Where an institution ceases to calculate the own fund requirements of its trading-book business in accordance with this Article, it shall only be permitted to calculate the own funds requirements of its trading-book business in accordance with this Article where it demonstrates to the competent authority that all the conditions set out in paragraph 1 have been met for an uninterrupted full year period.

8.  Institutions shall not enter into a trading book position for the only purpose of complying with any of the conditions set out in paragraph 1 during the monthly assessment.".

(42)  Article 99 is replaced by the following:

"Article 99Reporting on own funds requirements and financial information

1.  Institutions shall report to their competent authorities on the obligations laid down in Article 92 in accordance with this Article.

  Resolution entities shall report to their competent authorities on the obligations laid down in Article 92a and 92b at least on a semi-annual basis.

2.  In addition to the own funds reporting referred to in paragraph 1, institutions shall report financial information to their competent authorities where they are one of the following:

(a)  an institution subject to Article 4 of Regulation (EC) No 1606/2002;

(b)  a credit institution that prepares its consolidated accounts in accordance with the international accounting standards pursuant to Article 5(b) of Regulation (EC) No 1606/2002.

3.  Competent authorities may require from credit institutions that determine their own funds on a consolidated basis in accordance with international accounting standards pursuant to Article 24(2) of this Regulation, to report financial information in accordance with this Article.

4.  The reports required in accordance with paragraphs 1 shall be submitted by small and non-complex institutions semi-annually or more frequently. The reports required in accordance with paragraph 2 and 3 shall be submitted ▌by small and non-complex institutions annually.

All other institutions shall, subject to paragraph 6, submit the reports in accordance with paragraphs 1 to 3 semi-annually or more frequently▌.

5.  The reporting on financial information referred to in paragraphs 2 and 3 shall only comprise information that is needed to provide a comprehensive view of the institution's risk profile and the systemic risks posed by institutions to the financial sector or the real economy as set out in Regulation (EU) No 1093/2010.

6.  EBA shall develop draft implementing technical standards to specify the uniform formats, frequency, dates of reporting, definitions and IT solutions for the reporting referred to in paragraphs 1 to 3 and in Article 100.

The reporting requirements laid down in this Article shall be applied to institutions in a proportionate manner, having regard to their size, complexity and the nature and level of risk of their activities.

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in accordance with Article 15 of Regulation (EU) No 1093/2010.

7.  EBA shall assess the financial impact on institutions of Commission Implementing Regulation (EU) No 680/2014(19) in terms of compliance costs and report its findings to the Commission by no later than [31 December 2019]. That report shall in particular examine whether reporting requirements have been applied in a sufficiently proportionate manner. This shall especially be examined in the case of small and non-complex institutions.

For those purposes, the report shall:

(a)  classify institutions into categories based on their size, complexity and the nature and level of risk of their activities. The report shall in particular include a category of small and non-complex institutions▌;

(b)  measure the reporting burden incurred by each category of institutions during the relevant period to meet the reporting requirements set out in Implementing Regulation (EU) No 680/2014, taking into account the following principles:

(i)  the reporting burden shall be measured as the ratio of compliance costs relative to institutions' net income during the relevant period;

(ii)  the compliance costs shall comprise all expenditure directly or indirectly related to the implementation and operation on an on-going basis of the reporting systems, including expenditure on staff, IT systems, legal, accounting, auditing and consultancy services;

(iii)  the relevant period shall refer to each annual period during which institutions have incurred compliance costs to prepare for the implementation of the reporting requirements laid down in Implementing Regulation (EU) No 680/2014 and to continue operating the reporting systems on an on-going basis;

(c)  assess whether and to what extent compliance costs substantially prevented newly incorporated institutions from entering the market;

(ca)  assess the added value and the necessity of the data collected and reported for prudential purposes;

(d)  assess the impact of compliance costs, as referred to in point (b)(ii), on each category of institutions in terms of opportunity costs; and

(e)  recommend amendments of Implementing Regulation (EU) No 680/2014 to reduce the reporting burden on institutions or specified categories of institutions where appropriate having regard to the objectives of this Regulation and Directive 2013/36/EU and to reduce the reporting frequency of the reports required in accordance with Articles 100, 394 and 430. Additionally, the report shall assess if reporting requirements in accordance with Article 100 could be waived if asset encumbrance is below a certain threshold and if the bank is considered as small and non-complex. The report shall, at a minimum, make recommendations on how ▌the extent and level of granularity of reporting requirements for small and non-complex institutions can be reduced so that the expected average compliance costs for small and non-complex institutions shall be ideally 20% or more and at least 10% lower after the reduced reporting obligations have been fully applied.

Based on the findings of that EBA report, the Commission shall, by [31 December 2020], amend the corresponding technical regulatory standards and shall submit, if necessary, one or more legislative proposals for implementing those recommendations.

8.  For the purposes of point (d) of paragraph 7, 'opportunity costs' shall mean the value lost to institutions for services not provided to customers due to compliance costs.

9.  Competent authorities shall consult EBA on whether institutions, other than those referred to in paragraphs 2 and 3, should report on financial information on a consolidated basis in accordance with paragraph 2, provided that all of the following conditions are met:

(a)  the relevant institutions are not already reporting on a consolidated basis;

(b)  the relevant institutions are subject to an accounting framework in accordance with Directive 86/635/EEC;

(c)  financial reporting is considered necessary to provide a comprehensive view of the risk profile of those institutions' activities and of the systemic risks they pose to the financial sector or the real economy as set out in Regulation (EU) No 1093/2010.

EBA shall develop draft implementing technical standards to specify the formats that institutions referred to in the first subparagraph shall use for the purposes set out therein.

Power is conferred on the Commission to adopt the implementing technical standards referred to in the second subparagraph in accordance with Article 15 of Regulation (EU) No 1093/2010.

10.  Where a competent authority considers information not covered by the implementing technical standards referred to in paragraph 6 as necessary for the purposes set out in paragraph 5, it shall notify EBA and the ESRB of the additional information it deems necessary to include in the implementing technical standards referred to in that paragraph.

11.  Competent authorities may waive the requirements to report data items specified in the implementing technical standards referred to in this Article and Articles 100, 101, 394, 415 and 430, reduce the reporting frequency, allow the institution to report in another reporting framework, if at least one of the following applies:

(a)  those data items are already available to the competent authorities by means other than those specified under the above mentioned implementing ▌standards, including where that information is available to the competent authorities in different formats or levels of granularity; the competent authority may then only grant the exceptions stated in this paragraph if data received, collated or aggregated through such alternative methods are identical to those data points which otherwise ought to be reported in accordance with the respective implementing technical standards;

(b)  the data points or formats have not been updated in accordance with the amendments to this Regulation within an appropriate time period before the deadline for the data to be reported;

Competent authorities, resolution authorities, designated authorities and relevant authorities shall make use of data exchange wherever possible to waive reporting requirements.".

(43)  Article 100 is replaced by the following:

"Article 100Reporting requirements on asset encumbrance

1.  Institutions shall report to their competent authorities on their level of asset encumbrance.

2.  The report referred to in paragraph 1 shall provide for a breakdown by type of asset encumbrance, such as repurchase agreements, securities lending, securitised exposures or loans attached as collateral to covered bonds. ".

(43a)  The following Article is inserted:

“Article 101a

The creation of a consistent and integrated system for collecting statistical and prudential data

The EBA shall develop a consistent and integrated system for collecting statistical and prudential data and report its findings to the Commission no later than [31 December 2019]. The report, involving all the competent authorities, as well as authorities in charge of deposit guarantee schemes, statistical authorities, all relevant authorities, in particular the ECB and its previous work on statistical data collections, and taking into account the previous work that has been conducted with regard to a European Reporting Framework, shall be based on an overall benefits and cost analysis amongst other with regards to the establishment of a central collection point and as a minimum include

(a)  an overview of the quantity and scope of the data collected by the competent authorities in their jurisdiction and of its origins and granularity;

(b)  a review of the completion of a standard dictionary of the data to be collected, in order to increase the convergence of reporting requirements, as regards regular reporting obligations as well as information requested on an ad hoc basis by the institutions’ competent authorities, and to avoid unnecessary queries;

(c)  an assessment, considering the business activities of a small and non-complex institution, of applicable data points, which are not necessary to assess compliance with the prudential requirements or the financial situation of an institution and which data points could be merged

(d)  a timetable for an integrated, standardised reporting system with a central collection point, which

(i) contains a central data register with all statistical and prudential data in the necessary granularity and frequency for the particular institution and is updated at necessary intervals;

(ii) serves as a point of contact for the competent authorities, where they receive, process and pool all data queries, where queries can be matched with existing collected reported data and which allows the competent authorities quick access to the requested information;

(iii) serves as the sole point of contact for the supervised institutions, transfers statistical and prudential data queries by competent authorities to the institution and enters the requested data into the central data register;

(iv) holds a coordinating role for the exchange of information and data between competent authorities;

(v) transfers only ad hoc queries by competent authorities to the supervised institution after the query has been matched with existing queries and the standard dictionary referred to in point b, in order to avoid duplicates;

(vi) has sufficient organisational, financial and personnel structures and resources to fulfil its mandate;

(vii) takes into account the proceedings and processes of other competent authorities and transfers them into a standardised system.

(viii) ensures that newly introduced reporting requirements are applied not earlier than 2 years after their publication and that final reporting templates are made available at least 1 year prior to their application date.

By ...[one year after presentation of the report] the Commission shall, if appropriate and taking into account the report referred to in this Article, submit one or more legislative proposals to the European Parliament and to the Council for the establishment of a standardised and integrated reporting system for reporting requirements.”.

(44)  In Article 101(1), the introductory phrase is replaced by the following:

“1.   Institutions shall report to their competent authorities on a semi-annual basis the following aggregate data for each national immovable property market to which they are exposed:”.

(45)  In Article 101, paragraphs 4 and 5 are replaced by the following:

“4.   EBA shall develop draft implementing technical standards to specify uniform formats for, definitions of and frequencies and reporting dates of the aggregate data referred to in paragraph 1, as well as the IT solutions.

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in accordance with Article 15 of Regulation (EU) No 1093/2010.

5.   By way of derogation from paragraph 1, small institutions as defined in Article 430a shall report the information referred to in paragraph 1 on an annual basis.”.

(46)  Article 102 is amended as follows:

(a)  Paragraphs 2, 3 and 4 are replaced by the following:

“2. Trading intent shall be evidenced on the basis of the strategies, policies and procedures set up by the institution to manage the position or portfolio in accordance with Article 103 and 104.

3. Institutions shall establish and maintain systems and controls to manage their trading book in accordance with Articles 103.

4. Trading book positions shall be attributed to trading desks established by the institution in accordance with Article 104b, unless the institution is eligible for the treatment set out in Article 94 or has been granted the waiver referred to in Article 104b(3).”

The following paragraphs 5 and 6 are added:

“5. Positions in the trading book shall be subject to the requirements for prudent valuation specified in Article 105.

6. Institutions shall treat internal hedges in accordance with Article 106.”.

(47)  Article 103 is amended as follows:

(a)  Paragraph 1 is replaced by the following:

"1. Institutions shall have in place clearly defined policies and procedures for the overall management of the trading book. Those policies and procedures shall at least address:

(a)  which activities the institution considers to be trading business and as constituting part of the trading book for own funds requirement purposes;

(b)  the extent to which a position can be marked-to-market daily by reference to an active, liquid two-way market;

(c)  for positions that are marked-to-model, the extent to which the institution can:

(i)  identify all material risks of the position;

(ii)  hedge all material risks of the position with instruments for which an active, liquid two-way market exists;

(iii)  derive reliable estimates for the key assumptions and parameters used in the model.

(d)  the extent to which the institution can, and is required to, generate valuations for the position that can be validated externally in a consistent manner;

(e)  the extent to which legal restrictions or other operational requirements would impede the institution's ability to effect a liquidation or hedge of the position in the short term;

(f)  the extent to which the institution can, and is required to, actively manage the risks of positions within its trading operation;

(g)  the extent to which the institution may transfer risk or positions between the non-trading and trading books and the criteria for those transfers as referred to in Article 104a.";

(b)  In paragraph 2, the introductory part is replaced by the following:

"2. In managing its positions or portfolios of positions in the trading book the institution shall comply with all of the following requirements:";

(c)  In paragraph 2, point (a) is replaced by the following:

"(a)  the institution shall have in place a clearly documented trading strategy for the position or portfolios in the trading book, which shall be approved by senior management and include the expected holding period;";

(d)  In paragraph 2, the introductory part of point (b) is amended as follows:

"(b)  the institution shall have in place clearly defined policies and procedures for the active management of positions or portfolios in the trading book. Those policies and procedures shall include the following:";

(e)  In paragraph 2, point (b)(i) is amended as follows:

"(i) which positions or portfolios of positions may be entered into by each trading desk or, as the case may be, by designated dealers;".

(48)  Article 104 is replaced by the following:

"Article 104Inclusion in the trading book

1.  Institutions shall have in place clearly defined policies and procedures for determining which position to include in the trading book for the purposes of calculating their capital requirements, in accordance with the requirements set out in Article 102, the definition of trading book provided in point (86) of Article 4(1) and the provisions of this Article, taking into account the institution's risk management capabilities and practices. The institution shall fully document its compliance with those policies and procedures, shall subject them to internal audit at least on a yearly basis and make the results of that audit available to the competent authorities.

2.  Positions in the following instruments shall be assigned to the trading book:

(a)  instruments that meet the criteria for the inclusion in the correlation trading portfolio ('CTP'), as referred to in paragraphs 7 to 9;

(b)  financial instruments that are managed on a trading desk established in accordance with Article 104b;

(c)  financial instruments giving rise to a net short credit or equity position;

(d)  instruments resulting from underwriting commitments;

(e)  instruments held as accounting trading assets or liabilities measured at fair value;

(f)  instruments resulting from market-making activities;

(g)  collective investment undertakings, provided that they meet the conditions specified in paragraph 10 of this Article;

(h)  listed equities;

(i)  trading-related SFTs;

(j)  options including bifurcated embedded derivatives from instruments in the non-trading book that relate to credit or equity risk.

For the purposes of point (c) of this paragraph, an institution shall have a net short equity position where a decrease in an equity price results in a profit for the institution. Correspondingly, an institution shall have a net short credit position where a credit spread increase or deterioration in the creditworthiness of an issuer or group of issuers results in a profit for the institution.

3.  Positions in the following instruments shall not be assigned to the trading book:

(a)  instruments designated for securitisation warehousing;

(b)  real estate holdings;

(c)  retail and SME credit;

(d)  other collective investment undertakings than the ones specified in point (g) of paragraph 2 in which the institution cannot look through the fund on a daily basis or where the institution cannot obtain real prices for its equity investment in the fund on a daily basis;

(e)  derivative contracts with underlying instruments referred to in point (a) to (d);

(f)  instruments held for the purpose of hedging a particular risk of a position in an instrument referred to in point (a) to (e).

4.  Notwithstanding paragraph 2, an institution may not assign a position in an instrument referred to in points (e) to (i) of paragraph 2 to the trading book where that institution is able to satisfy the competent authorities that the position is not held with trading intend or does not hedge positions held with trading intend.

5.  Competent authorities may require an institution to provide evidence that a position that is not referred to in paragraph 3 shall be assigned to the trading book. In the absence of suitable evidence, competent authorities may require the institution to reallocate that position to the non-trading book, except for the positions referred to in points (a) to (d) of paragraph 2.

6.  Competent authorities may require an institution to provide evidence that a position that is not referred to in points (a) to (d) of paragraph 2 shall be assigned to the non-trading book. In the absence of suitable evidence, competent authorities may require the institution to reallocate that position to the trading book, unless that position is referred to paragraph 3.

7.  CTP securitisation positions and n-th-to-default credit derivatives that meet all of the following criteria shall be assigned to the CTP:

(a)  the positions are neither re-securitisation positions, nor options on a securitisation tranche, nor any other derivatives of securitisation exposures that do not provide a pro-rata share in the proceeds of a securitisation tranche;

(b)  all their underlying instruments are:

(i)  single-name instruments, including single-name credit derivatives, for which a liquid two-way market exists;

(ii)  commonly-traded indices based on the instruments referred to in point (i).

A two-way market is considered to exist where there are independent bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined within one day and settled at that price within a relatively short time conforming to trade custom.

8.  Positions with any of the following underlying instruments shall not be included in the CTP:

(a)  underlying instruments that belong to the exposure classes referred to in points (h) or (i) of Article 112;

(b)  a claim on a special purpose entity, collateralised, directly or indirectly, by a position that, according to paragraph 6, would itself not be eligible for inclusion in the CTP.

9.  Institutions may include in the CTP positions that are neither securitisation positions nor n-th-to-default credit derivatives but that hedge other positions of that portfolio, provided that a liquid two-way market as described in the last subparagraph of paragraph 7 exists for the instrument or its underlying instruments.

10.  Institution shall assign a position in a collective investment undertaking to the trading book where it meets at least one of the following conditions:

(a)  the institution can look through the collective investment undertaking on a daily basis;

(b)  the institution can obtain prices for the collective investment undertaking on a daily basis.".

(49)  The following Articles 104a and 104b are inserted:

"Article 104aRe-classification of a position

1.  Institutions shall have in place clearly defined policies for identifying which exceptional circumstances justify the re-classification of a trading book position as a non-trading book position or conversely a non-trading book position as a ▌ trading book position for the purposes of determining their own funds requirements to the satisfaction of the competent authorities. The institutions shall review these policies at least annually.

A new classification of instruments shall be permitted only in exceptional circumstances. These may include a bank restructuring that results in permanent closure of trading desks, requiring termination of the business activity applicable to the instrument or portfolio or a change in accounting standards that allows an item to be fair valued through the profit and loss. Market events, changes in the liquidity of a financial instrument, or a change of trading intent alone are not valid reasons for re-designating an instrument to a different book. A new classification shall be subject to paragraphs 2 to 5 and guarantee that the requirements of Article 104 are fulfilled. A new classification of instruments for the purpose of regulatory arbitrage is prohibited.

2.  Apart from re-classifications directly enforced under Article 104, competent authorities shall grant permission to re-classify a trading book position as a non-trading book position or conversely a non-trading book position as a ▌ trading book position for the purposes of determining their own funds requirements only where the institution has provided the competent authorities with written evidence that its decision to re-classify that position is the result of an exceptional circumstance that is consistent with the policies set out by the institution in accordance with paragraph 1. For that purpose, the institution shall provide sufficient evidence that the position no longer meets the condition to be classified as a trading book or non-trading book positions pursuant to Article 104.

The decision referred to in the first subparagraph shall be approved by the management body of the institution.

3.  Where the competent authorities have granted their permission in accordance with paragraph 2, the institution shall:

(a)  publicly disclose at the earliest reporting date the information that its position has been re-classified;

(b)  subject to the treatment set out in paragraph 4, determine as from the earliest reporting date the own funds requirements of the re-classified position in accordance with Article 92;

4.  Where, at the earliest reporting date, the net change in the amount of the institution's own funds requirements arising from re-classifying the position results in a net decrease of own funds requirements, the institution shall hold additional own funds equal to this net change and publicly disclose the amount of those additional own funds. The amount of those additional own funds shall remain constant until the position matures unless, the competent authorities permit the institution to phase this amount out at an earlier date.

5.  The re-classification of a position in accordance with this article, apart from re-classifications directly enforced under Article 104, shall be irrevocable.

Article 104bRequirements for trading desk

1.  Institutions shall establish trading desks and attribute each of their trading book positions to one of these trading desks. Trading book positions shall be attributed to the same trading desk only where they satisfy the agreed business strategy for the trading desk and are consistently managed and monitored in accordance with paragraph 2.

2.  Institutions' trading desks shall at all times meet all of the following requirements:

(a)  each trading desk shall have a clear and distinctive business strategy and a risk management structure that is adequate for its business strategy;

(b)  each trading desk shall have a clear organisational structure;positions in a given trading desk shall be managed by designated dealers within the institution; each dealer shall have dedicated functions in the trading desk; one dealer shall be assigned to one trading desk only;one dealer in each trading desk shall take a lead role in overseeing the activities and the other dealers of the trading desk;

(c)  position limits shall be set within each trading desk according to the business strategy of that trading desk;

(d)  reports on the activities, profitability, risk management and regulatory requirements at the trading desk level shall be produced at least on a weekly basis and communicated to the management body of the institution on a regular basis;

(e)  each trading desk shall have a clear annual business plan including a well-defined remuneration policy based on sound criteria used for performance measurement.

2a.  By way of derogation from point b, the competent authority may allow for dealers to be assigned to more than one trading desk, in case the institution has a cooperative or institutional protection scheme structure and proves to the satisfaction of the competent authority that its centralised market risk management is efficient.

3.  Institutions shall notify the competent authorities on the manner in which they comply with paragraph 2. Competent authorities may require an institution to change the structure or organisation of its trading desks to comply with this Article.

4.  By way of derogation from paragraph 1, institutions using the approaches set out in points (a) and (c) of Article 325(1) to determine the own funds requirements for market risk may apply for a waiver for part or all of the requirements set out in this Article. Competent authorities may grant the waiver where the institution demonstrates that:

(a)  non-compliance with paragraph 2 would not have a material adverse impact on the institution's ability to manage and monitor effectively the market risks of its trading book positions;

(b)  the institution complies with the general trading book management requirements set out in Article 103.".

(50)  Article 105 is amended as follows:

(a)  paragraph 1 is replaced by the following:

"1.   All trading book positions and non-trading book positions measured at fair value shall be subject to the standards for prudent valuation specified in this Article. Institutions shall in particular ensure that the prudent valuation of their trading book positions achieves an appropriate degree of certainty having regard to the dynamic nature of trading book positions and non-trading book positions measured at fair value, the demands of prudential soundness and the mode of operation and purpose of capital requirements in respect of trading book positions and non-trading book positions measured at fair value.";

(b)  paragraphs 3 and 4 are replaced by the following:

"3.   Institutions shall revalue trading book positions at fair value at least on a daily basis. Changes in the value of those positions shall be reported in the profit and loss account of the institution.

4.   Institutions shall mark their trading book positions and non-trading book positions measured at fair value to market whenever possible, including when applying the relevant capital treatment to those positions.";

(c)  paragraphs 3 and 4 are replaced by the following:

"6.   Where marking to market is not possible, institutions shall conservatively mark to model their positions and portfolios, including when calculating own funds requirements for positions in the trading book and positions measured at fair value in the non-trading book.";

(d)  in paragraph 7, the last subparagraph is replaced by the following:

"For the purposes of point (d), the model shall be developed or approved independently of the trading desks and shall be independently tested, including validation of the mathematics, assumptions and software implementation.";

(e)  in paragraph 11, point(a) is replaced by the following:

"(a)  the additional amount of time it would take to hedge out the position or the risks within the position beyond the liquidity horizons that have been assigned to the risk factors of the position in accordance with Article 325be;".

(51)  Article 106 is amended as follows:

(a)  paragraphs 2 and 3 are replaced by the following:

"2.   The requirements of paragraph 1 shall apply without prejudice to the requirements applicable to the hedged position in the non-trading book or in the trading book, where relevant.

3.   Where an institution hedges a non-trading book credit risk exposure or counterparty risk exposure using a credit derivative booked in its trading book, this credit derivative position shall be recognised as an internal hedge of the non-trading book credit risk exposure or counterparty risk exposure for the purpose of calculating the risk-weighted exposure amounts referred to in Article 92(3)(a) where the institution enters into another credit derivative transaction with an eligible third party protection provider that meets the requirements for unfunded credit protection in the non-trading book and perfectly offsets the market risk of the internal hedge.

Both an internal hedge recognised in accordance with the first sub-paragraph and the credit derivative entered into with the third party shall be included in the trading book for the purposes of calculating the own funds requirements for market risks.";

(b)  The following paragraphs 4, 5 and 6 are added:

"4.   Where an institution hedges a non-trading book equity risk exposure using an equity derivative booked in its trading book, this equity derivative position shall be recognised as an internal hedge of the non-trading book equity risk exposure for the purpose of calculating the risk-weighted exposure amounts referred to in Article 92(3)(a) where the institution enters into another equity derivative transaction with an eligible third party protection provider that meets the requirements for unfunded credit protection in the non-trading book and perfectly offsets the market risk of the internal hedge.

Both an internal hedge recognised in accordance with the first sub-paragraph and the equity derivative entered into with the third party shall be included in the trading book for the purpose of calculating the own funds requirements for market risks.

5. Where an institution hedges non-trading book interest rate risk exposures using an interest rate risk position booked in its trading book, this position shall be considered to be an internal hedge for the purposes of assessing the interest rate risks arising from non-trading positions in accordance with Articles 84 and 98 of Directive 2013/36/EU where the following conditions are met:

(a)  the position has been attributed to a trading desk established in accordance with Article 104b the business strategy of which is solely dedicated to manage and mitigate the market risk of internal hedges of interest rate risk exposure. For that purpose, that trading desk may enter into other interest rate risk positions with third parties or other trading desks of the institution, as long as those other trading desks perfectly offset the market risk of those other interest rate risk positions by entering into opposite interest rate risk positions with third parties;

(b)  the institution has fully documented how the position mitigates the interest rate risks arising from non-trading book positions for the purposes of the requirements laid down in Articles 84 and 98 of Directive 2013/36/EU;

6. The own funds requirements for market risks of all the positions assigned to or entered into by the trading desk referred to in point (a) of paragraph 3 shall be calculated on a standalone basis as a separate portfolio and shall be additional to the own funds requirements for the other trading book positions.".

(52)  In Article 107, paragraph 3 is replaced by the following:

“3. For the purposes of this Regulation, exposures to a third country investment firm, a third country credit institution and a third country exchange shall be treated as exposures to an institution only where the third country applies prudential and supervisory requirements to that entity that are at least equivalent to those applied in the Union.”.

(52a)  In Article 117, paragraph 2 is replaced by the following:

"2.  Exposures to the following multilateral development banks shall be assigned a 0 % risk weight:

(a)  the International Bank for Reconstruction and Development;

(b)  the International Finance Corporation;

(c)  the Inter-American Development Bank;

(d)  the Asian Development Bank;

(e)  the African Development Bank;

(f)  the Council of Europe Development Bank;

(g)  the Nordic Investment Bank;

(h)  the Caribbean Development Bank;

(i)  the European Bank for Reconstruction and Development;

(j)  the European Investment Bank;

(k)  the European Investment Fund;

(l)  the Multilateral Investment Guarantee Agency;

(m)  the International Finance Facility for Immunisation;

(n)  the Islamic Development Bank;

(na)  International Development Association.

For the purposes of this paragraph, the Commission is empowered to adopt delegated acts in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010, to specify under consideration of existing regulatory equivalence assessments as to whether multilateral development banks not yet included in the list of this paragraph fulfil the requirements to be assigned a 0% risk weight."

(52b)  In Article 123, subparagraph 3a is inserted:

“Exposures to loans, which are secured through salary or pension payments and guaranteed by all the following:

(i)  mandatory insurance, which covers risks of death, inability to work or unemployment of the borrower;

(ii)  direct repayments by the employer or pension fund through direct deduction from the debtor’s salary or pension and

(iii)  monthly instalment which do not exceed 35% of the net monthly salary or net pension payment,

shall be assigned a risk weighting of 35%.”

(52c)  Article 124 is replaced by the following:

  “1.  An exposure or any part of an exposure fully secured by mortgage on immovable property shall be assigned a risk weight of 100 %, where the conditions under Article 125 or Article 126 are not met, except for any part of the exposure which is assigned to another exposure class. The part of the exposure that exceeds the mortgage value of the property shall be assigned the risk weight applicable to the unsecured exposures of the counterparty involved.

The part of an exposure treated as fully secured by immovable property shall not be higher than the pledged amount of the market value or in those Member States that have laid down rigorous criteria for the assessment of the mortgage lending value in statutory or regulatory provisions, the mortgage lending value of the property in question.

2.  Based on the data collected under Article 101, and any other relevant indicators, the competent authorities shall periodically, and at least annually or upon request by the designated authority, as referred to in Article 458 (1), assess whether the risk-weight of 30% for exposures secured by mortgages on residential property referred to in Article 125 and the risk weight of 50 % for exposures secured on commercial immovable property referred to in Article 126 located in their territory are appropriately based on:

(a)  the loss experience of exposures secured by immovable property;

(b)  forward-looking immovable property markets developments;

Competent authorities shall share the result of their assessment with designated authorities.

3.  Where, based on the assessment referred to in paragraph 2 of this Article, a competent authority concludes that the risk weights set out in Article 125(2) or Article 126(2) do not reflect the actual risks related to exposures fully secured by mortgages on residential or commercial immovable property located in the Member State of the competent authority, it shall increase the risk weights applicable to those exposures or impose stricter criteria than those set out in Article 125 (2) or Article 126(2).

The designated authority may request the competent authority to perform an assessment as per paragraph 2 of this Article. The designated authority may set a higher risk weight or stricter criteria than those set out in Article 125(2) and Article 126(2) where all of the following conditions are met:

(a)  it has consulted the competent authority and the ESRB on the changes;

(b)  it considers that refraining from implementing the changes would materially affect current or future financial stability in its Member State. The competent authorities shall consult EBA and inform the designated authority on the adjustments to the risk weights and criteria applied.

The competent and designated authorities shall notify EBA and the ESRB about any adjustments to risk weights and criteria applied pursuant to this paragraph.

EBA and the ESRB shall publish the risk weights and criteria that the authorities set for exposures referred to in Articles 125, 126 and 199(1)(a).

4.  For the purposes of paragraph 3 competent and designated authorities may set the risk weights within the following ranges:

(a)  30% to 150% for exposures secured by mortgages on residential property;

(b)  50 % to 150 % for exposures secured by mortgages on commercial immovable property

4a.  Where a competent or designated authority sets higher risk weights or stricter criteria pursuant to paragraph 3, institutions shall have a 6-month transitional period to apply the new risk weight them. Institutions shall apply the higher risk weights or stricter criteria, as applicable, to all their corresponding exposures secured by mortgages on commercial and residential property located in that Member State.

4b.  EBA in cooperation with the ESRB shall develop draft regulatory technical standards to specify the rigorous criteria for the assessment of the mortgage lending value referred to in paragraph 1 and the conditions referred to in paragraph 2 that competent authorities shall take into account when determining higher risk weights.

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2019.

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

5.  The institutions of one Member State shall apply the risk- weights and criteria that have been determined by the authorities of another Member State to exposures secured by mortgages on commercial and residential immovable property located in that Member State.”

(52d)  Article 125 is replaced by the following:

“Article 125

Exposures fully and completely secured by mortgages on residential property

1.   Unless otherwise decided by the competent authorities in accordance with Article 124(2), exposures fully and completely secured by mortgages on residential property shall be treated as follows:

(a)   exposures or any part of an exposure fully and completely secured by mortgages on residential property which is or shall be occupied or let by the owner, or the beneficial owner in the case of personal investment companies, shall be assigned a risk weight of 30%;

(b)   exposures to a tenant under a property leasing transaction concerning residential property under which the institution is the lessor and the tenant has an option to purchase, shall be assigned a risk weight of 35 % provided that the exposure of the institution is fully and completely secured by its ownership of the property.

2.   Institutions shall consider an exposure or any part of an exposure as fully and completely secured for the purposes of paragraph 1 only if the following conditions are met:

(a)   the value of the property shall not materially depend upon the credit quality of the borrower. Institutions may exclude situations where purely macro-economic factors affect both the value of the property and the performance of the borrower from their determination of the materiality of such dependence;

(b)   the risk of the borrower shall not materially depend upon the performance of the underlying property or project, but on the underlying capacity of the borrower to repay the debt from other sources, and as a consequence, the repayment of the facility shall not materially depend on any cash flow generated by the underlying property serving as collateral. For those other sources, institutions shall determine maximum loan-to-income ratios as part of their lending policy and obtain suitable evidence of the relevant income when granting the loan.

(c)  the requirements set out in Article 208 and the valuation rules set out in Article 229(1) are met;

(d)  unless otherwise determined under Article 124(2), the part of the loan to which the 30% risk weight is assigned does not exceed 75 % of the market value of the property in question or 75% of the mortgage lending value of the property in question in those Member States that have laid down rigorous criteria for the assessment of the mortgage lending value in statutory or regulatory provisions.

3.  Institutions may derogate from point (b) of paragraph 2 for exposures fully and completely secured by mortgages on residential property which is situated within the territory of a Member State, where the competent authority of that Member State has published evidence showing that a well-developed and long-established residential property market is present in that territory with loss rates which do not exceed the following limits:

(a)  losses stemming from lending collateralised by residential property up to 80 % of the market value or 80 % of the mortgage lending value unless otherwise decided under Article 124(2) do not exceed 0,3 % of the outstanding loans collateralised by residential property in any given year;

(b)  overall losses stemming from lending collateralised by residential property do not exceed 0,5 % of the outstanding loans collateralised by residential property in any given year.

4.   If either of the limits referred to in paragraph 3 is not satisfied in a given year, the eligibility to use paragraph 3 shall cease and the condition contained in point (b) of paragraph 2 shall apply until the conditions in paragraph 3 are satisfied in a subsequent year.”

(53)  Article 128, paragraphs 1 and 2 are replaced by the following:

“1. Institutions shall assign a 150 % risk weight to exposures that are associated with particularly high risks.

2. For the purposes of this Article, institutions shall treat speculative immovable property financing as exposures associated with particularly high risks.”.

(54)  Article 132 is replaced by the following:

“Article 132Own funds requirements for exposures in the form of units or shares in CIUs

1.  Institutions shall calculate the risk-weighted exposure amount for their exposures in the form of units or shares in a CIU by multiplying the risk-weighted exposure amount of the CIU's exposures, calculated in accordance with the approaches referred to in the first subparagraph of paragraph 2, with the percentage of units or shares held by those institutions.

2.  Where the conditions set out in paragraph 3 are met, institutions may apply the look-through approach in accordance with Article 132a(1) or the mandate-based approach in accordance with Article 132a(2).

Subject to Article 132b(2), institutions that do not apply the look-through approach or the mandate-based approach shall assign a risk weight of 1,250 % (‘fall-back approach’) to their exposures in the form of units or shares in a CIU.

Institutions may calculate the risk weighted exposure amount for their exposures in the form of units or shares in a CIU by using a combination of the approaches referred to in this paragraph, provided that the conditions for using those approaches are met.

3.  Institutions may determine the risk weighted exposure amount of r a CIU's exposures in accordance with the approaches set out in Article 132a where all of the following conditions are met:

(a)  the CIU is one of the following:

(i)  an undertaking for collective investment in transferable securities (UCITS), governed by Directive 2009/65/EC;

(ii)  an EU AIF managed by an EU AIFM registered under Article 3(3) of Directive 2011/61/EU;

(iii)  an AIF managed by an EU AIFM authorised under Article 6 of Directive 2011/61/EU;

(iv)  an AIF managed by a non-EU AIFM authorised under Article 37 of Directive 2011/61/EU;

(v)  a non-EU AIF managed by a non-EU AIFM and marketed in accordance with Article 42 of Directive 2011/61/EU;

(b)  the CIU’s prospectus or equivalent document includes the following:

(i)  the categories of assets in which the CIU is authorised to invest;

(ii)  where investment limits apply, the relative limits and the methodologies to calculate them;

(c)  reporting by the CIU to the institution complies with the following requirements:

(i)  the business of the CIU is reported at least as frequently as that of the institution;

(ii)  the granularity of the financial information is sufficient to allow the institution to calculate the CIU's risk weighted exposure amount in accordance with the approach chosen by the institution;

(iii)  where the institution applies the look-through approach, information about the underlying exposures is verified by an independent third party.

4.  Institutions that do not have adequate data or information to calculate the risk weighted exposure amount of a CIU's exposures in accordance with the approaches set out in Article 132a may rely on the calculations of a third party, provided that all of the following conditions are met:

(a)  the third party is one of the following:

(i)  the depository institution or the depository financial institution of the CIU, provided that the CIU exclusively invests in securities and deposits all securities at that depository institution or depository financial institution;

(ii)  for CIUs not covered by point (i), the CIU management company, provided that the company meets the condition set out in point (a) of paragraph 3.

(b)  the third party carries out the calculation in accordance with the approaches set out in paragraphs 1, 2 and 3 of Article 132a, as applicable;

(c)  an external auditor has confirmed the correctness of the third party's calculation.

Institutions that rely on third-party calculations shall multiply the risk weighted exposure amount of a CIU's exposures resulting from those calculations by a factor of 1,2, if the institutions do not have the necessary data or information to replicate the calculations.

5  Where an institution applies the approaches referred to in Article 132a for the purpose of calculating the risk-weighted exposure amount of a CIU's exposures (‘level 1 CIU’), and any of the underlying exposures of the level 1 CIU is an exposure in the form of units or shares in another CIU (‘level 2 CIU’), the risk weighted exposure amount of the level 2 CIU's exposures may be calculated by using any of the three approaches described in paragraph 2. The institution may use the look-through approach to calculate the risk-weighted exposure amounts of CIUs' exposures in level 3 and any subsequent level only where it used that approach for the calculation in the preceding level. In any other scenario it shall use the fall-back approach.

6.  The risk weighted exposure amount of a CIU's exposures calculated in accordance with the look-through approach and the mandate based approach shall be capped at the risk weighted amount of that CIU's exposures calculated in accordance with the fall-back approach.

7.  By way of derogation from paragraph 1, institutions applying the look-through approach in accordance with Article 132a(1) may calculate the risk-weighted exposure amount for their exposures in the form of units or shares in a CIU by multiplying the exposure values of those exposures, calculated in accordance with Article 111, with the risk weight (RWi*) calculated in accordance with the formula set out in Article 132c, provided that the following conditions are met:

(a)  the institutions measure the value of their holdings of units or shares in a CIU at historical cost while they would measure the value of the underlying assets of the CIU at fair value if they would apply the look-through approach;

(b)  a change in the market value of the units or shares for which institutions measure the value at historic cost changes neither the amount of own funds of those institutions nor the exposure value associated with those holdings.

8.  For off-balance sheet minimum value commitments that represent an obligation to compensate an investment into units or shares of one or more CIUs if the market value of the underlying exposure of the CIU or CIUs falls below a certain factor, a conversion factor of 20% is applied to determine the exposure value if:

(i)  the current market value of the underlying exposures of the CIU covers or exceeds the present value of the threshold and

(ii)  if the institution or another undertaking that is included in the same scope of consolidation can influence the composition of the underlying exposures of the CIU with a view to limiting the potential for a further reduction of the excess, or to the extent that the institution has subordinated its guarantee to the application by the CIU or CIUs of guidelines that will have the same effect of limiting the potential for a further reduction of the excess.”.

(55)  The following Article 132a is inserted:

“Article 132aApproaches for calculating risk weighted exposure amounts of CIUs

1.  Where the conditions of Article 132(3) are met, institutions that have sufficient information about the individual underlying exposures of a CIU shall look through to those exposures to calculate the risk weighted exposure amount of the CIU, risk weighting all underlying exposures of the CIU as if they were directly held by those institutions.

2.  Where the conditions of Article 132(3) are met, institutions that do not have sufficient information about the individual underlying exposures of a CIU to use the look-through approach may calculate the risk weighted exposure amount of those exposures in accordance with the limits set in the CIU’s mandate and relevant legislation.

For the purposes of the first subparagraph, institutions shall carry out the calculations under the assumption that the CIU first incurs exposures to the maximum extent allowed under its mandate or relevant legislation in the exposures attracting the highest own funds requirement and then continues incurring exposures in descending order until the maximum total exposure limit is reached.

Institutions shall carry out the calculation referred to in the first subparagraph in accordance with the methods set out in this Chapter, in Chapter 5 of this Title, and in Sections 3, 4, or 5 of Chapter 6 of this Title.

As part of this calculation, institutions shall assume that a CIU increases leverage to the maximum extent allowed under its mandate or relevant legislation, where applicable.

3.  By way of derogation from point (d) of Article 92(3), institutions that calculate the risk weighted exposure amount of a CIU’s exposures in accordance with paragraphs 1 or 2 of this Article may replace the own funds requirement for the credit valuation adjustment risk of derivatives exposures of that CIU by an amount equal to 50% of the exposure value of those exposures calculated in accordance with Section 3, 4 or 5 of Chapter 6 of this Title, as applicable.

By way of derogation from the first subparagraph, an institution may exclude from the calculation of the own funds requirement for credit valuation adjustment risk derivatives exposures which would not be subject to that requirement if they were incurred directly by the institution.

4.  EBA shall develop draft regulatory technical standards to specify how institutions shall calculate the risk weighted exposure amount referred to in paragraph 2 where any of the inputs required for that calculation are not available.

EBA shall submit those draft regulatory technical standards to the Commission by [nine months after entry into force].

Power is conferred on the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Article 15 of Regulation (EU) No 1093/2010.”.

(56)  The following Article 132b is inserted:

“Article 132bExclusions from the approaches for calculating risk weighted exposure amounts of CIUs

1.  Institutions shall exclude from the calculations referred to in Article 132 Common Equity Tier 1, Additional Tier 1, and Tier 2 instruments held by a CIU which must be deducted in accordance with Article 36(1), Article 56 and Article 66, respectively.

2.  Institutions may exclude from the calculations referred to in Article 132 exposures in the form of units or shares in CIUs in the sense of points (g) and (h) of Article 150(1) and instead apply the treatment set out in Article 133 to those exposures.”.

(56a)  The following Article 132c is inserted:

“Article 132cTreatment of off-balance sheet exposures to CIUs

Institutions shall calculate the risk-weighted exposure amount for their off-balance sheet items with the potential to convert into exposures in the form of units or shares in a CIU by multiplying the exposure values of these exposures calculated in accordance with Article 111, with the following risk weight (RWi*):

(a)  for all exposures for which institutions use one of the approaches set out in Article 132a:

 

where:

i= the index denoting the CIU:

RW= the amount calculated in accordance with Article 132a

= the exposure value of the exposures of CIU i;

= the accounting value of assets of CIU i;

 

(b)  for all other exposures,

(57)  Article 152 is replaced by the following:

“Article 152Treatment of exposures in the form of units or shares in CIUs

1.  Institutions shall calculate the risk weighted exposure amounts for their exposures in the form of units or shares in a CIU by multiplying the risk weighted exposure amount of the CIU, calculated in accordance with the approaches set out in this Article, with the percentage of units or shares held by those institutions.

2.  Where the conditions in Article 132(3) are met, institutions that have sufficient information about the individual underlying exposures of a CIU shall look through to those underlying exposures to calculate the risk weighted exposure amount of the CIU, risk weighting all underlying exposures of the CIU as if they were directly held by the institutions.

3.  By way of derogation from point (d) of Article 92(3), institutions that calculate the risk weighted exposure amount of the CIU in accordance with paragraphs 1 or 2 of this Article may replace the own funds requirement for credit valuation adjustment risk of derivatives exposures of that CIU by an amount equal to 50% of the exposure value of those exposures calculated in accordance with Section 3, 4 or 5 of Chapter 6 of this Title, as applicable.

By way of derogation from the first subparagraph, an institution may exclude from the calculation of the own funds requirement for credit valuation adjustment risk derivatives exposures which would not be subject to that requirement if they were incurred directly by the institution.

4.  Institutions that apply the look-through approach in accordance with paragraphs 2 and 3 and that fulfil the conditions for permanent partial use in accordance with Article 150, or that do not meet the conditions for using the methods set out in this Chapter for all or parts of the underlying exposures of the CIU, shall calculate risk weighted exposure amounts and expected loss amounts in accordance with the following principles:

(a)  for exposures belonging to the equity exposure class referred to in point (e) of Article 147(2), institutions shall apply the simple risk-weight approach set out in Article 155(2);

(b)  for exposures belonging to the securitisation exposure class, institutions shall apply the ratings based method set out in Article 261;

(c)  for all other underlying exposures, institutions shall apply the Standardised Approach laid down in Chapter 2 of this Title.

For the purposes of point (a) of the first subparagraph, where the institution is unable to differentiate between private equity exposures, exchange-traded exposures and other equity exposures, it shall treat the exposures concerned as other equity exposures.

5.  Where the conditions of Article 132(3) are met, institutions that do not have sufficient information about the individual underlying exposures of a CIU may calculate the risk weighted exposure amount for those exposures in accordance with the mandate-based approach set out in Article 132a(2). However, for the exposures listed in point (a), (b) and (c) of paragraph 4 of this Article, institutions shall apply the approaches set out therein.

6.  Subject to Article 132b(2), institutions that do not apply the look-through approach in accordance with paragraph 2 and 3 of this Article or the mandate-based approach in accordance with paragraph 5 of this Article shall apply the fall-back approach referred to in Article 132(2).

7.  Institutions that do not have adequate data or information to calculate the risk weighted amount of a CIU in accordance with the approaches set out in paragraphs 2, 3, 4 and 5 may rely on the calculations of a third party, provided that all of the following conditions are met:

(a)  the third party is one of the following:

(i)  the depository institution or the depository financial institution of the CIU, provided that the CIU exclusively invests in securities and deposits all securities at that depository institution or depository financial institution;

(ii)  for CIUs not covered by point (i), the CIU management company, provided that the CIU management company meets the criteria set out in point (a) of Article 132(3);

(b)  for exposures other than those listed in points (a), (b) and (c) paragraph 4, the third party carries out the calculation in accordance with the approach set out in Article 132a(1);

(c)  for exposures listed in points (a), (b) and (c) of paragraph 4, the third party carries out the calculation in accordance with the approaches set out therein;

(d)  an external auditor has confirmed the correctness of the third party's calculation.

Institutions that rely on third-party calculations shall multiply the risk weighted exposure amounts of a CIU's exposures resulting from those calculations by a factor of 1,2, if they do not have the necessary data or information to replicate the calculation.

8.  For the purposes of this Article, the provisions in Article 132(5) and (6) and Article 132b shall apply.”.

(57a)  In Article 164, paragraphs 5, 6 and 7 are replaced by the following:

"5.  Based on the data collected under Article 101 and on any other relevant indicators, and taking into account forward-looking immovable property market developments, the competent authorities shall periodically, and at least annually or upon request by the designated authority, as referred to in Article 458 (1), assess whether the minimum LGD values referred to in paragraph 4 of this Article, and the LGD values of corporate exposures secured by immovable property, are appropriate for exposures secured by mortgages on residential or commercial immovable property located in their territory.

Competent authorities will share the result of their assessment with designated authorities.

Where, based on the assessment referred to the first subparagraph of this paragraph, a competent authority concludes that the minimum LGD values referred to in paragraph 4 of this Article, or where it considers the LGD values of corporate exposures secured by immovable property are not adequate, it shall set higher minimum LGD values for those exposures in its territory. Such higher minimum values may also be applied at the level of one or more property segments of exposures located in one or more parts of its territory.

The designated authority may request the competent authority to perform an assessment as per paragraph 2 of this Article. The designated authority may set higher minimum LGD values where all the following conditions are met:

(a)  it has consulted the competent authority and the ESRB on the changes;

(b)  it considers that refraining from implementing the changes would materially affect current or future financial stability in its Member State.

Competent authorities shall notify EBA and the designated authority of any changes to the minimum LGD values that they make in accordance with the second subparagraph and EBA shall publish these LGD values.

The designated authorities shall notify the ESRB of any changes to the minimum LGD values that they make in accordance with the second subparagraph and the ESRB shall publish these LGD values.

6.  EBA, in cooperation with the ESRB, shall develop draft regulatory technical standards to specify the conditions that competent authorities shall take into account when assessing the appropriateness of LGD values as part of the assessment referred to in paragraph 5.

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2019.

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

7.  The institutions of one Member State shall apply the higher minimum LGD values that have been determined by the authorities of another Member State in accordance with paragraph 5 to all their corresponding exposures located in that Member State."

(57b)  In Article 181(1), the following point is added after point (a):

"(aa) By way of complementing point (a) of this paragraph, an institution may in case of massive disposals adjust its LGD estimates by partly or fully offsetting the effect of such disposals on LGD estimates. If an institution decides to apply for an adjustment of this kind, the institution shall inform the competent authorities of the scale, composition and the date of the disposals. If the competent authority concludes that an adjustment referred to in this paragraph is not a massive disposal, it shall decide within 30 days of the notification that the notifying institution cannot apply the adjustment. In such cases, the competent authority shall immediately inform the notifying institution of this decision.

The provision according to subparagraph 1 is applicable during the period between 23 November 2016 and the [date of entry into force of this Regulation + 5 years]"

(58)  In Article 201(1), point (h) is replaced by the following:

“(h) qualifying central counterparties.”.

(59)  The following Article 204a is inserted:

“Article 204aEligible types of equity derivatives

1.  Institutions may use equity derivatives, which are total return swaps or economically effectively similar, as eligible credit protection only for the purpose of conducting internal hedges.

Where an institution buys credit protection through a total return swap and records the net payments received on the swap as net income, but does not record the offsetting deterioration in the value of the asset that is protected either through reductions in fair value or by an addition to reserves, that credit protection does not qualify as eligible credit protection.

2.  Where an institution conducts an internal hedge using an equity derivative, in order for the internal hedge to qualify as eligible credit protection for the purposes of this Chapter, the credit risk transferred to the trading book shall be transferred out to a third party or parties.

Where an internal hedge has been conducted in accordance with the first subparagraph and the requirements in this Chapter have been met, institutions shall apply the rules set out in Sections 4 to 6 of this Chapter for the calculation of risk-weighted exposure amounts and expected loss amounts where they acquire unfunded credit protection.”.

(60)  Article 223 is amended as follows:

(a)  In paragraph 3, the last subparagraph is replaced by the following:

"In the case of OTC derivative transactions institutions using the method laid down in Section 6 of Chapter 6 shall calculate EVA as follows:

.".

(b)  In paragraph 5, the last subparagraph is replaced by the following:

“In the case of OTC derivative transactions, institutions using the methods laid down in Sections 3, 4 and 5 of Chapter 6 of this Title shall take into account the risk-mitigating effects of collateral in accordance with the provisions laid down in those Sections, as applicable.”

(60a)  In Article 247, paragraph 3 is replaced by the following:

"3.  By way of derogation from paragraph 2, the eligible providers of unfunded credit protection listed in points (b) to (h) of Article 201(1) except for qualifying central counterparties shall have a credit assessment by a recognised ECAI which has been determined to be associated with credit quality step 3 or above under Article 136 and shall have been associated with credit quality step 2 or above at the time the credit protection was first recognised. Institutions that have a permission to apply the IRB Approach to a direct exposure to the protection provider may assess eligibility according to the first sentence based on the equivalence of the PD for the protection provider to the PD associated with the credit quality steps referred to in Article 136."

(61)  In Article 272, points (6) and (12) are replaced by the following:

“(6) ‘hedging set’ means a group of transactions within a single netting set for which full or partial offsetting is allowed for determining the potential future exposure under the methods set out in Sections 3 or 4 of this Chapter ;

(12) ‘Current Market Value’ or ‘CMV’ means, for the purposes of Section 3 to Section 5 of this Chapter, the net market value of all the transactions within a netting set gross of any collateral held or posted where positive and negative market values are netted in computing the CMV;”.

(62)  In Article 272, the following points (7a) and (12a) are inserted:

“(7a) ‘one way margin agreement’ means a margin agreement under which an institution is required to post variation margins to a counterparty but is not entitled to receive variation margin from that counterparty or vice-versa;”.

“(12a) ‘net independent collateral amount’ or ‘NICA’ means the sum of the volatility-adjusted value of net collateral received or posted, as applicable, to the netting set other than variation margin;”.

(63)  Article 273 is amended as follows:

(a)  Paragraph 1 is replaced by the following:

"1.  Institutions shall calculate the exposure value for the contracts listed in Annex II on the basis of one of the methods set out in Sections 3 to 6 of this Chapter in accordance with this Article.

An institution which does not meet the conditions set out in Article 273a (2) shall not use the method set out in Section 4 of this Chapter. An institution which does not meet the conditions set out in Article 273a (3) shall not use the method set out in Section 5 of this Chapter.

To determine the exposure value for the contracts listed in point 3 of Annex II an institution shall not use the method set out in Section 5 of this Chapter.

Institutions may use in combination the methods set out in Sections 3 to 6 of this Chapter on a permanent basis within a group. A single institution shall not use in combination the methods set out in Sections 3 to 6 of this Chapter on a permanent basis."

(b)  Paragraphs 6, 7, 8 and 9 are replaced by the following:

"6. Under all methods set out in Sections 3 to 6 of this Chapter, the exposure value for a given counterparty shall be equal to the sum of the exposure values calculated for each netting set with that counterparty.

By way of derogation from the first subparagraph, where one margin agreement applies to multiple netting sets with that counterparty and the institution is using one of the method set out in Section 3 and Section 6 of this Chapter to calculate the exposure value of these netting sets, the exposure value shall be calculated in accordance with that Section.

For a given counterparty, the exposure value for a given netting set of OTC derivative instruments listed in Annex II calculated in accordance with this Chapter shall be the greater of zero and the difference between the sum of exposure values across all netting sets with the counterparty and the sum of CVA for that counterparty being recognised by the institution as an incurred write-down. The credit valuation adjustments shall be calculated without taking into account any offsetting debit value adjustment attributed to the own credit risk of the firm that has been already excluded from own funds in accordance with point (c) of Article 33(1).

7. In calculating the exposure value in accordance with the methods set out in Sections 3 to 5 of this Chapter, institutions may treat two OTC derivative contracts included in the same netting agreement that are perfectly matching as if they were a single contract with a notional principal equals to zero.

For the purposes of the first subparagraph, two OTC derivative contracts are perfectly matching when they meet all of the following conditions:

(a)  their risk positions are opposite;

(b)  their features, with the exception of the trade date, are identical;

(c)  their cash-flows fully offset each other.

8. Institutions shall determine the exposure value for exposures arising from long settlement transactions by any of the methods set out in Sections 3 to 6 of this Chapter, regardless of which method the institution has chosen for treating OTC derivatives and repurchase transactions, securities or commodities lending or borrowing transactions, and margin lending transactions. In calculating the own funds requirements for long settlement transactions, an institution that uses the approach set out in Chapter 3 may assign the risk weights under the approach set out in Chapter 2 on a permanent basis and irrespective of the materiality of those positions.

9. For the methods set out in Sections 3 to 6 of this Chapter, institutions shall treat transactions where specific wrong way risk has been identified in accordance with Article 291.".

(64)  The following Articles 273a and 273b are inserted:

"Article 273aConditions for using simplified methods for calculating the exposure value

1.  An institution may calculate the exposure value of derivative positions in accordance with the method set out in Section 4 provided that the size of its on- and off-balance sheet derivative business is equal to or less than the following thresholds on the basis of an assessment carried out on a monthly basis:

(a)  10 % of the institution’s total assets;

(b)  EUR 300 million;

2.  An institution may calculate the exposure value of ▌derivative positions in accordance with the method set out in Section 5, provided that the size of its on- and off-balance sheet derivative business is equal to or less than the following thresholds on the basis of an assessment carried out on a monthly basis:

(a)  5 % of the institution’s total assets;

(b)  EUR 100 million;

3.  For the purposes of paragraphs 1 and 2, institutions shall calculate the size of their on- and off-balance sheet derivative business on a given date in accordance with the following requirements:

(a)  derivative positions shall be valued at their market prices on that given date. Where the market value of a position is not available on a given date, institutions shall take a fair value for the position on that date. Where the fair value or market value of a position is not available on a given date, institutions shall take the most recent market value for that position.

(b)  the absolute value of long positions shall be summed with the absolute value of short positions.

(ba)  all derivative positions shall be included, except credit derivatives that are recognised as internal hedges against non-trading book credit risk exposures.

4.  Institutions shall notify the competent authorities of the methods set out in Sections 4 or 5 of this Chapter that they use, or cease to use, as applicable, to calculate the exposure value of their derivative positions

5.  Institutions shall not enter into a derivative transaction for the only purpose of complying with any of the conditions set out in paragraph 1 and 2 during the monthly assessment.

Article 273bNon-compliance with the conditions for using simplified methods for calculating the exposure value of derivatives

1.  An institution that no longer meets any of the conditions set out in Article 273a(1) or (2) shall immediately notify the competent authority thereof.

2.  An institution shall cease to apply Article 273a(1) or (2) within three months of one of the following cases occurring:

(a)  the institution does not meet any of the conditions of Article 273a(1) or (2) for three consecutive months;

(b)  the institution does not meet any of the conditions of Article 273a(1) or (2), as applicable, during more than 6 out of the last 12 months.

3.  Where an institution ceases to apply Article 273a(1) or (2), it shall only be permitted to determine the exposure value of its derivatives positions with the use of the methods set out in Section 4 or 5 of this Chapter, as applicable, where it demonstrates to the competent authority that all the conditions set out in Article 273a(1) or (2) have been met for an uninterrupted full year period.".

(65)  In Part Three, Title II, Chapter 6, Section 3 is replaced by the following:

"Section 3Standardised Approach for Counterparty Credit Risk

Article 274

Exposure value

1.  An institution may calculate a single exposure value at netting set level for all the transactions covered by a contractual netting agreement where all the following conditions are met:

(a)  the netting agreement belongs to one of the type of contract netting agreements referred to in Article 295;

(b)  the netting agreement has been recognised by competent authorities in accordance with Article 296;

(c)  the institution has fulfilled the obligations laid down in Article 297 in respect of the netting agreement.

Where any of those conditions are not met, the institution shall treat each transaction as if it was its own netting set.

2.  Institutions shall calculate the exposure value of a netting set under the Standardised Approach for Counterparty Credit Risk Method as follows:

where:

RC   =   the replacement cost calculated in accordance with Article 275;

PFE   =   the potential future exposure calculated in accordance with Article 278;

α   =   1,4.

3.  The exposure value of a netting set subject to a contractual margin agreement shall be capped at the exposure value of the same netting set not subject to any form of margin agreement.

4.  Where multiple margin agreements apply to the same netting set, institutions shall allocate each margin agreement to the group of transactions in the netting set to which that margin agreement contractually applies to and calculate an exposure value separately for each of those grouped transactions.

5.  Institutions may set to zero the exposure value of a netting set that satisfies all of the following conditions:

(a)  the netting set is solely composed of sold options;

(b)  the current market value of the netting set is at all times negative;

(c)  the premium of all the options included in the netting set has been received upfront by the institution to guarantee the performance of the contracts;

(d)  the netting set is not subject to any margin agreement.

6.  In a netting set, institutions shall replace a transaction which is a linear combination of bought or sold call or put options with all the single options that form that linear combination, taken as an individual transaction, for the purpose of calculating the exposure value of the netting set in accordance with this section.

Article 275

Replacement cost

1.  Institutions shall calculate the replacement cost ('RC') for netting sets not subject to a margin agreement, in accordance with the following formula:

2.  Institutions shall calculate the replacement cost for single netting sets subject to a margin agreement in accordance with the following formula:

 

where:

VM    =   the volatility-adjusted value of the net variation margin received or posted, as applicable, to the netting set on a regular basis to mitigate changes in the netting set's CMV;  

TH    =   the margin threshold applicable to the netting set under the margin agreement below which the institution cannot call for collateral;

MTA    =  the minimum transfer amount applicable to the netting set under the margin agreement.

3.  Institutions shall calculate the replacement cost for multiple netting sets subject to a margin agreement in accordance with the following formula:

where:

i  =   the index that denotes the netting sets subject to the single margin agreement;

CMVi  =   the CMV of netting set 'i';

VMMA   =   the sum of the volatility-adjusted value of collateral received or posted, as applicable, on a regular basis to multiple netting sets to mitigate changes in their CMV;

NICAMA  =   the sum of the volatility-adjusted value of collateral received or posted, as applicable, to multiple netting sets other than VMMA.

For the purposes of the first subparagraph, NICAMA may be calculated at trade-level, at netting set-level or at the level of all the netting sets to which the margin agreement applies depending on the level at which the margin agreement applies.

Article 276

Recognition and treatment of collateral

1.  For the purposes of this Section, institutions shall calculate the collateral amounts of VM, VMMA, NICA and NICAMA, by applying all of the following requirements:

(a)  where all the transactions included in a netting set belong to the trading book, only collateral that is eligible under Article 299 shall be recognised;

(b)  where a netting set contains at least one transaction that belongs to the non-trading book, only collateral that is eligible under Article 197 shall be recognised;

(c)  collateral received from a counterparty shall be recognised with a positive sign and collateral posted to a counterparty shall be recognised with a negative sign.

(d)  the volatility-adjusted value of any type of collateral received or posted shall be calculated in accordance to Article 223. For the purpose of this calculation, institutions shall not use the method sets out in Article 225.

(e)  the same collateral item shall not be included in both VM and NICA at the same time;

(f)  the same collateral item shall not be included in both VMMA and NICAMA at the same time;

(g)  any collateral posted to the counterparty that is segregated from the assets of that counterparty and, as a result of that segregation, is bankruptcy remote in the event of the default or insolvency of that counterparty shall not be recognised in the calculation of NICA and NICAMA.

2.  For the calculation of the volatility-adjusted value of collateral posted referred to in point (d) of paragraph 1, institutions shall replace the formula in Article 223(2) with the following formula:

3.  For the purpose of point (d) of the paragraph 1, institutions shall set the liquidation period relevant for the calculation of the volatility-adjusted value of any collateral received or posted in accordance with one of the following time horizon:

(a)  for the netting sets referred to in Article 276(1), the time horizon shall be one year;

(b)  for the netting sets referred to in Articles 276(2) and (3), the time horizon shall be the margin period of risk determined in accordance with point(b) of Article 279d(1).

Article 277

Mapping of transactions to risk categories

1.  Institutions shall map each transaction of a netting set to one of the following six risk categories to determine the potential future exposure of the netting set referred to in Article 278:

(a)  interest rate risk;

(b)  foreign exchange risk;

(c)  credit risk;

(d)  equity risk;

(e)  commodity risk;

(f)  other risks.

2.  Institutions shall conduct the mapping referred to in paragraph 1 on the basis of the primary risk driver of the transaction. For transactions other than those referred to in paragraph 3, the primary risk driver shall be the only material risk driver of a derivative position.

3.  From [date of application of this Regulation], for a derivative transaction allocated to the trading book for which an institution uses the approaches laid down in either Chapters 1a or 1b to calculate the own funds requirements for market risk, the primary risk driver shall be the risk factor associated with the highest absolute sensitivity among all the sensitivities for that transaction calculated in accordance with Chapter 1b of Title IV.

4.  Notwithstanding paragraphs 1 and 2, when mapping transactions to the risk categories listed in paragraph 1, institutions shall apply the following requirements:

(a)  where the primary risk driver of a transaction is an inflation variable, institutions shall map the transaction to the interest rate risk category;

(b)  where the primary risk driver of a transaction is a climatic conditions variable, institutions shall map the transaction to the commodity risk category.

5.  By way of derogation from paragraph 2, institutions shall map derivative transactions that have more than one material risk driver to more than one risk category. Where all the material risk drivers of one of those transactions belong to the same risk category, institutions shall only be required to map one time that transaction to this risk category based on the most material of those risk drivers. Where the material risk drivers of one of those transactions belong to different risk categories, institutions shall map that transaction one time to each risk category for which the transaction has at least one material risk driver, based on the most material of the risk drivers in that risk category.

6.  EBA shall develop draft regulatory technical standards to specify in greater detail:

(a)  a method for identifying the only material risk driver of transactions other than those referred to in paragraph 3;

(b)  a method for identifying transactions with more than one material risk driver and for identifying the most material of these risk drivers for the purposes of paragraph 3;

EBA shall submit those draft regulatory technical standards to the Commission by [6 months after the entry into force of this Regulation].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

Article 277a

Hedging sets

1.  Institutions shall establish the relevant hedging sets for each risk category of a netting set and assign each transaction to those hedging sets as follows:

(a)  transactions mapped to the interest rate risk category shall be assigned to the same hedging set only where their primary risk driver is denominated in the same currency.

(b)  transactions mapped to the foreign exchange risk category shall be assigned to the same hedging set only where their primary risk driver is based on the same currency pair;

(c)  all the transactions mapped to the credit risk category shall be assigned to the same hedging set;

(d)  all the transactions mapped to the equity risk category shall be assigned to the same hedging set;

(e)  transactions mapped to the commodity risk category shall be assigned to one of the following five hedging sets based on the nature of their primary risk driver:

(i)  energy;

(ii)  metals;

(iii)  agricultural goods;

(iv)  climatic conditions;

(v)  other commodities.

(f)  transactions mapped to the other risks category shall be assigned to the same hedging set only where their primary risk driver is identical.

For the purpose of point (a), transactions mapped to the interest rate risk category that have an inflation variable as the primary risk driver shall be assigned to separate hedging sets, other than the hedging sets established for transactions mapped to the interest rate risk category that have an inflation variable as the primary risk driver. Those transactions shall be assigned to the same hedging set only where their primary risk driver is denominated in the same currency.

2.  By the way of derogation from paragraph 1, institutions shall establish separate individual hedging sets in each risk category for the following transactions:

(a)  transactions for which the primary risk driver is either the market implied volatility or the realised volatility of a risk driver or the correlation between two risk drivers;

(b)  transactions for which the primary risk driver is the difference between two risk drivers mapped to the same risk category or transactions that consist of two payment legs denominated in the same currency and for which a risk driver from the same risk category of the primary risk driver is contained in the other payment leg than the one containing the primary risk driver.

For the purposes of point (a) of the first subparagraph, institutions shall assign transactions to the same hedging set of the relevant risk category only where their primary risk driver is identical.

For the purposes of point (b) of the first subparagraph, institutions shall assign transactions to the same hedging set of the relevant risk category only where the pair of risk drivers in those transactions as referred to in point (b) is identical and the two risk drivers contained in this pair are positively correlated. Otherwise, institutions shall assign transactions referred to in point (b) to one of the hedging sets established in accordance with paragraph 1, on the basis of only one of the two risk drivers referred to in point (b).

3.  The institutions shall make available upon request by the competent authorities the number of hedging sets established in accordance with paragraph 2 for each risk category, with the primary risk driver or the pair of risk drivers of each of those hedging sets and with the number of transactions in each of those hedging sets.

Article 278

Potential future exposure

1.  Institutions shall calculate the potential future exposure ('PFE') of a netting set as follows:

where:

a  =   the index that denotes the risk categories included in the calculation of the potential future exposure of the netting set;

AddOn(a)  =   the add-on for risk category 'a' calculated in accordance with Articles 280a to 280f, as applicable;

multiplier  =   the multiplier factor calculated in accordance with the formula referred to in paragraph 3.

For the purposes of this calculation, institutions shall include the add-on of a given risk category in the calculation of the potential future exposure of a netting set where at least one transaction of the netting set has been mapped to that risk category.

2.  The potential future exposure of multiple netting sets subject to one margin agreement, as referred in Article 275(3), shall be calculated as the sum of all the individual netting sets considered as if they were not subject to any form of margin agreement.

3.  For the purpose of paragraph 1, the multiplier shall be calculated as follows:

where:

Floorm  =   5%;

y     =   

z    =

NICAi   =  the net independent collateral amount calculated only for transactions that are included in netting set 'i'. NICAi shall be calculated at trade-level or at netting set-level depending on the margin agreement.

Article 279

Calculation of risk position

For the purposes of calculating the risk category add-ons referred to in Articles 280a to 280f, institutions shall calculate the risk position of each transaction of a netting set as follows:

where:

δ    =   the supervisory delta of the transaction calculated in accordance with the formula laid down in Article 279a;

AdjNot  =   the adjusted notional amount of the transaction calculated in accordance with Article 279b;

MF     =   the maturity factor of the transaction calculated in accordance with the formula laid down in Article 279c;

Article 279a

Supervisory delta

1.  Institution shall calculate the supervisory delta (δ) as follows:

(a)  for call and put options that entitle the option buyer to purchase or sell an underlying instrument at a positive price on a single date in the future, except where those options are mapped to the interest rate risk category, institutions shall use the following formula:

where:

sign  =  -1 where the transaction is a sold call option or a bought put option

    +1 where the transaction is a bought call or sold put option

type  =  -1 where the transaction is a put option

    +1 where the transaction is a call option

N(x)    =  the cumulative distribution function for a standard normal random variable meaning the probability that a normal random variable with mean zero and variance of one is less than or equal to 'x';

P    =  the spot or forward price of the underlying instrument of the option;

K    =  the strike price of the option;

T     =  the expiry date of the option which is the only future date at which the option may be exercised. The expiry date shall be expressed in years using the relevant business day convention.

σ    =  the supervisory volatility of the option determined in accordance with Table 1 on the basis of the risk category of the transaction and the nature of the underlying instrument of the option.

Table 1

Risk category

Underlying instrument

Supervisory volatility

Foreign Exchange

All

15%

Credit

 

Single-name instrument

100%

Multiple-names instrument

80%

Equity

 

Single-name instrument

120%

Multiple-names instrument

75%

Commodity

Electricity

150%

Other commodities (excluding electricity)

70%

Others

All

150%

Institution using the forward price of the underlying instrument of an option shall ensure that:

(i) the forward price is consistent with the characteristics of the option;

(ii) the forward price is calculated using a relevant interest rate prevailing at the reporting date;

(iii) the forward price integrates the expected cash-flows of the underlying instrument before the expiry of the option.

(b)   for tranches of a synthetic securitisation, institutions shall use the following formula:

where:

sign  =

A  =   the attachment point of the tranche;

D  =  the detachment point of the tranche.

(c)  for transactions not referred to in points (a) or (b), institutions shall use the following supervisory delta:

2.  For the purposes of this Section, a long position in the primary risk driver means that the market value of the transaction increases when the value of the primary risk driver increases and a short position in the primary risk driver means that the market value of the transaction decreases when the value of the primary risk driver increases.

For transactions referred to in Article 277(3), a long position is a transaction for which the sign of the sensitivity of the primary risk driver is positive and a short position is a transaction for which the sign of the sensitivity of the primary risk driver is negative. For transactions other than the ones referred to in Article 277(3), institutions shall determine whether those transactions are long or short positions in the primary risk driver based on objective information about the structure of those transactions or their intend.

3.  Institutions shall determine whether a transaction with more than one material risk driver is a long position or a short position in each of the material risk driver in accordance with the approach used under paragraph 2 for the primary risk driver.

4.  EBA shall develop draft regulatory technical standards to specify:

(a)  the formula that institutions shall use to calculate the supervisory delta of call and put options mapped to the interest rate risk category compatible with market conditions in which interest rates may be negative as well as the supervisory volatility that is suitable for that formula;

(b)  what objective information concerning the structure and the intend of a transaction institutions shall use to determine whether a transaction that is not referred to in Article 277(2) is a long or short position in its primary risk driver;

EBA shall submit those draft regulatory technical standards to the Commission by [6 months after the entry into force of this Regulation].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

Article 279b

Adjusted notional amount

1.  Institutions shall calculate the adjusted notional amount as follows:

(a)  for transactions mapped to the interest rate risk category or the credit risk category, institutions shall calculate the adjusted notional amount as the product of the notional amount of the derivative contract multiplied by the supervisory duration factor, which shall be calculated as follows:

where:

R   =   the supervisory discount rate; R = 5%;

S  =  the start date which is the date at which a transaction starts fixing or making payments, other than payments related to the exchange of collateral in a margin agreement. Where the transaction has already been fixing or making payments at the reporting date, the start date shall be equal to 0. The start date shall be expressed in years using the relevant business day convention.

Where a transaction has one or multiple future dates at which the institution or the counterparty may decide to terminate the transaction earlier than its contractual maturity, the start date shall be equal to the earliest of the following:

(i) the date or the earliest of the multiple future dates at which the institution or the counterparty may decide to terminate the transaction earlier than its contractual maturity;

(ii) the date at which a transaction starts fixing or making payments, other than payments related to the exchange of collateral in a margin agreement.

Where a transaction has a financial instrument as the underlying instrument that may give rise to contractual obligations additional to those of the transaction, the start date of the transaction shall be determined based on the earliest date at which the underlying instrument starts fixing or making payments.

E  =   the end date which is the date at which the value of the last contractual payment of a transaction is exchanged between the institution and the counterparty. The end date shall be expressed in years using the relevant business day convention.

Where a transaction has a financial instrument as underlying instrument that may give rise to contractual obligations additional to those of the transaction, the end date of the transaction shall be determined based on the last contractual payment of the underlying instrument of the transaction;

(b)  for transactions mapped to the foreign exchange risk category, institutions shall calculate the adjusted notional amount as follows:

(i)  where the transaction consists of one payment leg, the adjusted notional amount shall be the notional amount of the derivative contract;

(ii)  where the transaction consists of two payment legs and the notional amount of one payment leg is denominated in the institution's reporting currency, the adjusted notional amount shall be the notional amount of the other payment leg.

(iii)  where the transaction consists of two payment legs and the notional amount of each payment leg is denominated in another currency than the institution's reporting currency, the adjusted notional amount shall be the largest of the notional amounts of the two payment legs after those amounts have been converted into the institution's reporting currency at the prevailing spot exchange rate.

(c)  for transactions mapped to the equity risk category or commodity risk category, institutions shall calculate the adjusted notional amount as the product of the market price of one unit of the underlying instrument of the transaction multiplied by the number of units in the underlying instrument referenced by the transaction

  Institution shall use the notional amount as the adjusted notional where a transaction mapped to the equity risk category or commodity risk category is contractually expressed as a notional amount, rather than the number of units in the underlying instrument,.

2.  Institutions shall determine the notional amount or number of units of the underlying instrument for the purpose of calculating the adjusted notional amount of a transaction referred to in paragraph 1 as follows:

(a)  where the notional amount or the number of units of the underlying instrument of a transaction is not fixed until its contractual maturity:

(i)  for deterministic notional amounts and numbers of units of the underlying instrument, the notional amount shall be the weighted average of all the deterministic values of notional amounts or number of units of the underlying instrument, as applicable, until the contractual maturity of the transaction, where the weights are the proportion of the time period during which each value of notional amount applies;

(ii)  for stochastic notional amounts and numbers of units of the underlying instrument, the notional amount shall be the amount determined by fixing current market values within the formula for calculating the future market values.

(b)  for binary and digital options, the notional amount shall be the largest value of the possible states of the option payoff at the expiry of the option.

Without prejudice to the first subparagraph, if a possible state of the option payoff is stochastic, institution shall use the method set out in point (ii) of point (a) to determine the value of the notional amount;

(c)  for contracts with multiple exchanges of the notional amount, the notional amount shall be multiplied by the number of remaining payments still to be made in accordance with the contracts;

(d)  for contracts that provides for a multiplication of the cash flows payments or a multiplication of the underlying of the contract, the notional amount shall be adjusted by an institution to take into account the effects of the multiplication on the risk structure of those contracts.

3.  Institutions shall convert the adjusted notional amount of a transaction into their reporting currency at the prevailing spot exchange rate where the adjusted notional amount is calculated under this Article from a contractual notional amount or a market price of the number of units of the underlying instrument denominated in another currency.

Article 279cMaturity Factor

1.  Institutions shall calculate the maturity factor ('MF') as follows:

(a)  for transactions included in netting sets as referred to in Article 275(1), institution shall use the following formula:

where:

M      =  the remaining maturity of the transaction which is equal to the period of time needed for the termination of all contractual obligations of the transaction. For that purpose, any optionality of a derivative contract shall be considered to be a contractual obligation. The remaining maturity shall be expressed in years using the relevant business day convention.

Where a transaction has another derivative contract as underlying instrument that may give rise to additional contractual obligations beyond the contractual obligations of the transaction, the remaining maturity of the transaction shall be equal to the period of time needed for the termination of all contractual obligations of the underlying instrument.

OneBusinessYear  =  one year expressed in business days using the relevant business day convention.

(b)  for transactions included in the netting sets referred to in Article 275(2) and (3), the maturity factor is defined as:

where:

MPOR    =   the margin period of risk of the netting set determined in accordance with Article 285(2) to (5).

When determining the margin period of risks for transactions between a client and a clearing member, an institution acting either as the client or as the clearing member shall replace the minimum period set out in point (b) of Article 285(2) with 5 business days.

2.  For the purpose of paragraph 1, the remaining maturity shall be equal to the period of time until the next reset date for transactions that are structured to settle outstanding exposure following specified payment dates and where the terms are reset in such a way that the market value of the contract shall be zero on those specified payment dates.

Article 280

Hedging set supervisory factor coefficient

For the purposes of calculating the add-on of a hedging set as referred to in Articles 280a to 280f, the hedging set supervisory factor coefficient 'ϵ' shall be the following:

  1 for the hedging set established in accordance with Article 277a(1)

ϵ =  5 for the hedging set established in accordance with point (a) of Article 277a(2)

  0.5 for the hedging set established in accordance with point (b) of Article 277a(2)

Article 280a

Interest rate risk category add-on

1.  For the purposes of Article 278institutions shall calculate the interest rate risk category add-on for a given netting set as follows:

where:

j    = the index that denotes all the interest rate risk hedging sets established in accordance with point (a) of Article 277a(1) and with Article 277a(2) for the netting set;

AddOnIRj  = the add-on of hedging set 'j' of the interest rate risk category calculated in accordance with paragraph 2.

2.  The add-on of hedging set 'j' of the interest rate risk category shall be calculated as follows:

where:

ϵj      =  the hedging set supervisory factor coefficient of hedging set 'j' determined in accordance with the applicable value specified in Article 280;

SFIR       =  the supervisory factor for the interest rate risk category with a value equal to 0,5%;

EffNotIRj  =  the effective notional amount of hedging set 'j' calculated in accordance with paragraphs 3 and 4.

3.  For the purpose of calculating the effective notional amount of hedging set 'j', institutions shall first allocate each transaction of the hedging set to the appropriate bucket in Table 2. They shall do so on the basis of the end date of each transaction as determined under point (a) of Article 279b(1):

Table 2

Bucket

End date

(in years)

1

>0 and <=1

2

>1 and <= 5

3

> 5

Institutions shall then calculate the effective notional of hedging set 'j' in accordance with the following formula:

where:

l  =  the index that denotes the risk position;

Dj,k   =  the effective notional amount of bucket 'k' of hedging set 'j' calculated as follows:

Article 280b

Foreign Exchange risk category add-on

1.  For the purposes of Article 278 the foreign exchange risk category add-on for a given netting set shall be calculated as follows:

where:

j  = the index that denotes the foreign exchange risk hedging sets established in accordance with Article 277a(1)(b) and with Article 277a(2) for the netting set;

AddOnFXj   =  the add-on of hedging set 'j' of the foreign risk category calculated in accordance with paragraph 2.

2.  The add-on of hedging set 'j' of the foreign exchange risk category shall be calculated as follows:

where:

ϵj    =   the hedging set supervisory factor coefficient of hedging set 'j' calculated in accordance with Article 280;

SFFX    =   the supervisory factor for the foreign exchange risk category with a value equal to 4%;

EffNotIRj  =  the effective notional of hedging set 'j' calculated as follows:

Article 280c

Credit risk category add-on

1.  For the purposes of paragraph 2, institutions shall establish the relevant credit reference entities of the netting set in accordance with the following:

(a) There shall be one credit reference entity for each issuer of a reference debt instrument that underlies a single-name transaction allocated to the credit risk category. Single-name transactions shall be assigned to the same credit reference entity only where the underlying reference debt instrument of those transactions is issued by the same issuer;

(b)  There shall be one credit reference entity for each group of reference debt instruments or single-name credit derivatives that underlie a multi-name transaction allocated to the credit risk category. Multi-names transactions shall be assigned to the same credit reference entity only where the group of underlying reference debt instruments or single-name credit derivatives of those transactions has the same constituents.

2.  For the purposes of Article 278, institution shall calculate the add-on for the credit risk category for a given netting set as follows:

where:

j    =   the index that denotes all the credit risk hedging sets established in accordance with point (c) of Article 277a(1) and with Article 277a(2) for the netting set;

AddOnCreditj  =  the credit risk category add-on for hedging set 'j' calculated in accordance with paragraph 2.

3.  Institutions shall calculate the credit risk category add-on of hedging set 'j' as follows:

where:

j       =  the index that denotes the credit reference entities of the netting set established in accordance with paragraph 1;

ϵj      =   the hedging set supervisory factor coefficient of hedging set 'j' determined in accordance with Article 280(3);

AddOn(Entityj)   =   the add-on for credit reference entity 'j' determined in accordance with paragraph 4;

ρjCredit     =   the correlation factor of entity 'j'. Where the credit reference entity 'j' has been established in accordance with paragraph 1(a), ρjCredit = 50%.Where the credit reference entity 'j' has been established in accordance with paragraph 1(b), ρjCredit = 80%

4.  Institutions shall calculate the add-on for credit reference entity 'j' as follows:

where:

EffNotCreditj   =  the effective notional of credit reference entity 'j' calculated as follows:

where :

l    =   the index that denotes the risk position;

SFj,lCredit  =   the supervisory factor applicable to credit reference entity 'j' determined in accordance with paragraph 5.

5.  For the purposes of paragraph 4, institutions shall calculate the supervisory factor applicable to credit reference entity 'j' as follows:

(a)  For credit reference entity 'j' established in accordance with point (a) of paragraph 1, SFj,lCredit shall be mapped to one of the six supervisory factors set out in Table 3 of this Article based on an external credit assessment by a nominated ECAI of the corresponding individual issuer. For an individual issuer for which a credit assessment by a nominated ECAI is not available:

(i)  an institution using the approach referred to in Chapter 3 of Title II shall map the internal rating of the individual issuer to one of the external credit assessment;

(ii)  an institution using the approach referred to in Chapter 2 of Title II shall assign SFj,lCredit = 0,54 % to this credit reference entity. However, where an institution applies Article 128 to risk weight counterparty credit risk exposures to this individual issuer, SFj,lCredit = 1,6 % shall be assigned;

(b)  For credit reference entities 'j' established in accordance with point (b) of paragraph 1:

(i)  where a position 'l' assigned to credit reference entity 'j' is a credit index listed on a recognised exchange, SFj,lCredit shall be mapped to one of the two supervisory factors set out in Table 4 of this Article based on the majority of credit quality of its individual constituents;

(ii)  where a position 'l' assigned to credit reference entity 'j' is not referred to in point (i) of this point, SFj,lCredit shall be the weighted average of the supervisory factors mapped to each constituent in accordance with the method set out in point (a) of this paragraph, where the weights are defined by the proportion of notional of the constituents in that position.

Table 3

Credit quality step

Supervisory factor for single-name transactions

1

0,38%

2

0,42%

3

0,54%

4

1,06%

5

1,6%

6

6,0%

Table 4

Dominant credit quality

Supervisory factor for quoted indices

Investment grade

0,38%

Non-investment grade

1,06%

Article 280d

Equity risk category add-on

1.  For the purposes of paragraph 2, institutions shall establish the relevant equity reference entities of the netting set in accordance with the following :

(a)  there shall be one equity reference entity for each issuer of a reference equity instrument that underlies a single-name transaction allocated to the equity risk category. Single-name transactions shall be assigned to same equity reference entity only where the underlying reference equity instrument of those transactions is issued by the same issuer;

(b)  there shall be one equity reference entity for each group of reference equity instruments or single-name equity derivatives that underlie a multi-name transaction allocated to the equity risk category. Multi-names transactions shall be assigned to the same equity reference entity only where the group of underlying reference equity instruments or single-name equity derivatives, as applicable, of those transactions has the same constituents.

2.  For the purposes of Article 278, for a given netting set, institution shall calculate the equity risk category add-on as follows:

where:

j    =   the index that denotes all the credit risk hedging sets established in accordance with point (d) of Article 277a(1) and with Article 277a(2) for the netting set;

AddOnEquityj   =  add-on of hedging set 'j' of the credit risk category determined in accordance with paragraph 3.

3.  Institutions shall calculate the equity risk category add-on for hedging set 'j' as follows:

 

   where:

j   =   the index that denotes the equity reference entities of the netting set established in accordance with paragraph 1;

ϵj     =  hedging set supervisory factor coefficient of hedging set 'j' determined in accordance with Article 280;

AddOn(Entityj) =  the add-on for equity reference entity 'j' determined in accordance with paragraph 4;

ρjEquity    =  the correlation factor of entity 'j'. Where the equity reference entity j has been established in accordance with paragraph 1(a), ρjEquity =50%. Where the equity reference entity j has been established in accordance with paragraph 1(b), ρjEquity =80%.

4.  Institutions shall calculate the add-on of equity reference entity 'j' as follows:

where:

SFjEquity   =   the supervisory factor applicable to equity reference entity 'j'. When the equity reference entity 'j' has been established in accordance with paragraph 1(a), SFjEquity = 32%; when the equity reference entity 'j' has been established in accordance with paragraph 1(b), SFjEquity = 20%;

EffNotEquityj  =  the effective notional of equity reference entity 'j' calculated as follows:

Article 280e

Commodity risk category add-on

1.  For the purposes of Article 278, institutions shall calculate the commodity risk category add-on for a given netting set as follows:

j     =  the index that denotes the commodity hedging sets established in accordance with point (e) of Article 277a(1) and with Article 277a(2) for the netting set;

AddOnComj   = the commodity risk category add-on for hedging set 'j' determined in accordance with paragraph 4.

2.  For the purpose of calculating the add-on of a commodity hedging set of a given netting set in accordance with paragraph 4, institutions shall establish the relevant commodity reference types of each hedging set. Commodity derivative transactions shall be assigned to same commodity reference type only where the underlying commodity instrument of those transactions has the same nature.

3.  By way of derogation from paragraph 2, competent authorities may require an institution with large and concentrated commodity derivative portfolios to consider additional characteristics other than the nature of the underlying commodity instrument to establish the commodity reference types of a commodity hedging set in accordance with paragraph 2.

EBA shall develop draft regulatory technical standards to specify in greater detail what constitutes a large and concentrated commodity derivative portfolio as referred to in the first subparagraph.

EBA shall submit those draft regulatory technical standards to the Commission by [15 months after the entry into force of this Regulation].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

4.  Institutions shall calculate the commodity risk category add-on for hedging set 'j' as follows:

where:

k      =  the index that denotes the commodity reference types of the netting set established in accordance with paragraph 2;

ϵj       =  the hedging set supervisory factor coefficient of hedging set 'j' calculated in accordance with Article 280;

AddOn(Typejk)   =  the add-on of commodity reference type 'k' calculated in accordance with paragraph 5;

ρCom      =  the correlation factor of the commodity risk category with a value equal to 40%.

5.  Institution shall calculate the add-on for commodity reference type 'k' as follows:

where:

SFkCom   =   the supervisory factor applicable to commodity reference type 'k'.

When the commodity reference type 'k' corresponds to transactions allocated to the hedging set referred to in point(i) of point(e) of Article 277b(1), SFkCom = 40%; otherwise, SFkCom = 18%.

EffNotComk  =   the effective notional amount of commodity reference type 'k' calculated as follows:

Article 280f

Other risks category add-on

1.  For the purposes of Article 278, institutions shall calculate the other risk category add-on for a given netting set as follows:

where:

j    =   the index that denotes the other risk hedging sets established in accordance with point(f) of Article 277a(1) and with Article 277a(2) for the netting set;

AddOnOtherj   =   the other risks category add-on for hedging set 'j' determined in accordance with paragraph 2.

2.  Institutions shall calculate the other risks category add-on for hedging set 'j' as follows:

where:   

ϵj     =   the hedging set supervisory factor coefficient of hedging set 'j' calculated in accordance with Article 280;

SFOther   =   the supervisory factor for the other risk category with a value equal to 8%;

EffNotOtherj = the effective notional amount of hedging set 'j' calculated as follows:

"

(66)  In Part Three, Title II, Chapter 6, Section 4 is replaced by the following:

"Section 4Simplified Standardised Approach for Counterparty Credit Risk Method

Article 281Calculation of the exposure value

1.  Institution shall calculate a single exposure value at netting set level in accordance with Section 3 of this Chapter, subject to paragraph 2.

2.  The exposure value of a netting set shall be calculated in accordance with the following requirements:

(a)  institutions shall not apply the treatment referred to in Article 274(6);

(b)  by way of derogation from Article 275(1), instiutions shall apply the following:

For netting sets not referred to in Article 275(2), institutions shall calculate the replacement cost in accordance with the following formula:

;

(c)  by way of derogation from Article 275(2), instiutions shall apply the following:

For netting sets of transactions that are traded on a recognised exchange, netting sets of transactions that are centrally cleared by a central counterparty authorised in accordance with Article 14 of Regulation (EU) 648/2012 or recognised in accordance Article 25 of with Regulation (EU) 648/2012 or netting sets of transactions for which collateral is exchanged bilaterally with the counterparty in accordance with Article 11 of Regulation (EU) 648/2012, institutions shall calculate the replacement cost in accordance with the following formula:

where:

TH  =   the margin threshold applicable to the netting set under the margin agreement below which the institution cannot call for collateral;

MTA  =  the minimum transfer amount applicable to the netting set under the margin agreement;

(d)  by way of derogation from Article 275(3), instiutions shall apply the following:

For netting sets subject to a margin agreement, where the margin agreement applies to multiple netting sets, institutions shall calculate the replacement cost as the sum of the replacement cost of each individual netting set calculated in accordance with paragraph 1 as if they were not margined.

(e)  all hedging sets shall be established in accordance with Article 277a(1).

(f)  institutions shall set to 1 the multiplier in the formula used to calculate the potential future exposure in Article 278(1), as follows:

;

(g)  By way of derogation from Article 279a(1), instiutions shall apply the following:

For all transactions, institutions shall calculate the supervisory delta as follows:

;

(h)  The formula used to compute the supervisory duration factor in point (a) of Article 279b(1) shall read as follows:

;

(i)  The maturity factor referred to in Article 279c(1) shall be calculated as follows:

(a) for transactions included in netting sets referred to in Article 275(1), MF = 1;

(b) for transactions included in netting sets referred to in Article 275(2) and (3), MF = 0,42;

(j)  The formula used to calculate the effective notional of hedging set 'j' in Article 280a(3) shall read as follows:

(k)  The formula used to calculate the credit risk category add-on for hedging set 'j' of the credit risk category in Article 280c(3) shall read as follows:

(l)  The formula used to calculate the equity risk category add-on for hedging set 'j' of the equity risk category in Article 280d(3) shall read as follows:

(m)  The formula used to calculate the commodity risk category add-on for hedging set 'j' of the commodity risk category in Article 280e(3) shall read as follows:

"

(67)  In Part Three, Title II, Chapter 6, Section 5 is replaced by the following:

"Section 5Original Exposure Method

Article 282Calculation of the exposure value

1.  Institutions may calculate a single exposure value for all the transactions within a contractual netting agreement where all the conditions set out in Article 274(1) are met. Otherwise, institutions shall calculate an exposure value separately for each transaction treated as its own netting set.

2.  The exposure value of a netting set or transaction shall be the product of 1,4 times the sum of the current replacement cost and the potential future exposure.

3.  The current replacement cost referred to in paragraph 2 shall be determined as follows:

(a)  for netting sets of transactions that are traded on a recognised exchange, or netting sets of transactions that are centrally cleared by a central counterparty authorised in accordance with Article 14 of Regulation (EU) 648/2012 or recognised in accordance with Article 25 of Regulation (EU) 648/2012 or netting sets of transactions for which collateral is exchanged bilaterally with the counterparty in accordance with Article 11 of Regulation (EU) 648/2012, institutions shall calculate the current replacement cost referred to in paragraph 2 as follows:

where:

TH  =   the margin threshold applicable to the netting set under the margin agreement below which the institution cannot call for collateral;

MTA  =  the minimum transfer amount applicable to the netting set under the margin agreement

(b)  for all other netting sets or individual transactions, institutions shall calculate the current replacement cost referred to in paragraph 2 as follows:

In order to calculate the current replacement cost, institutions shall update current market values at least monthly.

4.  Institutions shall calculate the potential future exposure referred to in paragraph 2 as follows:

(a)  the potential future exposure of a netting set is the sum of the potential future exposure of all the transactions included in the netting set, as calculated in accordance with point (b);

(b)  the potential future exposure of a single transaction is its notional amount multiplied by:

(i)  the product of 0,5% multiplied by the residual maturity of the transaction for interest-rate derivative contracts;

(ia)  the product of 6% multiplied by the residual maturity of the transaction for credit underlying derivative contracts

(ii)  4% for contracts concerning foreign-exchange rate derivatives;

(iii)  18% for commodity derivative contracts including all commodities except electricity;

(iiia) 40% for electricity derivative contracts;

(iiib) 32% for equity derivative contracts;

(c)  the notional amount referred to in point (b) shall be determined in accordance with points (a), (b) and c of Article 279b(1) and with Article 279b(2) and (3), as applicable;

(d)  the potential future exposure of netting sets referred to in point (a) of paragraph 3 shall be multiplied by 0,42.

For calculating the potential exposure of interest-rate contracts in accordance with point (b)(ii), an institution may choose to use the original maturity instead of the residual maturity of the contracts.".

(68)  In Article 283, paragraph 4 is replaced by the following:

“4. For all OTC derivative transactions and for long settlement transactions for which an institution has not received permission under paragraph 1 to use the IMM, the institution shall use the methods set out in Section 3 or Section 5. Those methods may be used in combination on a permanent basis within a group.” .

(69)  Article 298 is replaced by the following:

"Article 298

Effects of recognition of netting as risk-reducing

Netting for the purposes of Section 3 to 6 shall be recognised as set out in those Sections.".

(70)  In Article 299, point (a) of paragraph 2 is deleted.

(71)  Article 300 is amended as follows:

(a)  (the intrductory sentence is replaced by the following:

“For the purposes of this Section and of Part Seven, the following definitions shall apply:ˮ;

(b)  the following points (5) to (11) are added:

“(5) ‘cash transactions’ means transactions in cash, debt instruments and equities as well as spot foreign exchange and spot commodities transactions; repurchase transactions and securities or commodities lending and securities or commodities borrowing transactions are not cash transactions;

(6) ‘indirect clearing arrangement’ means an arrangement that meets the conditions laid down in the second subparagraph of Article 4(3) of Regulation (EU) No 648/2012;

(7) ‘multi-level client structure’ means an indirect clearing arrangement under which clearing services are provided to an institution by an entity which is not a clearing member, but is itself a client of a clearing member or of a higher-level client;

(8) ‘higher-level client’ means the entity providing clearing services to a lower-level client;

(9) ‘lower-level client’ means the entity accessing the services of a CCP through a higher-level client;

(10) ‘unfunded contribution to a default fund’ means a contribution that an institution acting as a clearing member has contractually committed to provide to a CCP after the CCP has depleted its default fund to cover the losses it incurred following the default of one or more of its clearing members;

(11) ‘fully guaranteed deposit lending or borrowing transaction’ means a fully collateralised money market transaction in which two counterparties exchange deposits and a CCP interposes itself between them to ensure the performance of those counterparties' payment obligations.ˮ;

(72)  Article 301 is replaced by the following:

“Article 301Material scope

1.  This Section applies to the following contracts and transactions for as long as they are outstanding with a CCP:

(a)  the contracts listed in Annex II and credit derivatives;

(b)  SFTs and fully guaranteed deposit lending or borrowing transactions;

(c)  long settlement transactions.

This Section does not apply to exposures arising from the settlement of cash transactions. Institutions shall apply the treatment laid down in Title V of this Part to trade exposures arising from those transactions and a 0% risk weight to default fund contributions covering only those transactions. Institutions shall apply the treatment set out in Article 307 to default fund contributions that cover any of the contracts listed in the first subparagraph in addition to cash transactions.

2.  For the purposes of this Section, the following shall apply:

(a)  initial margin shall not include contributions to a CCP for mutualised loss sharing arrangements;

(b)  initial margin shall include collateral deposited by an institution acting as a clearing member or by a client in excess of the minimum amount required respectively by the CCP or by the institution acting as a clearing member, provided the CCP or the institution acting as a clearing member may, in appropriate cases, prevent the institution acting as a clearing member or the client from withdrawing such excess collateral;

(c)  where a CCP uses initial margin to mutualise losses among its clearing members, institutions acting as clearing members shall treat that initial margin as a default fund contribution.ˮ.

(73)  In Article 302, paragraph 2 is replaced by the following:

“2. Institutions shall assess, through appropriate scenario analysis and stress testing, whether the level of own funds held against exposures to a CCP, including potential future or contingent credit exposures, exposures from default fund contributions and, where the institution is acting as a clearing member, exposures resulting from contractual arrangements as laid down in Article 304, adequately relates to the inherent risks of those exposures.ˮ.

(74)  Article 303 is replaced by the following:

“Article 303Treatment of clearing members' exposures to CCPs

1.  An institution that acts as a clearing member, either for its own purposes or as a financial intermediary between a client and a CCP, shall calculate the own funds requirements for its exposures to a CCP as follows:

(a)  it shall apply the treatment set out in Article 306 to its trade exposures with the CCP;

(b)  it shall apply the treatment set out in Article 307 to its default fund contributions to the CCP.

2.  For the purposes of paragraph 1, the sum of an institution's own funds requirements for its exposures to a QCCP due to trade exposures and default fund contributions shall be subject to a cap equal to the sum of own funds requirements that would be applied to those same exposures if the CCP were a non-qualifying CCP.ˮ.

(75)  Article 304 is amended as follows:

(a)  paragraph 1 is replaced by the following:

“1. An institution acting as a clearing member and, in that capacity, acting as a financial intermediary between a client and a CCP, shall calculate the own funds requirements for its CCP-related transactions with the client in accordance with Sections 1 to 8 of this Chapter, with Section 4 of Chapter 4 of this Title and with Title VI of this Part, as applicable.”;

(b)  paragraphs 3, 4 and 5 are replaced by the following:

“3. Where an institution acting as a clearing member uses the methods set out in Section 3 or 6 of this Chapter to calculate the own funds requirement for its exposures, the following shall apply:

(a)  by way of derogation from Article 285(2), the institution may use a margin period of risk of at least five business days for its exposures to a client;

(b)  the institution shall apply a margin period of risk of at least 10 business days for its exposures to a CCP;

(c)  by way of derogation from Article 285(3), where a netting set included in the calculation meets the condition set out in point (a) of that paragraph, the institution may disregard the limit set out in that point provided that the netting set does not meet the condition in point (b) of that paragraph and does not contain disputed trades;

(d)  where a CCP retains variation margin against a transaction and the institution's collateral is not protected against the insolvency of the CCP, the institution shall apply a margin period of risk that is the lower between one year and the remaining maturity of the transaction, with a floor of 10 business days.

4. By way of derogation from point (h) of Article 281(2), where an institution acting as a clearing member uses the method set out in Section 4 of this Chapter to calculate the own fund requirement for its exposures to a client, the institution may use a maturity factor equal to 0,21 for its calculation.

5. By way of derogation from point (d) of Article 282(4), where an institution acting as a clearing member uses the method set out in Section 5 of this Chapter to calculate the own fund requirement for its exposures to a client, it may use a maturity factor equal to 0,21 in that calculation.”;

(c)  the following paragraphs 6 and 7 are added:

“6. An institution acting as a clearing member may use the reduced exposure at default resulting from the calculations in paragraphs 3, 4 and 5 for the purposes of calculating its own funds requirements for CVA risk in accordance with Title VI.

7. An institution acting as a clearing member that collects collateral from a client for a CCP-related transaction and passes the collateral on to the CCP may recognise that collateral to reduce its exposure to the client for that CCP-related transaction.

In case of a multi-level client structure the treatment set out in the first subparagraph may be applied at each level of that structure.ˮ.

(76)  Article 305 is amended as follows:

(a)  paragraph 1 is replaced by the following:

“1. An institution that is a client shall calculate the own funds requirements for its CCP-related transactions with its clearing member in accordance with Sections 1 to 8 of this Chapter, with Section 4 of Chapter 4 of this Title and with Title VI of this Part, as applicable.”;

(b)  in paragraph 2, point (c) is replaced by the following:

“(c) the client has conducted a sufficiently thorough legal review, which it has kept up to date, that substantiates that the arrangements that ensure that the condition in point (b) is met are legal, valid, binding and enforceable under the relevant laws of the relevant jurisdiction or jurisdictions;”;

(c)  in paragraph 2, the following subparagraph is added:

“An institution may take into account any clear precedents of transfers of client positions and of corresponding collateral at a CCP, and any industry intent to continue with this practice, when the institution assesses its compliance with the condition in point (b) of the first subparagraph.”;

(d)  paragraphs 3 and 4 are replaced by the following:

“3. By way of derogation from paragraph 2 of this Article, where an institution that is a client fails to meet the condition set out in point (a) of that paragraph because that institution is not protected from losses in the case that the clearing member and another client of the clearing member jointly default, but all the other conditions set out in point (a) of that paragraph and in the other points of that paragraph are met, the institution may calculate the own funds requirements for its trade exposures for CCP-related transactions with its clearing member in accordance with Article 306, subject to replacing the 2 % risk weight in point (a) of Article 306(1) with a 4 % risk weight.

4. In the case of a multi-level client structure, an institution that is a lower-level client accessing the services of a CCP through a higher-level client may apply the treatment set out in paragraph 2 or 3 only where the conditions in those paragraphs are met at every level of that structure.ˮ.

(77)  Article 306 is amended as follows:

(a)  in paragraph 1, point (c) is replaced by the following:

“(c) where the institution is acting as a financial intermediary between a client and a CCP and the terms of the CCP-related transaction stipulate that the institution is not required to reimburse the client for any losses suffered due to changes in the value of that transaction in the event that the CCP defaults, it may set the exposure value of the trade exposure with the CCP that corresponds to that CCP-related transaction to zero;”;

(b)  in paragraph 1, the following point (d) is added:

“(d) where an institution is acting as a financial intermediary between a client and a CCP and the terms of the CCP-related transaction stipulate that the institution is required to reimburse the client for any losses suffered due to changes in the value of that transaction in the event that the CCP defaults, it shall apply the treatment in point (a) or (b), as applicable, to the trade exposure with the CCP that corresponds to that CCP-related transaction.”;

(c)  paragraphs 2 and 3 are replaced by the following:

“2. By way of derogation from paragraph 1, where assets posted as collateral to a CCP or a clearing member are bankruptcy remote in the event that the CCP, the clearing member or one or more of the other clients of the clearing member become insolvent, an institution may attribute an exposure value of zero to the counterparty credit risk exposures for those assets.

3. An institution shall calculate exposure values of its trade exposures with a CCP in accordance with Sections 1 to 8 of this Chapter and with Section 4 of Chapter 4 of this Title, as applicable.”.

(78)  Article 307 is replaced by the following:

“Article 307Own funds requirements for contributions to the default fund of a CCP

An institution acting as a clearing member shall apply the following treatment to its exposures arising from its contributions to the default fund of a CCP:

(a)  it shall calculate the own funds requirement for its pre- funded contributions to the default fund of a QCCP in accordance with the approach set out in Article 308;

(b)  it shall calculate the own funds requirement for its pre-funded and unfunded contributions to the default fund of a non-qualifying CCP in accordance with the approach set out in Article 309;

(c)  it shall calculate the own funds requirement for its unfunded contributions to the default fund of a QCCP in accordance with the treatment set out in Article 310.ˮ.

(79)  Article 308 is amended as follows:

(a)  Paragraphs 2 and 3 are replaced by the following:

“2. An institution shall calculate the own funds requirement (Ki) to cover the exposure arising from its pre-funded contribution (DFi) as follows:

 

where:

i =  the index denoting the clearing member;

KCCP  = the hypothetical capital of the QCCP communicated to the institution by the QCCP in accordance with Article 50c of Regulation (EU) No 648/2012;

DFCM   = the sum of pre-funded contributions of all clearing members of the QCCP communicated to the institution by the QCCP in accordance with Article 50c of Regulation (EU) No 648/2012;

DFCCP  = the pre-funded financial resources of the CCP communicated to the institution by the CCP in accordance with Article 50c of Regulation (EU) No 648/2012.

3. An institution shall calculate the risk weighted exposure amounts for exposures arising from that institution's pre-funded contribution to the default fund of a QCCP for the purposes of Article 92(3) as the own funds requirement (KCMi), determined in accordance with paragraph 2, multiplied by 12,5.ˮ;

(b)  paragraphs 4 and 5 are deleted.

(80)  Article 309 is replaced by the following:

“Article 309Own funds requirements for pre-funded contributions to the default fund of a non-qualifying CCP and for unfunded contributions to a non-qualifying CCP

1.  An institution shall apply the following formula to calculate the own funds requirement (K) for the exposures arising from its pre-funded contributions to the default fund of a non-qualifying CCP (DF) and from unfunded contributions (UC) to such CCP:

 

2.  An institution shall calculate the risk weighted exposure amounts for exposures arising from that institution’s contribution to the default fund of a non-qualifying CCP for the purposes of Article 92(3) as the own funds requirement (K), determined in accordance with paragraph 1, multiplied by 12,5.ˮ.

(81)  Article 310 is replaced by the following:

“Article 310Own funds requirements for unfunded contributions to the default fund of a QCCP

An institution shall apply a 0% risk weight to its unfunded contributions to the default fund of a QCCP.ˮ.

(82)  Article 311 is replaced by the following:

“Article 311Own funds requirements for exposures to CCPs that cease to meet certain conditions

1.  Institutions shall apply the treatment set out in this Article where it has become known to them, following a public announcement or notification from the competent authority of a CCP used by those institutions or from that CCP itself, that the CCP will no longer comply with the conditions for authorisation or recognition, as applicable.

2.  Where the condition in paragraph 1 is met, institutions shall, within three months of the circumstance set out in that paragraph arising, or earlier where the competent authorities of those institution require it, do the following with respect to their exposures to that CCP:

(a)  apply the treatment set out in point (b) of Article 306(1) to their trade exposures to that CCP;

(b)  apply the treatment set out in Article 309 to their pre-funded contributions to the default fund of that CCP and to its unfunded contributions to that CCP;

(c)  treat their exposures to that CCP, other than the exposures listed in points (a) and (b) of this paragraph, as exposures to a corporate in accordance with the Standardised Approach for credit risk in Chapter 2 of this Title.ˮ.

(82a)  In Article 316(1), the following subparagraph is added:

"By way of derogation from the first subparagraph, institutions may choose not to apply the accounting categories for the profit and loss account under Article 27 of Directive 86/635/EEC to financial and operating leases for the purposes of calculating the relevant indicator, and may instead:

(a) include interest income from financial and operating leases and profits from leased assets into the category referred to in point 1 of Table 1;

(b) include interest expense from financial and operating leases, losses, depreciation and impairment of operating leased assets into the category referred to in point 2 of Table 1."

(83)  In Part Three, Title IV, Chapter 1 is replaced by the following:

"Chapter 1General Provisions

Article 325Approaches for calculating the own funds requirements for market risks

1.  An institution shall calculate the own funds requirements for market risks of all trading book positions and non-trading book positions subject to foreign exchange risk or commodity risk in accordance with the following approaches:

(a)  from 1. January 2022, the standardised approach set out in Chapter 1a of this Title;

(b)  from 1. January 2022, the internal model approach set out in Chapter 1b of this Title only for those positions assigned to trading desks for which the institution has been granted a permission by competent authorities to use that approach as set out in Article 325ba;

(c)  after 1. January 2022, only institutions that meet the conditions defined in Article 325a(1) may use the simplified standardised approach referred to in paragraph 4 to determine their own funds requirements for market risks;

(d)  until 1. January 2022, the simplified internal model approach set out in Chapter 5 of this Title for those risk categories for which the institution has been granted the permission in accordance with Article 363 to use that approach in. After [date of application of this Regulation], institutions shall no longer use the simplified internal model approach set out in Chapter 5 to determine the own funds requirements for market risks.

2.  The own funds requirements for markets risks calculated with the simplified standardised approach referred to in point (c) of paragraph 1 means the sum of the following own funds requirements, as applicable:

(a)  the own funds requirements for position risks referred to in Chapter 2 of this Title;

(b)  the own funds requirements for foreign exchange risks referred to in Chapter 3 of this Title;

(c)  the own funds requirements for commodity risks referred to in Chapter 4 of this Title;

3.  An institution may use in combination the approaches set out in points (a) and (b) of paragraph 1 on a permanent basis within a group provided that the own funds requirements for market risks calculated under the approach set out in point (a) does not exceed 90% of the total own funds requirements for market risks. Otherwise, the institution shall use the approach set out in point (a) of paragraph 1 for all the positions subject to the own funds requirements for market risks.

The competent authority may, based on the approach chosen by the institution for comparable desks, decide to nominate desks to fall within the scope of the approach set out in paragraph 1(b).

4.  An institution may use in combination the approaches set out in points (c) and (d) of paragraph 1 on a permanent basis within a group in accordance with Article 363.

5.  An institution shall not use either of the approaches set out in points (a) and (b) of paragraph 1 in combination with the approach set out in point (c).

6.  Institutions shall not use the approach set out in point (b) of paragraph 1 for instruments in the trading book that are securitisation positions or positions included in the CTP as defined in paragraphs 7 to 9 of Article 104.

7.  For the purpose of calculating the own funds requirements for CVA risks using the advanced method set out in Article 383, institutions may continue to use the simplified internal model approach set out in Chapter 5 of this Title after [date of application of this Regulation] at which date institutions shall cease to use that approach for the purposes of calculating the own funds requirements for market risks.

8.  EBA shall develop regulatory technical standards to specify in more detail how institutions shall determine the own funds requirements for market risks for non-trading book positions subject to foreign exchange risk or commodity risk in accordance with the approaches set out in points (a) and (b) of paragraph 1.

EBA shall submit those draft regulatory technical standards to the Commission by [6 months after the entry into force of this Regulation].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with article 10 to 14 of Regulation (EU) No 1093/2010.

Article 325aConditions for using the Simplified Standardised Approach

1.  An institution may calculate the own funds requirements for market risks with the approach referred to in point (c) of Article 325(1) provided that the size of the institution’s on- and off-balance sheet business subject to market risks is equal to or less than the following thresholds on the basis of an assessment carried out on a monthly basis:

(a)  10 % of the institution's total assets;

(b)  EUR 300 million.

On an institution's request, the competent authority may permit the individual institution to calculate the own funds requirements for market risks according to the approach set out in point c of Article 325(1), provided the scope of its on- and off-balance sheet transactions that are subject to the market risks does not exceed EUR 500 million on the basis of a monthly assessment.

2.  Institutions shall calculate the size of their on- and off-balance sheet subject to market risks on a given date in accordance with the following requirements:

(a)  all the positions assigned to the trading book shall be included▌;

(b)  all non-trading book positions generating foreign-exchange and commodity risks shall be included;

(c)  all positions shall be valued at their market prices on that date, except for positions referred to in point (b). If the market price of a position is not available on a given date, institutions shall take the most recent market value for that position;

(d)  all the non-trading book positions generating commodity risks shall be considered as an overall net foreign exchange position and valued in accordance with Article 352

(e)  all the non-trading book positions generating commodity risks shall be valued using the provisions set out in Articles 357 to 358;

(f)  the absolute value of long positions shall be summed with the absolute value of short positions.

3.  Institutions shall notify the competent authorities when they calculate, or cease to calculate, their own fund requirements for market risks in accordance with this Article.

4.  An institution that no longer meets any of the conditions of paragraph 1 shall immediately notify the competent authority.

5.  Institutions shall cease to calculate the own fund requirements for market risks in accordance with paragraph 1 within three months of one of the following cases:

(a)  the institution does not meet any of the conditions of paragraph 1 for three consecutive months;

(b)  the institution does not meet any of the conditions of paragraph 1 during more than 6 out of the last 12 months;

6.  Where an institution ceases to calculate the own fund requirements for market risks in accordance with paragraph 1, it shall only be permitted to calculate the own fund requirements for market risks according to paragraph 1 where it demonstrates to the competent authority that all the conditions set out in paragraph 1 have been met for an uninterrupted full year period.

7.  Institutions shall not enter into a position for the only purpose of complying with any of the conditions set out in paragraph 1 during the monthly assessment.

Article 325bAllowances for consolidated requirements

1.  Subject to paragraph 2 and only for the purpose of calculating net positions and own funds requirements in accordance with this Title on a consolidated basis, institutions may use positions in one institution or undertaking to offset positions in another institution or undertaking.

2.  Institutions may apply paragraph 1 only subject to the permission of the competent authorities, which shall be granted if all of the following conditions are met:

(a)  there is a satisfactory allocation of own funds within the group;

(b)  the regulatory, legal or contractual framework in which the institutions operate is such as to guarantee mutual financial support within the group.

3.  Where there are undertakings located in third countries all of the following conditions shall be met in addition to those in paragraph 2:

(a)  such undertakings have been authorised in a third country and either satisfy the definition of a credit institution or are recognised third-country investment firms;

(b)  such undertakings comply, on an individual basis, with own funds requirements equivalent to those laid down in this Regulation;

(c)  no regulations exist in the third countries in question which might significantly affect the transfer of funds within the group.

Article 325cStructural hedges of foreign exchange risk

1.  The competent authorities may permit an institution to exclude certain foreign exchange risk positions which an institution has deliberately taken in order to hedge against the adverse effect of foreign exchange rates on its ratios referred to in Article 92(1) may, subject to permission of the competent authorities, be excluded from the calculation of own funds requirements for market risks, provided the following conditions are met:

(a)  the exclusion is limited to the largest of the following amounts:

(i)  the amount of investment in affiliated entities denominated in foreign currencies but which are not consolidated with the institution;

(ii)  the amount of investment in consolidated subsidiaries denominated in foreign currencies.

(b)  the exclusion from the calculation of own funds requirements for market risks is made for at least six months;

(c)  the institution has provided to the competent authorities the details of that position, has substantiated that that position has been entered into for the purpose of hedging partially or totally against the adverse effect of the exchange rate on its ratios defined in accordance with Article 92(1) and the amounts of that position that are excluded from the own funds requirements for market risk as referred to in point (a).

2.  Any exclusion of positions from the own funds requirements for market risks in accordance with paragraph 1 shall be applied consistently and remain in place for the life of the assets or other items.

3.  Competent authorities shall approve any subsequent changes by the institution to the amounts that shall be excluded from the own funds requirements for market risks in accordance with paragraph 1.".

(84)  In Part 3, Title IV, the following Chapters 1a and 1b are added:

"Chapter 1aThe standardised approach

Section 1General provisions

Article 325dScope and structure of the standardised approach

An institution shall calculate the own funds requirements for market risk with the standardised approach for a portfolio of trading book positions or non-trading book positions generating foreign-exchange and commodity risks as the sum of the following three components:

(a)  the own funds requirement under the sensitivities based method set out in Section 2 of this Chapter;

(b)  the default risk own funds requirement set out in Section 5 of this Chapter which is only applicable to the trading book positions referred to in that Section;

(c)  the own funds requirements for residual risks set out in Section 4 of this Chapter which is only applicable to the trading book positions referred to in that Section.

Section 2Sensitivities-based method own funds requirement

Article 325eDefinitions

For the purposes of this Chapter, the following definitions shall apply:

(1) 'risk class' means one of the following seven categories: (i) general interest rate risk; (ii) non-securitisation credit spread risk; (iii) securitisation credit spread risk (non-CTP); (iv) securitisation credit spread risk (CTP); (v) equity risk; (vi) commodity risk; and (vii) foreign exchange risk.

(2) 'sensitivity' means the relative change in the value of an position, calculated with the institution's pricing model, as a result of a change in the value of one of the relevant risk factors of the position.

(3) 'bucket' means a sub-category of positions within one risk class with a similar risk profile to which a risk-weight is assigned as defined in subsection 1 of Section 3 of this Chapter.

Article 325fComponents of the sensitivities-based method

1.  Institutions shall calculate the own funds requirement for market risk under the sensitivities-based method by aggregating the following three own fund requirements in accordance with Article 325i:

(a)  own fund requirements for delta risk which captures the risk of changes in the value of an instrument due to movements in its non-volatility related risk factors and assuming a linear pricing function;

(b)  own fund requirements for vega risk which captures the risk of changes in the value of an instrument due to movements in its volatility-related risk factors;

(c)  own fund requirements for curvature risk which captures the risk of changes in the value of an instrument due to movements in the main non-volatility related risk-factors not captured by delta risk.

2.  For the purposes of the calculation referred to in paragraph 1,

(d)  all the positions of instruments with optionality shall be subject to the own fund requirements referred to in points (a), (b) and (c) of paragraph 1.

(e)  all the positions of instruments without optionality shall only be subject to the own fund requirements referred to in points (a) of paragraph 1.

For the purposes of this Chapter, instruments with optionality include, amongst others: calls, puts, caps, floors, swaptions, barrier options and exotic options. Embedded options, such as prepayment or behavioural options, shall be considered to be standalone positions in options for the purpose of calculating the own funds requirements for market risks.

For the purposes of this Chapter, instruments whose cash flows can be written as a linear function of the underlying's notional value shall be considered to be instruments without optionality.

Article 325g Own funds requirements for delta and vega risks

1.  Institutions shall apply the delta and vega risk factors described in subsection 1 of Section 3 of this Chapter to calculate the own fund requirements for delta and vega risks.

2.  Institutions shall apply the process set out in paragraphs 3 to 8 to calculate own funds requirements for delta and vega risks.

3.  For each risk class, the sensitivity of all instruments in scope of the own funds requirements for delta or vega risks to each of the applicable delta or vega risk factors included in that risk class shall be calculated by using the corresponding formulas in subsection 2 of Section 3 of this Chapter. If the value of an instrument depends on several risk factors, the sensitivity shall be determined separately for each risk factor.

4.  Sensitivities shall be assigned to one of the buckets 'b' within each risk class.

5.  Within each bucket 'b', the positive and negative sensitivities to the same risk factor shall be netted, giving rise to net sensitivities ( to each risk factor k within a bucket.

6.  The net sensitivities to each risk factor () within each bucket shall be multiplied by the corresponding risk weights (RWk) prescribed in Section 6, giving rise to weighted sensitivities (WSk) to each risk factor within that bucket in accordance with the following formula:

7.  The weighted sensitivities to the different risk factors within each bucket shall be aggregated in accordance with the formula below, where the quantity within the square root function is floored at zero, giving rise to the bucket-specific sensitivity (Kb). The corresponding correlations for weighted sensitivities within the same bucket (), laid down in Section 6, shall be used.

8.  The bucket-specific sensitivity (Kb) shall be calculated for each bucket within a risk class in accordance with paragraphs 5 to 7. Once the bucket-specific sensitivity has been calculated for all buckets, weighted sensitivities to all risk factors across buckets shall be aggregated in accordance with the formula below, using the corresponding correlations γbc for weighted sensitivities in different buckets laid down in 6, giving rise to the risk-class specific delta or vega own funds requirement:

where for all risk factors in bucket b and in bucket c. Where those values for and produce a negative number for the overall sum of , the institution shall calculate the risk-class specific delta or vega own funds requirements using an alternative specification whereby for all risk factors in bucket b and for all risk factors in bucket c.

The risk-class specific delta or vega risk own fund requirements shall be calculated for each risk class in accordance with paragraphs (1) to (8).

Article 325hOwn funds requirements for curvature risk

1.  Institutions shall apply the process set out in paragraphs 2 to 6 to calculate own funds requirements for curvature risk.

2.  Using the sensitivities calculated in accordance with Article 325g(4), for each risk class, a net curvature risk requirement for each risk factor (k) included in that risk class shall be calculated in accordance with the formula below.

where:

i = the index that denotes an instrument subject to curvature risks associated with risk factor k;

= the current level of risk factor k;

= the value of an instrument i as estimated by the pricing model of the institution by using the current value of risk factor k;

and = the value of an instrument i after is shifted upward and downward respectively in accordance with the corresponding risk weights;

= the risk weight for curvature risk factor k for instrument i determined in accordance with Section 6.

= the delta sensitivity of instrument i with respect to the delta risk factor that corresponds to curvature risk factor k.

3.  For each risk class, the net curvature risk requirements calculated in accordance with paragraph 2 shall be assigned to one of the buckets (b) within that risk class.

4.  All the net curvature risk requirements within each bucket (b) shall be aggregated in accordance with the formula below, where the corresponding prescribed correlations rkl among pairs of risk factors k,l within each bucket shall be used, giving rise to the bucket-specific curvature risk own funds requirements:

  

where:

y = a function that takes the value 0 if and both have negative signs. In all other cases, yshall take the value of 1.

5.  The net curvature risk own funds requirements shall be aggregated across buckets within each risk class in accordance with the formula below, where the corresponding prescribed correlations γbc for sets of net curvature risk requirements belonging to different buckets shall be used. This gives rise to the risk-class specific curvature risk own funds requirements.

  

where:

for all risk factors in bucket b, and in bucket c;

is a function that takes the value 0 if and both have negative signs. In all other cases, takes the value of 1.

Where these values for and produce a negative number for the overall sum of

the institution shall calculate the curvature risk charge using an alternative specification whereby for all risk factors in bucket b and for all risk factors in bucket c.

6.  The risk class specific curvature risk own funds requirements shall be calculated for each risk class in accordance with paragraphs 2 to 5.

Article 325iAggregation of risk-class specific own funds requirements for delta, vega and curvature risks

1.  Institutions shall aggregate risk-class specific own funds requirements for the delta, vega and curvature risks in accordance with the process set out in paragraphs 2 and 3.

2.  The process to calculate delta, vega and curvature risk-class specific own funds requirements described in Articles 325g and 325h shall be performed three times per risk-class, each time using a different set of correlation parameters (correlation between risk factors within a bucket) and (correlation between buckets within a risk class. Each of those three sets shall correspond to a different scenario, as follows:

(a)  the 'medium correlations' scenario, whereby the correlation parameters and remain unchanged from those specified in Section 6.

(b)  the 'high correlations' scenario, whereby the correlation parameters and that are specified in Section 6 shall be uniformly multiplied by 1,25, with and subject to a cap at 100%.

(c)  the 'low correlations' scenario, whereby the corresponding prescribed correlations specified in Section 6 shall be uniformly multiplied by 0,75.

3.  The institution establishes an own funds requirement at the portfolio level that is specific to each scenario. The scenario-specific own funds requirement at the portfolio level shall be calculated as a sum of the own funds requirements specific to the risk class for this scenario.

4.  The final ▌own funds requirements of the portfolio correspond to the highest scenario-specific own funds requirements at the portfolio level calculated according to paragraph 3.

Article 325jTreatment of index instruments, multi-underlying options

1.  Institutions shall use a look through approach for index instruments and multi-underlying options where all the constituents of the index or the option have delta risk sensitivities of the same sign. The sensitivities to constituent risk factors from index instruments and multi-underlying options are allowed to net with sensitivities to single name instruments without restrictions, except for positions of in the CTP.

2.  Multi-underlying options with delta risk sensitivities of different signs shall be exempted from delta and vega risk but shall be subject to the residual risk add-on referred to in Section 4 of this Chapter.

Article 325kTreatment of collective investment undertakings

1.  Institutions shall calculate the own funds requirements for market risk of a position in a collective investment undertaking ('CIU') using one of the following approaches:

(a)  An institution that is able to identify the underlying investments of the CIU or the index instrument on a daily basis shall look through to those underlying investments and calculate the own funds requirements for market risk for this position in accordance with the approach set out in Article 325j(1);

(b)  Where daily prices for the CIU may be obtained but an institution is aware of the mandate of the CIU, that institution shall consider the CIU position as an equity instrument for the purposes of the sensitivities based-method;

(c)  Where daily prices for the CIU may be obtained but an institution is not aware of the mandate of the CIU, that institution shall consider the CIU position as an equity instrument for the purposes of the sensitivities based-method and assign that CIU position the risk weight of the equity risk bucket “other sector”.

2.  Institutions may rely on the following third parties to calculate and report their own funds requirements for market risk for positions in CIUs, in accordance with the methods set out in this Chapter:

(a)  the depository of the CIU provided that the CIU invests exclusively in securities and deposits all those securities at that depository;

(b)  for other CIUs, the CIU management company, provided that the CIU management company meets the criteria set out in point (a) of Article 132(3).

3.  EBA shall develop regulatory technical standards to specify in more detail which risk weights shall be assigned to positions in the CIU referred to in point (b) of paragraph 1

EBA shall submit those draft regulatory technical standards to the Commission by [fifteen months after the entry into force of this Regulation].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with article 10 to 14 of Regulation (EU) No 1093/2010.

Article 325lUnderwriting positions

1.  Institutions may use the process set out in this Article for calculating the own funds requirements for market risks of underwriting positions of debt or equity instruments.

2.  Institutions shall apply one of the appropriate multiplying factors listed in Table 1 to the net sensitivities of all the underwriting positions in each individual issuer, excluding the underwriting positions which are subscribed or sub-underwritten by third parties on the basis of formal agreements, and calculate the own funds requirements for market risks in accordance with the approach set out in this Chapter on the basis of the adjusted net sensitivities.

Table 1

working day 0

0%

working day 1

10%

working days 2 to 3

25%

working day 4

50%

working day 5

75%

after working day 5

100%

For the purpose of this Article, 'working day 0' means the working day on which the institution becomes unconditionally committed to accepting a known quantity of securities at an agreed price.

3.  Institutions shall notify the competent authorities of the application of the process set out in this Article.

Section 3Risk factor and sensitivity definitions

Subsection 1Risk factor definitions

Article 325mGeneral interest rate risk factors

1.  For all general interest rate risk factors, including inflation risk and cross-currency basis-risk, there shall be one bucket per currency, each containing different types of risk factor.

The delta general interest rate risk factors applicable to interest rate-sensitive instruments shall be the relevant risk-free rates per currency and per each of the following maturities: 0,25 years, 0,5 years, 1 year, 2 years, 3 years, 5 years, 10 years, 15 years, 20 years, 30 years. Institutions shall assign risk factors to the specified vertices by linear interpolation or by using a method that is most consistent with the pricing functions used by the independent risk control function of the institution to report market risks or profits and losses to senior management.

2.  Institutions shall obtain the risk-free rates per currency from money market instruments held in the trading book of the institution that have the lowest credit risk, such as overnight index swaps.

3.  Where institutions cannot apply the approach referred to in paragraph 2, the risk-free rates shall be based on one or more market-implied swap curves used by the institution to mark positions to market, such as the interbank offered rate swap curves.

Where the data on market-implied swap curves described in paragraph 2 and the first subparagraph of this paragraph are insufficient, the risk-free rates may be derived from the most appropriate sovereign bond curve for a given currency.

Where institutions use the risk factors derived in accordance with the procedure set out in the second subparagraph of this paragraph for sovereign debt instruments, the sovereign debt instrument shall not be exempted from credit spread risk own funds requirements. In those cases, where it is not possible to disentangle the risk-free rate from the credit spread component, the sensitivity to this risk factor shall be allocated both to the general interest rate risk and to credit spread risk classes.

4.  In the case of general interest rate risk factors, each currency shall constitute a separate bucket. Institutions shall assign risk factors within the same bucket, but with different maturities, a different risk weight, in accordance with Section 6.

Institutions shall apply additional risk factors for inflation risk to debt instruments whose cash flows are functionally dependent on inflation rates. Those additional risk factors shall consist of one vector of market-implied inflation rates of different maturities per currency. For each instrument, the vector shall contain as many components as there are inflation rates used as variables by the pricing model of the institution for that instrument.

5.  Institutions shall calculate the sensitivity of the instrument to the additional risk factor for inflation risk referred to in paragraph 4 as the change in the value of the instrument, according to its pricing model, as a result of a 1 basis point shift in each of the components of the vector. Each currency shall constitute a separate bucket. Within each bucket, institutions shall treat inflation as a single risk factor, regardless the number of components of each vector. Institutions shall offset all sensitivities to inflation within a bucket, calculated as described above, in order to give rise to a single net sensitivity per bucket.

6.  Debt instruments that involve payments in different currencies shall also be subject to cross-currency basis risk between those currencies. For the purposes of the sensitivities based method, the risk factors to be applied by institutions shall be the cross-currency basis risk of each currency over either US dollar or EUR. Institutions shall compute cross currency bases that do not relate to either basis over USD or basis over EUR either on 'basis over US dollar' or 'basis over EUR'.

Each cross-currency basis risk factor shall consist of one vector of cross-currency basis of different maturities per currency. For each instrument, the vector shall contain as many components as there are cross-currency basis used as variables by the pricing model of the institution for that instrument. Each currency shall constitute a different bucket.

Institutions shall calculate the sensitivity of the instrument to this risk factor as the change in the value of the instrument, according to its pricing model, as a result of a 1 basis point shift in each of the components of the vector. Each currency shall constitute a separate bucket. Within each bucket there shall be two possible distinct risk factors: basis over EUR and basis over USD, regardless of the number of components there are in each cross-currency basis vector. The maximum number of net sensitivities per bucket shall be two.

7.  The vega general interest rate risk factors applicable to options with underlyings that are sensitive to general interest rate shall be the implied volatilities of the relevant risk-free rates as described in paragraph 2 and 3, which shall be assigned to buckets depending on the currency and mapped to the following maturities within each bucket: 0,5 years, 1 year, 3 years, 5 years, 10 years. There shall be on bucket per currency.

For netting purposes, institutions shall consider implied volatilities linked to the same risk-free rates and mapped to the same maturities to constitute the same risk factor.

Where institutions map implied volatilities to the maturities as referred to in this paragraph, the following shall apply:

(a)  where the maturity of the option is aligned with the maturity of the underlying, a single risk factor shall be considered, which shall be mapped in accordance with that maturity.

(b)  where the maturity of the option is shorter than the maturity of the underlying, the following risk factors shall be considered as follows:

(i)  the first risk factor shall be mapped in accordance with the maturity of the option;

(ii)  the second risk factor shall be mapped in accordance with the residual maturity of the underlying of the option at the expiry date of the option.

8.  The curvature general interest rate risk factors to be applied by institutions shall consist of one vector of risk-free rates, representing a specific risk-free yield curve, per currency. Each currency shall constitute a different bucket. For each instrument, the vector shall contain as many components as there are different maturities of risk-free rates used as variables by the pricing model of the institution for that instrument.

9.  Institutions shall calculate the sensitivity of the instrument to each risk factor used in the curvature risk formula in accordance with Article 325h. For the purposes of the curvature risk, institutions shall consider vectors corresponding to different yield curves and with a different number of components as the same risk factor, provided that those vectors correspond to the same currency. Institutions shall offset sensitivities to the same risk factor. There shall be only one net sensitivity per bucket.

There shall be no curvature risk charge for inflation and cross currency basis risks.

Article 325nCredit spread risk factors

for non-securitisation

1.  The delta credit spread risk factors to be applied by institutions to non-securitisation instruments that are sensitive to credit spread shall be their issuer credit spread rates, inferred from the relevant debt instruments and credit default swaps, and mapped to each of the following maturities: 0.25 years, 0.5 years, 1 year, 2 years, 3 years, 5 years, 10 years, 15 years, 20 years, 30 years. Institutions shall apply one risk factor per issuer and maturity, regardless of whether those issuer credit spread rates are inferred from debts instruments or credit default swaps. The buckets shall be sectorial buckets, as referred to in Section 6, and each bucket shall include all the risk factors allocated to the relevant sector.

2.  The vega credit spread risk factors to be applied by institutions to options with non-securitisation underlyings that are sensitive to credit spread shall be the implied volatilities of the underlying's issuer credit spread rates inferred as laid down in paragraph 1, which shall be mapped to the following maturities in accordance with the maturity of the option subject to own funds requirements: 0.5 years, 1 year, 3 years, 5 years, 10 years. The same buckets shall be used as the buckets that were used for the delta credit spread risk for non-securitisation.

3.  The curvature credit spread risk factors to be applied by institutions to non-securitisation instruments shall consist of one vector of credit spread rates, representing a specific issuer credit spread curve. For each instrument, the vector shall contain as many components as there are different maturities of credit spread rates used as variables in the pricing model of the institution for that instrument. The same buckets shall be used as the buckets that were used for the delta credit spread risk for non-securitisation.

4.  Institutions shall calculate the sensitivity of the instrument to each risk factor used in the curvature risk formula in accordance with Article 325h. For the purposes of the curvature risk, institutions shall consider vectors inferred from either relevant debt instruments or credit default swaps and with a different number of components as the same risk factor as long as those vectors correspond to the same issuer.

Article 325oCredit spread risk risk-factors

for securitisation

1.  Institutions shall apply the CTP securitisations credit spread risk factors referred to in paragraph 3 to securitisation positions that belong to the CTP, as referred to in Article 104(7) to (9),

Institutions shall apply the securitisations non-CTP credit spread risk factors referred to in paragraph 5 to securitisation positions that do not belong to the CTP, as referred to in Article 104(7) to (9).

2.  The buckets applicable to the credit spread risk of securitisations that belong to the CTP shall the same as the buckets applicable to the credit spread risk of non-securitisations, as referred to in Section 6.

The buckets applicable to the credit spread risk of securitisations that do not belong to the CTP shall be specific to this risk-class category, as referred to in Section 6.

3.  The credit spread risk factors to be applied by institutions to securitisation positions that belong to the CTP are the following:

(a)  the delta risk factors shall be all the relevant credit spread rates of the issuers of the ' underlying exposures of the securitisation position, inferred from the relevant debt instruments and credit default swaps, and for each of the following maturities: 0.5 years, 1 year, 3 years, 5 years, 10 years.

(b)  the Vega risk factors applicable to options with securitisation positions that belong to the CTP as underlyings shall be the implied volatilities of the credit spreads of the issuers of the underlying exposures of the securitisation position, inferred as described in point a of this paragraph, which shall be mapped to the following maturities in accordance with the maturity of the corresponding option subject to own funds requirements: 0.5 years, 1 year, 3 years, 5 years, 10 years.

(c)  the curvature risk factors shall be the relevant credit spread yield curves of the issuers of the underlying exposures of the securitisation position expressed as a vector of credit spread rates for different maturities, inferred as indicated in paragraph a of this paragraph. For each instrument, the vector shall contain as many components as there are different maturities of credit spread rates that are used as variables by the pricing model of the institution for that instrument.

4.  Institutions shall calculate the sensitivity of the securitisation position to each risk factor used in the curvature risk formula as specified in Article 325h. For the purposes of the curvature risk, institutions shall consider vectors inferred either from relevant debt instruments or credit default swaps and with a different number of components as the same risk factor as long as those vectors correspond to the same issuer.

5.  The credit spread risk factors to be applied by institutions to securitisation positions that do not belong to the CTP shall refer to the spread of the tranche rather than the spread of the underlying instruments and shall be the following:

(a)  the delta risk factors shall be the relevant tranche credit spread rates, mapped to the following maturities, in accordance with the maturity of the tranche: 0.5 years, 1 year, 3 years, 5 years, 10 years.

(b)  the vega risk factors applicable to options with securitisation positions that do not belong to the CTP as underlyings shall be the implied volatilities of the credit spreads of the tranches, each of them mapped to the following maturities in accordance with the maturity of the option subject to own funds requirements: 0,5 years, 1 year, 3 years, 5 years, 10 years.

(c)  the curvature risk factors shall be the same as those described in point (a) of this paragraph. To all those risk factors, a common risk weight shall be applied, as referred to in Section 6.

Article 325p

Equity risk-factors

1.  The buckets for all equity risk factors shall be the sectorial buckets referred to in Section 6.

2.  The equity delta risk factors to be applied by institutions shall be all the equity spot prices and all the equity repurchase agreement rates or equity repo rates.

For the purposes of equity risk, a specific equity repo curve shall constitute a single risk factor, which is expressed as a vector of repo rates for different maturities. For each instrument, the vector shall contain as many components as there are different maturities of repo rates that are used as variables by the pricing model of the institution for that instrument.

Institutions shall calculate the sensitivity of the instrument to this risk factor as the change in the value of the instrument, according to its pricing model, as a result of a 1 basis point shift in each of the components of the vector. Institutions shall offset sensitivities to the repo rate risk factor of the same equity security, regardless of the number of components of each vector.

3.  The equity vega risk factors to be applied by institutions to options with underlyings that are sensitive to equity shall be the implied volatilities of equity spot prices, which shall be mapped to the following maturities in accordance with the maturities of the corresponding options subject to own funds requirements: 0,5 years, 1 year, 3 years, 5 years, 10 years. There shall be no vega risk capital charge for equity repo rates.

4.  The equity curvature risk factors to be applied by institutions to options with underlyings that are sensitive to equity are all the equity spot prices, regardless of the maturity of the corresponding options. There shall be no curvature risk charge for equity repo rates.

Article 325qCommodities risk-factors

1.  The buckets for all commodity risk factors shall be the sectorial buckets referred to in Section 6.

2.  The commodity delta risk factors to be applied by institutions to commodity sensitive instruments shall be all the commodity spot prices per commodity type and per each of the quality grades. Institutions shall only consider two commodity prices on the same type of commodity, with the same maturity and with the same type of contract grade to constitute the same risk factor where the set of legal terms regarding the delivery location are identical.

3.  The commodity vega risk factors to be applied by institutions to options with underlyings that are sensitive to commodity shall be the implied volatilities of commodity prices per commodity type, which shall be mapped to the following maturity steps in accordance with the maturities of the corresponding options subject to own funds requirements: 0,5 years, 1 year, 3 years, 5 years, 10 years. Institutions shall consider sensitivities to the same commodity type and allocated to the same maturity to be a single risk factor, which institutions shall then offset.

4.  The commodity curvature risk factors to be applied by institutions to options with underlyings that are sensitive to commodity shall be one set of commodity prices with different maturities per commodity type, expressed as a vector. For each instrument, the vector shall contain as many components as there are prices of that commodity that are used as variables by the pricing model of the institution for that instrument. Institutions shall not differentiate between commodity prices by grade or by delivery location.

The sensitivity of the instrument to each risk factor used in the curvature risk formula shall be calculated as specified in Article 325h. For the purpose of curvature risk, institutions shall consider vectors having a different number of components to constitute the same risk factor provided that those vectors correspond to the same commodity type.

Article 325rForeign exchange risk risk-factors

1.  The foreign exchange delta risk factors to be applied by institutions to foreign exchange sensitive instruments shall be all the spot exchange rates between the currency in which an instrument is denominated and the institution's reporting currency. There shall be one bucket per currency pair, containing a single risk factor and a single a net sensitivity.

2.  The foreign exchange vega risk factors to be applied by institutions to options with underlyings that are sensitive to foreign exchange shall be the implied volatilities of exchange rates between the currency pairs referred to in paragraph 1. Those implied volatilities of exchange rates shall be mapped to the following maturities in accordance with the maturities of the corresponding options subject to own funds requirements: 0,5 years, 1 year, 3 years, 5 years, 10 years.

3.  The foreign exchange curvature risk factors to be applied by institutions to options with underlyings that are sensitive to foreign exchange shall be the same as those referred to in paragraph 1.

4.  Institutions shall not be required to distinguish between onshore and offshore variants of a currency for all foreign exchange delta, vega and curvature risk factors.

Subsection 2: Sensitivity definitions

Article 325sDelta risk sensitivities

1.  Institutions shall calculate delta GIRR sensitivities as follows:

(a)  the sensitivities to risk factors consisting of risk-free rates shall be calculated as follows:

 

where:

= the rate of a risk-free curve k a with maturity t;

Vi (.) = the pricing function of instrument i;

x,y = other variables in the pricing function.

(b)  the sensitivities to risk factors consisting of inflation risk and cross-currency basis () shall be calculated as follows:

 

where:

= a vector of m components representing the implied inflation curve or the cross-currency basis curve for a given currency j with m being equal to the number of inflation or cross-currency related variables used in the pricing model of instrument i;

= the unity matrix of dimension (1 x m);

Vi (.) = the pricing function of the instrument i;

y, z = other variables in the pricing model

2.  Institutions shall calculate the delta credit spread risk sensitivities for all securitisation and non-securitisation positions ()as follows:

where:

= the value of the credit spread rate of an issuer j at maturity t;

Vi (.) = the pricing function of instrument i;

x,y = other variables in the pricing function.

3.  Institutions shall calculate delta equity sensitivities as follows:

(a)  the sensitivities to risk factors k (sk) consisting on equity spot prices shall be calculated as follows:

where:

k is a specific equity security;

EQk is the value of the spot price of that equity security; and

Vi (.) is the pricing function of instrument i.

x,y are other variables in the pricing model

(b)  the sensitivities to risk factors consisting on equity repos rates shall be calculated as follows:

 

where:

k = the index that denotes the equity;

= a vector of m components representing the repo term restructure for a specific equity k with m being equal to the number of repo rates corresponding to different maturities used in the pricing model of instrument i;

= the unity matrix of dimension (1 x m);

Vi (.) = the pricing function of the instrument i;

y, z = other variables in the pricing model of instrument i.

4.  Institutions shall calculate the delta commodity sensitivities to each risk factor k (sk) as follows:

where:

k = a given commodity risk factor;

CTYk = the value of risk factor k;

Vi (.) = the market value of instrument i as a function of risk factor k.

5.  Institutions shall calculate the delta foreign exchange sensitivities to each foreign exchange risk factor k (sk) as follows:

where:

k = a given foreign exchange risk factor;

FXk = the value of the risk factor;

Vi (.) = the market value of instrument i as a function of the risk factor k.

Article 325tVega risk sensitivities

1.  Institutions shall calculate the vega risk sensitivity of an option to a given risk factor k (sk) as follows:

where:

k = a specific vega risk factor, consisting of an implied volatility;

= the value of that risk factor, which should be expressed as a percentage;

x,y = other variables in the pricing function.

2.  In the case of risk classes where vega risk factors have a maturity dimension, but where the rules to map the risk factors are not applicable because the options do not have a maturity, institutions shall map those risk factors to the longest prescribed maturity. Those options shall be subject to the residual risks add-on.

3.  In the case of options that do not have a strike or barrier and options that have multiple strike or barriers, institutions shall apply the mapping to strikes and maturity used internally by the institution to price the option. Those options shall also be subject to the residual risks add-on.

4.  Institutions shall not calculate the vega risk for securitisation tranches included in the CTP referred to in Article 104(7) to (9) that do not have an implied volatility. Delta and curvature risk charges shall be computed for those securitisation tranches.

Article 325uRequirements on sensitivity computations

1.  Institutions shall derive sensitivities using the formulas set out in this sub-section from the institution’s pricing models that serve as a basis for reporting profit and loss to senior management.

By way of derogation from the first sub-paragraph, competent authorities may require an institution that has been granted the permission to use the internal model approach set out in Chapter 1b of this Title to use the pricing models of the risk-measurement model of their internal model approach in the calculation of the sensitivities under this Chapter for the calculation and reporting of the own fund requirements for market risks as required in point (b) of Article 325ba(2).

2.  Institutions shall assume that the implied volatility remains constant when computing the delta sensitivities for instruments subject to optionality..

3.  Institutions shall assume that the underlying of the option follows either a lognormal or a normal distribution in the pricing models from which sensitivities are derived when computing a vega general interest rate risk or credit spread risk sensitivity. Institutions shall assume that the underlying follows either a lognormal or a normal distribution in the pricing models from which sensitivities are derived when computing a vega equity, commodity or foreign exchange sensitivity.

4.  Institutions shall calculate all sensitivities excluding credit valuation adjustments.

4a.  By way of derogation from paragraph 1, an institution may, subject to the approval from competent authorities, use alternative definitions of delta risk sensitivities in the calculation of the own fund requirements of a trading book position under this chapter in the case the institution meets all of the following conditions:

  (a)  these alternative definitions are used for internal risk management purposes and to report profit and loss to senior management by an independent risk control unit within the institution;

  (b)  the institution shall demonstrate that these alternative definitions are more appropriate to capture the relevant sensitivities for the position than the formulas set out in this subsection and that the resulting sensitivities do not materially differ from those formulas.

4b.  By way of derogation from paragraph 1, an institution may, subject to the approval from competent authorities, calculate vega sensitivities based on a linear transformation of alternative definitions of sensitivities in the calculation of the own fund requirements of a trading book position under this chapter where the institution meets all of the following conditions:

  (a)  these alternative definitions are used for internal risk management purposes and to report profit and loss to senior management by an independent risk control unit within the institution;

  (b)  the institution shall demonstrate that these alternative definitions are more appropriate to capture the sensitivities for the position than the formulas set out in this subsection and the linear transformation referred to in the first sub-paragraph reflect a vega risk sensitivity.

Section 4The Residual Risk Add-On

Article 325vOwn fund requirements for Residual Risks

1.  In addition to the own funds requirements for market risk set out in Section 2 of this Chapter, institutions shall apply additional own fund requirements in accordance with this Article to instruments exposed to residual risks.

2.  Instruments are exposed to residual risks where they meet any of the following conditions:

(a)  the instrument references an exotic underlying;

  Instruments with an exotic underlying are trading book instruments with an underlying exposure that is not in the scope of the delta, vega or curvature risk treatments under the sensitivities-based method laid down in Section 2 or the default risk charge laid down in Section 5.

  Exotic underlying exposures include: longevity risk, weather, natural disasters and future realised volatility.

(b)  the instrument bears other residual risks.

  Instruments bearing other residual risks are those that meet the following criteria:

  (i)  An instrument is subject to vega and curvature risk own funds requirements in the sensitivities-based method laid down in Section 2 and generates pay-offs that cannot be replicated as a finite linear combination of plain-vanilla options with a single underlying equity price, commodity price, exchange rate, bond price, credit default swap price or interest rate swap; or

  (ii)  An instrument is a securitisation position that belongs to the correlation trading portfolio, as referred to in Article 104(7) to (9). Non-securitisation hedges that belong to the CTP shall not be considered.

3.  Institutions shall calculate the additional own fund requirements referred to in paragraph 1 as the sum of gross notional amounts of the instruments referred to in paragraph 2 multiplied by the following risk weights:

(a)  1,0% in the case of instruments referred to in point (a) of paragraph 2;

(b)  0,1% in the case of instruments referred to in point (b) of paragraph 2.

4.  By the way of derogation from paragraph 1, institution shall not apply the own fund requirement for residual risks to an instrument that meets any of the following conditions:

(a)  the instrument is listed on a recognised exchange;

(b)  the instrument is eligible for central clearing in accordance with Regulation (EU) 648/2012;

(c)  the instrument perfectly offsets the market risks of another position of the trading book, in which case the two perfectly matching trading book positions shall be exempted from the own fund requirement for residual risks.

5.  EBA shall develop regulatory technical standards to specify in more details what is an exotic underlying and which instruments are exposed to other residual risks for the purpose of paragraph 2.

EBA shall submit those draft regulatory technical standards to the Commission by [fifteen months after the entry into force of this Regulation]

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with article 10 to 14 of Regulation (EU) No 1093/2010.

Section 5The Default Risk Charge

Article 325wDefinitions and general provisions

1.  Default risk own funds requirements shall apply to debt and equity instruments, to derivative instruments having the former instruments as underlyings and to derivatives whose pay-offs or fair values are affected by the event of default of an obligor other than the counterparty to the derivative instrument itself. Institutions shall calculate the default risk requirements shall be calculated separately for each of the following types of instruments: non-securitisations, securitisations that do not belong to the-CTP and securitisations that belong to the CTP. The final default risk own funds requirements for an institution shall be the summation of these three components.

2.  For the purposes of this Section, the following definitions shall apply:

(a)  'short exposure ' means that the default of an issuer or group of issuers leads to a gain for the institution, regardless of the type of instrument or transaction creating the exposure.

(b)  ' long exposure ' means that the default of an issuer or group of issuers leads to a loss for the institution, regardless of the type of instrument or transaction creating the exposure.

(c)  gross jump to default (JTD) amount means the estimated size of the loss or gain that the default of the obligor would produce on a specific exposure.

(d)  net jump to default (JTD) amount means the estimated size of the loss or gain that the default of the obligor would produce on a specific institution, after offsetting among gross JTD amounts has taken place.

(e)  LGD is the loss given default of the obligor on an instrument issued by this obligor expressed as a share of the notional of the instrument.

(f)  default risk weights mean the percentage representing the estimated probabilities of default of each obligor, according to the creditworthiness of that obligor.

subsection 1default risk charge for

non-securitisations

Article 325xGross jump to default amounts

1.  Institutions shall calculate the gross JTD amounts for each long exposure to debt instruments formulas follows :

JTDlong = max{LGD · Vnotional + P&Llong + Adjustmentlong; 0}

where:

Vnotional = the notional value of the instrument;

P&Llong = a term which adjusts for gains or losses already accounted for by the institution due to changes in the fair value of the instrument creating the long exposure. Gains shall enter the formula with a positive sign and losses with a negative.

Adjustmentlong = the amount by which, due to the structure of the derivative instrument, the institution's loss in the event of default would be increased or reduced relative to the full loss on the underlying instrument. Increases shall enter the Adjustmentlong term with a positive sign and decreases with a negative sign.

2.  Institutions shall calculate gross JTD amounts for each short exposure to debt instruments formulas follows:

JTDshort = min{LGD · Vnotional + P&Lshort + Adjustmentshort; 0}

where:

Vnotional = the notional value of the instrument that shall enter into the formula with a negative sign;

P&Lshort = a term which adjusts for gains or losses already accounted for by the institution due to changes in the fair value of the instrument creating the short exposure. Gains shall enter into the formula with a positive sign and losses with a negative sign.

Adjustmentshort = the amount by which, due to the structure of the derivative instrument, the institution's gain in the event of default would be increased or reduced relative to the full loss on the underlying instrument. Decreases shall enter the Adjustmentshort term with a positive sign and decreases with a negative sign.

3.  The LGD for debt instruments to be applied by institutions for the purposes of the calculation set out in paragraphs 1 and 2 shall be the following:

(a)  exposures to non-senior debt instruments shall be assigned an LGD of 100%;

(b)  exposures to senior debt instruments shall be assigned an LGD of 75%;

(c)  exposures to covered bonds, as referred to in Article 129, shall be assigned an LGD of 25%.

4.  For the purpose of the calculations set out in paragraph 1 and 2, notional values in the case of debt instruments shall be the face value of the debt instrument. For the purpose of the calculations set out in paragraph 1 and 2, notional values in the case of derivative instruments on an underlying debt security shall be the face value of the underlying debt instrument.

5.  For exposures to equity instruments, institutions calculate the gross JTD amounts as follows, instead of those referred to in paragraph 1 and 2:

 

where

V = the fair value of the equity or, in case of derivative instruments on equities, the fair value of the underlying equity of the derivative instrument.

6.  Institutions shall assign an LGD of 100% to equity instruments for the purpose of the calculation set out in paragraph 6.

7.  In the case of exposures to default risk arising from derivative instruments whose payoffs in the event of default of the obligor are not related to the notional value of a specific instrument issued by this obligor or to the LGD of the obligor or an instrument issued by this obligor, institutions shall use alternative methodologies to estimate the Gross JTD amounts, which shall meet the definition of Gross JTD in paragraph 3 of article 325t.

8.  EBA shall develop draft regulatory technical standards to specify in more details how institutions shall calculate JTD amounts for different types of instruments in accordance with this Article, and which alternative methodologies institutions shall use for the purpose of the estimation of Gross JTD amounts referred to in paragraph 7.

EBA shall submit those draft regulatory technical standards to the Commission by [fifteen months after the entry into force of this Regulation].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with article 10 to 14 of Regulation (EU) No 1093/2010.

Article 325yNet jump to default amounts

1.  Institutions shall calculate net jump to default amounts by offsetting the gross JTD amounts of short and long exposures. Offsetting shall only be possible among exposures to the same obligor where short exposures have the same or lower seniority than long exposures.

2.  Offsetting shall be either full or partial depending on the maturities of the offsetting exposures:

(a)  offsetting shall be full where all offsetting exposures have maturities of one year or more;

(b)  offsetting shall be partial where at least one of the offsetting exposures has a maturity of less than one year, in which case, the size of the JTD amount of each exposure with a maturity of less than one year shall be scaled down by the ratio of the exposure’s maturity relative to one year.

3.  Where no offsetting is possible gross JTD amounts shall equal net JTD amounts in the case of exposures with maturities of one year or more. Gross JTD amounts with maturities of less than one year shall be scaled down to calculate net JTD amounts.

The scaling factor for those exposures shall be the ratio of the exposure’s maturity relative to one year, with a floor of 3 months.

4.  For the purposes of paragraphs 2 and 3, the maturities of the derivative contracts, and not those of their underlyings, shall be considered. Cash equity exposures shall be assigned a maturity of either one year or three months, at the institution's discretion.

Article 325z

Calculation of default risk own funds requirement

1.  Net JTD amounts, irrespective of the type of counterparty, shall be multiplied by the corresponding default risk weights in accordance with their credit quality as specified in Table 2:

Table 2

Credit quality category

Default risk weight

Credit quality step 1

0.5%

Credit quality step 2

3%

Credit quality step 3

6%

Credit quality step 4

15%

Credit quality step 5

30%

Credit quality step 6

50%

Unrated

15%

Defaulted

100%

2.  Exposures which would receive a 0% risk-weight under the Standardised approach for credit risk in accordance with Part III, Title II, Chapter 2 shall receive a 0% default risk weight for the default risk own fund requirements.

3.  The weighted net JTD shall be allocated to the following buckets: corporates, sovereigns, and local governments/municipalities.

4.  Weighted net JTD amounts shall be aggregated within each bucket in accordance with the following formula:

where

i = to the index that denotes an instrument belonging to bucket b;

= default risk own fund requirement for bucket b;

= a ratio recognising a benefit for hedging relationships within a bucket, which shall be calculated as follows:

 

The summation of long and short positions for the purposes of the and the shall be made for all positions within a bucket regardless of the credit quality step to which those positions are allocated, resulting in the bucket-specific default risk own fund requirements.

5.  The final default risk own fund requirement for non-securitisations shall be calculated as a simple sum of the bucket-level own fund requirements.

Subsection 2Default Risk Charge for securitisations (non-CTP)

Article 325aaJump to default amounts

1.  Gross jump to default amounts for securitization exposures shall be the fair values of the securitisation exposures.

2.  Net jump to default amounts shall be determined by offsetting long gross jump to default amounts and short gross Jump to default amounts. Offsetting shall only be possible among securitisation exposures with the same underlying asset pool and belonging to the same tranche. No offsetting shall be permitted between securitisation exposures with different underlying asset pools, even where the attachment and detachment points are the same.

3.  Where, by decomposing or combining existing securitisation exposures, other existing securitisation exposures can be perfectly replicated, except for the maturity, the exposures resulting from the decomposition or combination may be used instead of the original ones for the purposes of offsetting.

4.  Where, by decomposing or combining existing exposures in underlying names, the entire tranche structure of an existing securitisation exposure can be perfectly replicated, the exposures resulting from decomposition or combination may be used for the purposes of offsetting. Where underlying names are used in this way, they shall be removed from the non-securitisation default risk treatment.

5.  Article 325y shall apply to both original and replicated securitisation exposures. The relevant maturities shall be those of the securitisation tranches.

Article 325abCalculation of default risk own funds requirement for securitisations

1.  Net JTD amounts of securitisation exposures shall be multiplied by 8% of the risk weight that applies to the relevant securitisation exposure, including STS securitisations, in the non-trading book in accordance with the hierarchy of approaches set out in Title II, Chapter 5, Section 3, and irrespective of the type of counterparty.

2.  A maturity of one year shall be applied to all tranches where risk weights are calculated in accordance with the SEC-IRBA and SEC-ERBA.

3.  The risk-weighted JTD amounts for individual cash securitisation exposures shall be capped at the fair value of the position.

4.  Risk-weighted net JTD amounts shall be assigned to the following buckets:

(a)  one common bucket for all corporates, regardless the region.

(b)  44 different buckets corresponding to 1 bucket per region for each of the eleven asset classes defined. The eleven asset classes are ABCP, Auto Loans/Leases, RMBS, Credit Cards, CMBS, Collateralised Loan Obligations, CDO-squared, Small and Medium Enterprises, Student loans, Other retail, Other wholesale. The 4 regions are Asia, Europe, North America, and other regions.

5.  In order to assign a securitisation exposure to a bucket, institutions shall rely on a classification commonly used in the market. Institutions shall assign each securitisation exposure to only one of the buckets above. Any securitisation exposure that an institution cannot assign to a type or region of underlying shall be assigned to the categories 'other retail', 'other wholesale' or 'other regions' respectively.

6.  Weighted net JTD amounts shall be aggregated within each bucket in the same way as for default risk of non-securitisation exposures, using the formula in Article 325z(4), resulting in the default risk own fund requirement for each bucket.

7.  The final default risk own fund requirement for non-securitisations shall be calculated as a simple sum of the bucket-level own fund requirements.

Subsection 3Default Risk Charge for securitisations (CTP)

Article 325acScope

1.  For the CTP, the capital charge shall include the default risk for securitisation exposures and for non-securitisation hedges. These hedges shall be removed from the default risk non-securitisation calculations. There shall be no diversification benefit between the default risk charge for non-securitisations, default risk charge for securitisations (non-CTP) and default risk charge for the securitisation CTP.

2.  For traded non-securitisation credit and equity derivatives, JTD amounts by individual constituent issuer legal entity shall be determined by applying a look-through approach.

Article 325adJump to default amounts for the CTP

1.  Gross jump to default amounts for securitisation exposures and non-securitisation exposures in the CTP shall be the fair values of those exposures.

2.  Nth-to-default products shall be treated as tranched products with the following attachment and detachment points:

(a)  attachment point = (N – 1) / Total Names

(b)  detachment point = N / Total Names

where “Total Names” shall be the total number of names in the underlying basket or pool.

3.  Net jump to default amounts shall be determined by offsetting long and short gross jump to default amounts. Offsetting shall only be possible among exposures that are otherwise identical except for maturity. Offsetting shall only be possible in the following cases:

(a)  for index products, offsetting shall be possible across maturities among the same index family, series and tranche, subject to the specifications for exposures of less than one year laid down in Article 325y. Long and short gross jump to default amounts that are perfect replications may be offset through decomposition into single name equivalent exposures using a valuation model. For the purposes of this Article, decomposition with a valuation model means that a single name constituent of a securitisation is valued as the difference between the unconditional value of the securitisation and the conditional value of the securitisation assuming that single name defaults with a LGD of 100%. In such cases, the sum of gross jump to default amounts of single name equivalent exposures obtained through decomposition shall be equal to the gross jump to default amount of the undecomposed exposure.

(b)  Offsetting through decomposition as set out is point (a) shall not be allowed for re-securitisations.

(c)  For indices and index tranches, offsetting shall be possible across maturities among the same index family, series and tranche by replication or decomposition. For the purposes of this Article:

(i)  replication means that the combination of individual securitisation index tranches are combined to replicate another tranche of the same index series, or to replicate an untranched position in the index series.

(ii)  decomposition means replicating an index by a securitisation of which the underlying exposures in the pool are identical to the single name exposures that compose the index.

Where the long and short exposures are otherwise equivalent except for one residual component, offsetting shall be allowed and the net Jump to default amount shall reflect the residual exposure.

(d)  Different tranches of the same index series, different series of the same index and different index families may not be offset.

Article 325aeCalculation of default risk own funds requirement for the CTP

1.  Net JTD amounts shall be multiplied by:

(a)  for tranched products, the default risk weights corresponding to their credit quality as specified in Article 325z(1) and (2);

(b)  for non-tranched products, by the default risk weights referred to in Article 325ab (1).

2.  Risk-weighted net JTD amounts shall be assigned to buckets that correspond to an index..

3.  Weighted net JTD amounts shall be aggregated within each bucket in accordance with the following formula:

where

i = an instrument belonging to bucket b;

= the default risk own fund requirement for bucket b;

ctp = the ratio recognising a benefit for hedging relationships within a bucket, which shall be calculated in accordance with the formula set out in Article 325z(4), but using long and short positions across the entire CTP and not just the positions in the particular bucket.

4.  Institutions shall calculate the default risk own fund requirements of the CTP (DRCCTP) by using the following formula:

  

Section 6Risk weights and Correlations

Subsection 1Delta risk weights and correlations

Article 325afRisk weights for general interest rate risk

1.  For currencies not included in the most liquid currency subcategory as referred to in point (b) of Article 325be(5), the risk weights of the risk-free rate risk factors shall be the following:

Table 3

Maturity

0.25 year

0.5 year

1 year

2 year

3 year

Risk weight (percentage points)

2.4%

2.4%

2.25%

1.88%

1.73%

Maturity

5 year

10 year

15 year

20 year

30 year

Risk weight (percentage points)

1.5%

1.5%

1.5%

1.5%

1.5%

2.  A common risk weight of 2.25% shall be set both for all inflation and cross currency basis risk factors.

3.  For the currencies included in the most liquid currency subcategory as referred to in point (b) of 325be(7) and the domestic currency of the institution, the risk weights of the risk-free rate risk factors shall be the risk weights referred to in Table 3 of this Article divided by

Article 325agIntra bucket correlations for general interest rate risk

1.  Between interest rate risk factors within the same bucket, the same assigned maturity but corresponding to different curves correlation rkl shall be set at 99.90%.

2.  Between interest rate risk factors within the same bucket, corresponding to the same curve, but having different maturities, correlation shall be set in accordance with the following formula:

where:

(respectively ) = the maturity that relates to the risk free rate;

=

3.  Between interest rate risk factors within the same bucket, corresponding to different curves and having different maturities, the correlation rkl shall be equal to the correlation parameter specified in paragraph 2 multiplied by 99,90%.

4.  Between risk-free rates risk factors and inflation risk factors, the correlation shall be set at 40%.

5.  Between cross-currency basis risk factors and any other general interest rate risk factors, including another cross-currency basis risk factor, the correlation shall be set at 0%.

Article 325ahCorrelations across buckets for general interest rate risk

1. The parameter γbc = 50% shall be used to aggregate risk factors belonging to different buckets.

2. The parameter γbc = 80% shall be used to aggregate risk factors belonging to different buckets of 325aw(2a).

Article 325aiRisk weights for credit spread risk (non-securitisations)

1.  Risk weights shall be the same for all the maturities (0,5 years, 1 year, 3 years, 5 years, 10 years) within each bucket.

Table 4

Bucket number

Credit quality

Sector

Risk weight (percentage points)

 

1

All

Central government, including central banks, of a Member State

0.50%

2

Credit quality step 1 to 3

Central government, including central banks, of a third country, multilateral development banks and international organisations referred to in Article 117(2) and 118

0.5%

3

Regional or local authority and public sector entities

1.0%

4

Financial sector entities including credit institutions incorporated or established by a central government, a regional government or a local authority and promotional lenders

5.0%

5

Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying

3.0%

6

Consumer goods and services, transportation and storage, administrative and support service activities

3.0%

7

Technology, telecommunications

2.0%

8

Health care, utilities, professional and technical activities

1.5%

9

Covered bonds issued by credit institutions in Member States

1.0%

10

Covered bonds issued by credit institutions in third countries

4.0%

11

Credit quality step 4 to 6

Central government, including central banks, of a third country, multilateral development banks and international organisations referred to in Article 117(2) and 118

3.0%

12

Regional or local authority and public sector entities

4.0%

13

Financial sector entities including credit institutions incorporated or established by a central government, a regional government or a local authority and promotional lenders

12.0%

14

Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying

7.0%

15

Consumer goods and services, transportation and storage, administrative and support service activities

8.5%

16

Technology, telecommunications

5.5%

17

Health care, utilities, professional and technical activities8.5%

5.0%

18

Other sector

12.0%

2.  To assign a risk exposure to a sector, credit institutions shall rely on a classification that is commonly used in the market for grouping issuers by industry sector. Credit institutions shall assign each issuer to only one of the sector buckets in the table under paragraph 1. Risk positions from any issuer that a credit institution cannot assign to a sector in this fashion shall be assigned to bucket 18.

Article 325ajIntra bucket correlations for credit spread risk (non-securitisations)

1.  Between two sensitivities 𝑊S𝑘 and 𝑊S𝑙 within the same bucket, the correlation parameter 𝜌𝑘l shall be set as follows:

𝜌𝑘l= 𝜌𝑘l (name) ⋅ 𝜌𝑘l (tenor) ⋅ 𝜌𝑘l (basis)

where:

𝜌𝑘l (name) shall be equal to 1 where the two names of sensitivities k and l are identical, and 35% otherwise;

𝜌𝑘l (tenor) shall be equal to 1 where the two vertices of the sensitivities k and l are identical, and to 65% otherwise;

𝜌𝑘l (basis) shall be equal to 1 where the two sensitivities are related to same curves, and 99,90% otherwise.

2.  The correlations above do not apply to the bucket 18 referred to in Article 325ai(1). The capital requirement for the delta risk aggregation formula within bucket 18 shall be equal to the sum of the absolute values of the net weighted sensitivities allocated to bucket 18:

  

Article 325akCorrelations across buckets for credit spread risk (non-securitisations)

1.  The correlation parameter γbc that applies to the aggregation of sensitivities between different buckets shall be set as follows:

𝛾𝑏c=𝛾𝑏c(rating) ⋅ 𝛾𝑏c(sector)

where:

𝛾𝑏c(rating) is equal to 1 where the two buckets have the same credit quality category (either credit quality step 1 to 3 or credit quality step 4 to 6), and 50% otherwise. For the purposes of this calculation, bucket 1 shall be considered as having the same credit quality category as buckets that have credit quality step 1 to 3;

𝛾𝑏c(sector) shall be equal to 1 where the two buckets have the same sector, and to the following percentages otherwise:

Table 5

Bucket

1,2 and 11

3 and 12

4 and 13

5 and 14

6 and 15

7 and 16

8 and 17

9 and 10

1,2 and 11

 

75%

10%

20%

25%

20%

15%

10%

3 and 12

 

 

5%

15%

20%

15%

10%

10%

4 and 13

 

 

 

5%

15%

20%

5%

20%

5 and 14

 

 

 

 

20%

25%

5%

5%

6 and 15

 

 

 

 

 

25%

5%

15%

7 and 16

 

 

 

 

 

 

5%

20%

8 and 17

 

 

 

 

 

 

 

5%

9 and 10

 

 

 

 

 

 

 

 

2.  The capital requirement for bucket 18 shall be added to the overall risk class level capital, with no diversification or hedging effects recognised with any other bucket.

Article 325alRisk weights for credit spread risk securitisations (CTP)

Risk weights shall be the same for all maturities (0,5 year, 1 year, 3 years, 5 years, 10 years) within each bucket.

Table 6

Bucket number

Credit quality

Sector

Risk weight (percentage points)

 

1

All

Central government, including central banks, of Member States of the Union

4%

2

Credit quality step 1 to 3

Central government, including central banks, of a third country, multilateral development banks and international organisations referred to in Article 117(2) and 118

4%

3

Regional or local authority and public sector entities

4%

4

Financial sector entities including credit institutions incorporated or established by a central government, a regional government or a local authority and promotional lenders

8%

5

Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying

5%

6

Consumer goods and services, transportation and storage, administrative and support service activities

4%

7

Technology, telecommunications

3%

8

Health care, utilities, professional and technical activities

2%

9

Covered bonds issued by credit institutions established in Member States of the Union

3%

10

Covered bonds issued by credit institutions in third countries

6%

11

Credit quality step 4 to 6

Central government, including central banks, of a third country, multilateral development banks and international organisations referred to in Article 117(2) and 118

13%

12

Regional or local authority and public sector entities

13%

13

Financial sector entities including credit institutions incorporated or established by a central government, a regional government or a local authority and promotional lenders

16%

14

Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying

10%

15

Consumer goods and services, transportation and storage, administrative and support service activities

12%

16

Technology, telecommunications

12%

17

Health care, utilities, professional and technical activities

12%

18

Other sector

13%

Article 325amCorrelations for credit spread risk securitisations (CTP)

1.  The delta risk correlation 𝜌𝑘l shall be derived in accordance with Article 325aj, except that, for the purposes of this paragraph, 𝜌𝑘l (basis) shall be equal to 1 where the two sensitivities are related to same curves, and 99,00% otherwise.

2.  The correlation 𝛾𝑏c shall be derived in accordance with Article 325ak.

Article 325anRisk weights for credit spread risk securitisations (non-CTP)

1.  Risk weights shall be the same for all the maturities (0,5 year, 1 year, 3 years, 5 years, 10 years) within each bucket.

Table 7

Bucket number

Credit quality

Sector

Risk weight (percentage points)

 

1

Senior & Credit quality step 1 to 3

RMBS - Prime

0.9%

2

RMBS - Mid-Prime

1.5%

3

RMBS - Sub-Prime

2.0%

4

CMBS

2.0%

5

ABS - Student loans

0.8%

6

ABS - Credit cards

1.2%

7

ABS - Auto

1.2%

8

CLO non-CTP

1.4%

9

Non-senior & Credit quality step 1 to 3

RMBS - Prime

1.125%

10

RMBS - Mid-Prime

1.875%

11

RMBS - Sub-Prime

2.5%

12

CMBS

2.5%

13

ABS - Student loans

1%

14

ABS - Credit cards

1.5%

15

ABS - Auto

1.5%

16

CLO non-CTP

1.75%

17

Credit quality step 4 to 6

RMBS - Prime

1.575%

18

RMBS - Mid-Prime

2.625%

19

RMBS - Sub-Prime

3.5%

20

CMBS

3.5%

21

ABS - Student loans

1.4%

22

ABS - Credit cards

2.1%

23

ABS - Auto

2.1%

24

CLO non-CTP

2.45%

25

Other sector

3.5%

2.  To assign a risk exposure to a sector, credit institutions shall rely on a classification that is commonly used in the market for grouping issuers by industry sector. Credit institutions shall assign each tranche to one of the sector buckets in the table under paragraph 1. Risk positions from any tranche that a credit institution cannot assign to a sector in this fashion shall be assigned to bucket 25.

Article 325aoIntra bucket correlations for credit spread risk securitisations (non-CTP)

1.  Between two sensitivities 𝑊S𝑘 and 𝑊S𝑙 within the same bucket, the correlation parameter 𝜌𝑘l shall be set as follows:

𝜌𝑘l= 𝜌𝑘l (tranche) ⋅ 𝜌𝑘l (tenor) ⋅ 𝜌𝑘l (basis)

where:

𝜌𝑘l (tranche) shall be equal to 1 where the two names of sensitivities k and l are within the same bucket and related to the same securitisation tranche (more than 80% overlap in notional terms), and to 40% otherwise;

𝜌𝑘l (tenor) shall be equal to 1 where the two vertices of the sensitivities k and l are identical, and to 80% otherwise;

𝜌𝑘l (basis) shall be equal to 1 where the two sensitivities are related to same curves, and to 99,90% otherwise.

2.  The correlations above shall not apply to bucket 25. The capital requirement for the delta risk aggregation formula within bucket 25 shall be equal to the um of the absolute values of the net weighted sensitivities allocated to that bucket:

Article 325apCorrelations across buckets for credit spread risk securitisations (non-CTP)

1.  The correlation parameter 𝛾𝑏c shall apply to the aggregation of sensitivities between different buckets and shall be set at 0%.

2.  The capital requirement for bucket 25shall be added to the overall risk class level capital, with no diversification or hedging effects recognised with any other bucket.

Article 325aqRisk weights for equity risk

1.  The risk weights for the sensitivities to equity and equity repo rates are set out in the following table:

Table 8

Bucket number

Market capitalisation

Economy

Sector

Risk weight for equity spot price(percentage points)

 

Risk weight for equity repo rate(percentage points)

 

1

Large

Emerging market economy

Consumer goods and services, transportation and storage, administrative and support service activities, healthcare, utilities

55%

0.55%

2

Telecommunications, industrials

60%

0.60%

3

Basic materials, energy, agriculture, manufacturing, mining and quarrying

45%

0.45%

4

Financials including government-backed financials, real estate activities, technology

55%

0.55%

5

Advanced economy

Consumer goods and services, transportation and storage, administrative and support service activities, healthcare, utilities

30%

0.30%

6

Telecommunications, industrials

35%

0.35%

7

Basic materials, energy, agriculture, manufacturing, mining and quarrying

40%

0.40%

8

Financials including government-backed financials, real estate activities, technology

50%

0.50%

9

Small

Emerging market economy

All sectors described under bucket numbers 1, 2, 3 and 4

70%

0.70%

10

Advanced economy

All sectors described under bucket numbers 5, 6, 7 and 8

50%

0.50%

11

Other sector

70%

0.70%

2.  A higher market capitalisation should be understood as a market capitalisation greater than or equal to EUR 1,75 billion, and a low market capitalisation should be understood as a market capitalisation under EUR 1,75 billion.

3.  EBA shall develop draft regulatory technical standards to specify what constitutes emerging market and advanced economies for the purpose of this Article.

EBA shall submit those draft regulatory technical standards to the Commission by [fifteen months after the entry into force of this Regulation]

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

4.  When assigning a risk exposure to a sector, credit institutions shall rely on a classification that is commonly used in the market for grouping issuers by industry sector. Credit institutions shall assign each issuer to one of the sector buckets in the table under paragraph 1 and shall assign all issuers from the same industry to the same sector. Risk positions from any issuer that a credit institution cannot assign to a sector in this fashion shall be assigned to bucket 11. Multinational or multi-sector equity issuers shall be allocated to a particular bucket on the basis of the most material region and sector in which the equity issuer operates.

Article 325arIntra bucket correlations for equity risk

1.  The delta risk correlation parameter ρkl shall be set at 99,90% between two sensitivities 𝑊S𝑘 and 𝑊S𝑙 within the same bucket where one is a sensitivity to an equity spot price and the other a sensitivity to an equity repo rate, where both are related to the same equity issuer name.

2.  In other cases than the cases referred to in paragraph 1, the correlation parameter ρkl between two sensitivities 𝑊S𝑘 and 𝑊S𝑙 to equity spot price within the same bucket shall be set as follows:

(a)  15% between two sensitivities within the same bucket that fall under large market capitalisation, emerging market economy (bucket number 1, 2, 3 or 4).

(b)  25% between two sensitivities within the same bucket that fall under large market capitalisation, advanced economy (bucket number 5, 6, 7, or 8).

(c)  7,5% between two sensitivities within the same bucket that fall under small market capitalisation, emerging market economy (bucket number 9).

(d)  12,5% between two sensitivities within the same bucket that fall under small market capitalisation, advanced economy (bucket number 10).

3.  The correlation parameter ρkl between two sensitivities 𝑊S𝑘 and 𝑊S𝑙 to equity repo rate within the same bucket shall be set in accordance with paragraph 2.

4.  Between two sensitivities 𝑊S𝑘 and 𝑊S𝑙 within the same bucket where one is a sensitivity to an equity spot price and the other a sensitivity to an equity repo rate and both sensitivities relate to a different equity issuer name, the correlation parameter ρkl shall be set at the correlations specified in paragraph 2 multiplied by 99,90%.

5.  The correlations above shall not apply to bucket 11. The capital requirement for the delta risk aggregation formula within bucket 11 shall be equal to the sum of the absolute values of the net weighted sensitivities allocated to that bucket:

Article 325asCorrelations across buckets for equity risk

1.  The correlation parameter 𝛾𝑏c shall apply to the aggregation of sensitivities between different buckets. It is set at 15% where the two buckets fall within buckets 1 to 10.

2.  This capital requirement for bucket 11 shall be added to the overall risk class level capital, with no diversification or hedging effects recognised with any other bucket.

Article 325atRisk weights for commodity risk

The risk weights for the sensitivities to commodities are set out in the following table:

Table 9

Bucket number

Bucket name

Risk weight (percentage points)

 

1

Energy - Solid combustibles

30%

2

Energy - Liquid combustibles

35%

3

Energy - Electricity and carbon trading

60%

4

Freight

80%

5

Metals – non-precious

40%

6

Gaseous combustibles

45%

7

Precious metals (including gold)

20%

8

Grains & oilseed

35%

9

Livestock & dairy

25%

10

Softs and other agriculturals

35%

11

Other commodity

50%

Article 325auIntra bucket correlations for commodity risk

1.  For the purpose of correlation recognition, any two commodities shall be considered distinct commodities where there exists in the market two contracts differentiated only by the underlying commodity to be delivered against each contract.

2.  Between two sensitivities 𝑊S𝑘 and 𝑊S𝑙 within the same bucket, the correlation parameter 𝜌𝑘l shall be set as follows:

𝜌𝑘l= 𝜌𝑘l (commodity) ⋅ 𝜌𝑘l (tenor) ⋅ 𝜌𝑘l (basis)

where:

𝜌𝑘l (commodity) shall be equal to 1 where the two commodities of sensitivities k and l are identical, and to the intra-bucket correlations in the table in paragraph 3 otherwise;

𝜌𝑘l (tenor) shall be equal to 1 where the two vertices of the sensitivities k and l are identical, and to 99% otherwise;

𝜌𝑘l (basis) shall be equal to 1 where the two sensitivities are identical in both (i) contract grade of the commodity and (ii) delivery location of a commodity, and 99,90% otherwise.

3.  The intra-bucket correlations 𝜌𝑘l (commodity) are:

Table 10

Bucket number

Bucket name

Correlation (𝜌commodity)

1

Energy - Solid combustibles

55%

2

Energy - Liquid combustibles

95%

3

Energy - Electricity and carbon trading

40%

4

Freight

80%

5

Metals – non-precious

60%

6

Gaseous combustibles

65%

7

Precious metals (including gold)

55%

8

Grains & oilseed

45%

9

Livestock & dairy

15%

10

Softs and other agriculturals

40%

11

Other commodity

15%

Article 325avCorrelations across buckets for commodity risk

The correlation parameter 𝛾𝑏c applying to the aggregation of sensitivities between different buckets shall set at:

(a)  20% where the two buckets fall within bucket numbers 1 to 10;

(b)  0% where any of the two buckets is bucket number 11.

Article 325awRisk weights for foreign exchange risk

1.  A risk weight of 30% shall apply to all sensitivities to foreign exchange.

2.  The risk weight of the foreign exchange risk factors concerning currency pairs which are composed by the Euro and the currency of a Member State participating in the second stage of the economic and monetary union shall be one of the following:

(a)  the risk weight referred to in paragraph 1 divided by 3;

(b)  the maximum fluctuation within the fluctuation band formally agreed by the Member State and the European Central Bank if narrower than the fluctuation band defined under the second stage of the economic and monetary union (ERM II).

3.  The risk weight of the foreign exchange risk factors included in the most liquid currency pairs subcategory as referred to in point (c) of 325be(7) shall be the risk weight referred to in paragraph 1 divided by

Article 325axCorrelations for foreign exchange risk

A uniform correlation parameter 𝛾𝑏c equal to 60% shall apply to the aggregation of sensitivities to foreign exchange.

Subsection 2Vega and curvature risk weights and correlations

Article 325ayVega and curvature risk weights

1.  The delta buckets referred to in subsection 1 shall be applied to vega risk factors.

2.  The risk weight for a given vega risk factor shall be determined as a share of the current value of that risk factor k, which represents the implicit volatility of an underlying, as described in Section 3.

3.  The share referred to in paragraph 2 shall be made dependent on the presumed liquidity of each type of risk factor in accordance with the following formula:

where:

shall be set at 55%;

is the regulatory liquidity horizon to be prescribed in the determination of each vega risk factor . , shall be set in accordance with the following table:

Table 11

Risk class

 

GIRR

60

CSR non-securitisations

120

CSR securitisations (CTP)

120

CSR securitisations (non-CTP)

120

Equity (large cap)

20

Equity (small cap)

60

Commodity

120

FX

40

4.  Buckets used in the context of delta risk in subsection 1 shall be used in the curvature risk context unless specified otherwise in this Chapter.

5.  For foreign exchange and curvature risk factors, the curvature risk weights shall be relative shifts equal to the delta risk weights referred to in subsection 1.

6.  For general interest rate, credit spread and commodity curvature risk factors, the curvature risk weight shall be the parallel shift of all the vertices for each curve based on the highest prescribed delta risk weight in subsection 1 for each risk class.

Article 325azVega and curvature risk correlations

7.  Between vega risk sensitivities within the same bucket of the GIRR risk class, the correlation parameter rkl shall be set as follows:

  

where:

shall be equal to where shall be set at 1%, and shall be the maturities of the options for which the vega sensitivities are derived, expressed as a number of years;

is equal to , where is set at 1%, and are the maturities of the underlyings of the options for which the vega sensitivities , derived minus the maturities of the corresponding options, expressed in both cases as a number of years.

8.  Between vega risk sensitivities within a bucket of the other risk classes, the correlation parameter rkl shall be set as follows:

where:

shall be equal to the delta intra bucket correlation corresponding to the bucket to which vega risk factors k and l would be allocated to.

shall be defined as in paragraph 1.

9.  With regard to vega risk sensitivities between buckets within a risk class (GIRR and non-GIRR), the same correlation parameters for γbc, as specified for delta correlations for each risk class in Section 4, shall be used in the vega risk context.

10.  There shall be no diversification or hedging benefit recognised in the standardised approach between vega and delta risk factors. Vega and delta risk charges shall be aggregated by simple summation.

11.  The curvature risk correlations shall be the square of corresponding delta risk correlations γbc referred to in subsection 1.

Chapter 1bThe internal model approach

SECTION 1PERMISSION AND OWN FUNDS REQUIREMENTS

Article 325baPermission to use internal models

1.  After having verified institutions' compliance with the requirements set out in Articles 325bi to 325bk, competent authorities shall grant permission to institutions to calculate their own funds requirements by using their internal models in accordance with Article 325bb for the portfolio of all positions attributed to trading desks that fulfil the following requirements:

(a)  the trading desks have been established in accordance with Article 104b;

(b)  the competent authority evaluates the result of the assessment set out in Article 325bh with regard to the Profit&Loss attribution ('P&L attribution') of the trading desk within the past 12 months as satisfactory;

(c)  the trading desks have met the back-testing requirements referred to in Article 325bg(1) for the immediately preceding 250 business days;

(d)  for trading desks that have been assigned at least one of those trading book positions referred to in Article 325bm, the trading desks fulfil the requirements set out in Article 325bn for the internal default risk model.

2.  Institutions that have been granted the permission referred to in paragraph 1 to use their internal models for one or more trading desk shall report to the competent authorities as follows:

(a)  the weekly unconstrained expected shortfall measure UESt calculated in accordance with paragraph 5 for all the positions in the trading desk which shall be reported to the competent authorities on a monthly basis.

(b)  for each desk for which this permission has been granted, the monthly own funds requirements for market risks calculated in accordance with Chapter 1a of this Title as if the institution not been granted the permission referred to in paragraph 1 and with all the positions attributed to the trading desk considered on a standalone basis as a separate portfolio. These calculations shall be reported to the competent authorities on a monthly basis.

(ba)  The monthly own funds requirements calculated under Chapter 1a of this title for market risks of the overall portfolio of the institution, which are calculated as if the institution had not been granted the permit under paragraph 1. These calculations shall be reported to the competent authorities on a monthly basis.

3.  An institution that has been granted the permission referred to in paragraph 1 shall immediately notify its competent authorities that one of its trading desks no longer meets any of the requirements set out in paragraph 1. That institution shall no longer be permitted to apply this Chapter to any of the positions attributed to that trading desk and shall calculate the own funds requirements for market risks in accordance with the approach set out Chapter 1a for all the positions attributed to that trading desk at the earliest reporting date and until the institution demonstrates to the competent authorities that the trading desk again fulfils all the requirements set out in paragraph 1.

4.  By way of derogation from paragraph 3, competent authorities may, in extraordinary circumstances, permit an institution to continue using its internal models for the purpose of calculating the own fund requirements for market risks of a trading desk that no longer meets the conditions referred to in points (b) or (c) of paragraph 1, if at least 10% of the aggregated own funds requirements for market risks result from trading desk positions that qualify for the internal market risk approach. These exceptional conditions can result from significant cross-border stress periods in the financial markets or if banks are exposed to a substantial systemic shift. When competent authorities exercise that discretion, they shall notify EBA and substantiate their decision.

5.  For positions attributed to trading desks for which an institution has not been granted the permission referred to in paragraph 1, the own funds requirements for market risk shall be calculated by that institution in accordance with Chapter 1a of this Title. For the purpose of that calculation, all those positions shall be considered on a standalone basis as a separate portfolio.

6.  For a given trading desk, the unconstrained expected shortfall measure referred to in point (a) of paragraph 2 shall mean the unconstrained expected shortfall measure calculated in accordance with Article 325bc for all the positions assigned to that trading desk considered on a standalone basis as a separate portfolio. By way of derogation from Article 325bd, institutions shall fulfil the following requirements when calculating that unconstrained expected shortfall measure for each trading desk:

(a)  the stress period used in the calculation of the partial expected shortfall number PEStFC for a given trading desk shall be the stress period identified in accordance with point (c) of Article 325bd(1) for the purpose of determining PEStFC for all the trading desks for which institutions have been granted the permission referred to in paragraph 1;

(b)  when calculating the partial expected shortfall numbers PEStRS and PEStRC for a given trading desk, the scenarios of future shocks shall only be applied to the modellable risk factors of positions assigned to the trading desk which are included in the subset of modellable risk factors chosen by the institution in accordance with point (a) of Article 325bd(1) for the purpose of determining PEStRS for all the trading desks for which institutions have been granted the permission referred to in paragraph 1.

7.  Material changes to the use of internal models that an institution has received permission to use, the extension of the use of internal models that the institution has received permission to use and material changes to the institution's choice of the subset of modellable risk factors referred to in Article 325bd(2) shall require a separate permission by its competent authorities.

Institutions shall notify the competent authorities of all other extensions and changes to the use of the internal models for which the institution has received permission to use.

8.  EBA shall develop draft regulatory technical standards to specify the following:

(a)  the conditions for assessing materiality of extensions and changes to the use of internal models and changes to the subset of modellable risk factors referred to in Article 325bd;

(b)  the assessment methodology under which competent authorities verify an institution's compliance with the requirements set out in Article 325bi to 370;

EBA shall submit those draft regulatory technical standards to the Commission by [two years after the entry into force of this Regulation]

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

Article 325bbOwn funds requirements when using internal models

1.  An institution using an internal model shall calculate the own funds requirements for the portfolio of all positions attributed to trading desks for which the institution has been granted the permission referred to in Article 325ba(1) as the sum of the following:

(a)  the higher of the following values:

(i)  the institution's previous day's expected shortfall risk measure calculated in accordance with Article 325bc (ESt-1);

(ii)  an average of the daily expected shortfall risk measure calculated in accordance with Article 325bc for each of the preceding sixty business days (ESavg), multiplied by the multiplication factor (mc) in accordance with Article 325bg;

(b)  the higher of the following values:

(i)  the institution's previous day's stress scenario risk measure calculated in accordance Section 5 of this Title (SSt-1);

(ii)  an average of the daily stress scenario risk measure calculated in accordance with Section 5 of this Title for each of the preceding sixty business days (SSavg).

2.  Institutions holding positions in traded debt and equity instruments that are included in the scope of the internal default risk model and attributed to trading desks referred to in paragraph 1 shall fulfil an additional own funds requirement expressed as the higher of the following values:

(a)  the most recent own funds requirement for default risk calculated in accordance with Section 3;

(b)  the average of the amount referred to in point(a) over the preceding 12 weeks.

Section 2General requirements

Article 325bcExpected shortfall risk measure

1.  Institutions shall calculate the expected shortfall risk measure 'ESt' referred to in point(a) of Article 325bb(1) for any given date 't' and for any given portfolio of trading book positions as follows:

where:

i  =   the index that denotes the five broad risk factor categories listed in the first column of Table 13 of Article 325be;

UESt    =  the unconstrained expected shortfall measure calculated as follows:

UESti   =   the unconstrained expected shortfall measure for broad risk factor category 'i' and calculated as follows:

ρ     =  the supervisory correlation factor across broad risk categories; ρ = 50%;

PEStRS  =  the partial expected shortfall number that shall be calculated for all the positions in the portfolio in accordance with Article 325bd(2);

PEStRC   =   the partial expected shortfall number that shall be calculated for all the positions in the portfolio in accordance with Article 325bd(3);

PEStFC   =   the partial expected shortfall number that shall be calculated for all the positions in the portfolio in accordance with Article 325bd(4);

PEStRS,i   =  the partial expected shortfall number for broad risk factor category 'i' that shall be calculated for all the positions in the portfolio in accordance with Article 325bd(2);

PEStRC,i   =  the partial expected shortfall number for broad risk factor category 'i' that shall be calculated for all the positions in the portfolio in accordance with Article 325bd(3);

PEStFC,i   =   the expected shortfall number for broad risk factor category 'i' that shall be calculated for all the positions in the portfolio in accordance with of Article 325bd(4).

2.  Institutions shall only apply scenarios of future shocks to the specific set of modellable risk factors applicable to each partial expected shortfall number as set out in Article 325bd when determining each partial expected shortfall number for the calculation of the expected shortfall risk measure in accordance with paragraph 1.

3.  Where at least one transaction of the portfolio has at least one modellable risk factor which has been mapped to the broad risk category 'i' in accordance with Article 325be, institutions shall calculate the unconstrained expected shortfall measure for broad risk factor category 'i' and include it in the formula of the expected shortfall risk measure referred to in paragraph 2.

Article 325bdPartial expected shortfall calculations

1.  Institutions shall calculate all the partial expected shortfall numbers referred to in Article 325bc(1) as follows:

(a)  daily calculations of the partial expected shortfall numbers;

(b)  at 97,5th percentile, one tailed confidence interval;

(c)  for a given portfolio of trading book positions, institution shall calculate the partial expected shortfall number at time 't' accordance with the following formula:

j      =   index that denotes the five liquidity horizons listed in the first column of Table 1;

LHj      =  the length of liquidity horizons j as expressed in days in Table 1;

T      =  the base time horizon, where T= 10 days;

PESt(T)   =   the partial expected shortfall number that is determined by applying scenarios of future shocks with a 10-days' time horizon only to the specific set of modellable risk factors of the positions in the portfolio set out in paragraphs 2, 3 and 4 for each partial expected shortfall number referred to in Article 325bc(2).

PESt(T, j)   =   the partial expected shortfall number that is determined by applying scenarios of future shocks with a 10-days' time horizon only to the specific set of modellable risk factors of the positions in the portfolio set out in paragraphs 2, 3 and 4 for each partial expected shortfall number referred to in Article 325bc(2) and of which the effective liquidity horizon, as determined in accordance with Article 325be(2), is equal or longer than LHj.

Table 1

Liquidity horizon

j

Length of liquidity horizon j

(in days)

1

10

2

20

3

40

4

60

5

120

2.  For the purposes of calculating the partial expected shortfall numbers PEStRS and PEStRS,i referred to in Article 325bc(2), institutions shall, in addition to the requirements set out in paragraph 1, meet the following requirements:

(a)  in calculating PEStRS, institutions shall only apply scenarios of future shocks to a subset of modellable risk factors of positions in the portfolio which has been chosen by the institution, to the satisfaction of competent authorities, so that the following condition is met at time t, with the sum taken over the preceding 60 business days:

An institution that no longer meets the requirement referred to in the first subparagraph of this point shall immediately notify the competent authorities thereof and update the subset of modellable risk factors within two weeks in order to meet that requirement. Where, after two weeks, that institution has failed to meet that requirement, it shall revert to the approach set out in Chapter 1a to calculate the own fund requirements for market risks for some trading desks, until that institution can demonstrate to the competent authority that it is meeting the requirement set out in the first subparagraph of this point;

(b)  in calculating PEStRS,i institutions shall only apply scenarios of future shocks to the subset of modellable risk factors of positions in the portfolio chosen by the institution for the purposes of point (a) and which have been mapped to the broad risk factor category i in accordance with Article 325be;

(c)  the data inputs used to determine the scenarios of future shocks applied to the modellable risk factors referred to in points (a) and (b) shall be calibrated to historical data from a continuous 12-month period of financial stress that shall be identified by the institution in order to maximise the value of PEStRS. Institutions shall review the identification of this stress period at least on a monthly basis and shall notify the outcome of that review to the competent authorities.For the purpose of identifying that stress period, institutions shall use an observation period starting at least from 1 January 2007, to the satisfaction of the competent authorities.

(d)  the model inputs of PEStRS,i shall be calibrated to the 12-month stress period that has been identified by the institution for the purposes of point (c).

3.  For the purpose of calculating the partial expected shortfall numbers PEStRC and PEStRC,i referred to in Article 325bc(2), institutions shall, in addition to the requirements set out in paragraph 1, meet the following requirements:

(a)  in calculating PEStRC, institutions shall only apply scenarios of future shocks to the subset of modellable risk factors of positions in the portfolio referred to in point (a) of paragraph 3;

(b)  in calculating PEStRC,i, institutions shall only apply scenarios of future shocks to the subset of modellable risk factors of positions in the portfolio referred to in point (b) of paragraph 3;

(c)  the data inputs used to determine the scenarios of future shocks applied to the modellable risk factors referred to in points (a) and (b) shall be calibrated to historical data from the preceding 12-months period. Those data shall be updated at least on a monthly basis.

4.  For the purpose of calculating the partial expected shortfall numbers PEStFC and PEStFC,i referred to in Article 325bc(2), institutions shall, in addition to the requirements set out in paragraph 1, meet the following requirements:

(a)  in calculating PEStFC , institutions shall apply scenarios of future shocks to all the modellable risk factors of positions in the portfolio;

(b)  in calculating PEStFC,i, institutions shall apply scenarios of future shocks to all the modellable risk factors of positions in the portfolio which have been mapped to the broad risk factor category i in accordance with Article 325be;

(c)  the data inputs used to determine the scenarios of future shocks applied to the modellable risk factors referred to in points (a) and (b) shall be calibrated to historical data from the preceding 12-months period. Those data shall be updated at least on a monthly basis. Where there is a significant upsurge in the price volatility of a material number of modellable risks factors of an institution's portfolio which are not in the subset of risk factors referred to in point (a) of paragraph 2, competent authorities may require an institution to use historical data from a period shorter than the preceding 12-months, but such shorter period shall not be shorter than the preceding 6-months period. Competent authorities shall notify EBA of any decision requiring an institution to use historical data from a shorter period than 12 months and substantiate it.

5.  In calculating a given partial expected shortfall number referred to in Article 325bc(2), institutions shall maintain the values of the modellable risks factors for which they have not been required in paragraphs 2, 3 and 4 to apply scenarios of future shocks for this partial expected shortfall number.

6.  By way of derogation from point (a) of paragraph 1, institutions may decide to calculate the partial expected shortfall numbers PEStRS,i, PEStRC,i and PEStFC,i on a weekly basis.

Article 325beLiquidity horizons

1.  Institutions shall map each risk factor of positions attributed to trading desks for which they have been granted the permission referred to in Article 325ba(1) or are in the process of being granted that permission to one of the broad risk factor categories listed in Table 2, as well as to one of the broad risk factor subcategories listed in that Table.

2.  The liquidity horizon of a risk factor of the positions referred to in paragraph 1 shall be the liquidity horizon of the corresponding broad risk factor subcategories it has been mapped to.

3.  By way of derogation from paragraph 1, an institution may decide, for a given trading desk, to replace the liquidity horizon of a broad risk subcategory listed in Table 2 with one of the longer liquidity horizons listed in Table 1. Where an institution takes this decision, the longer liquidity horizon shall apply to all the modellable risk factor of the positions attributed to this trading desk mapped to this broad risk subcategory for the purpose of calculating the partial expected shortfall numbers in accordance with point (c) of Article 325bd(1).

An institution shall notify the competent authorities of the trading desks and the broad risk subcategories for which it decides to apply the treatment referred to in the first subparagraph.

4.  For calculating the partial expected shortfall numbers in accordance with point (c) of Article 325bd(1), the effective liquidity horizon 'EffectiveLH' of a given modellable risk factor of a given trading book position shall be calculated as follows:

 

where:

Mat        =   the maturity of the trading book position;

SubCatLH      =   the length of liquidity horizon of the modellable risk factor determined in accordance with paragraph 1;

minj {LHj/LHj ≥ Mat}  =   the length of one of the liquidity horizons listed in Table … which is the nearest above the maturity of the trading book position.

5.  Currency pairs that are composed by the EUR and the currency of a Member State participating in the second stage of the economic and monetary union shall be included in the most liquid currency pairs subcategory in the foreign exchange broad risk factor category of Table 2.

6.  An institution shall verify the appropriateness of the mapping referred to in paragraph 1 at least on a monthly basis.

7.  EBA shall develop draft regulatory technical standards to specify in greater detail:

(a)  how institutions shall map trading book positions to broad risk factors categories and broad risk factor subcategories for the purpose of paragraph 1;

(b)  the currencies that constitute the most liquid currencies subcategory in the interest rate broad risk factor category of Table 2;

(c)  the currency pairs that constitute the most liquid currency pairs subcategory in the foreign exchange broad risk factor category of Table 2;

EBA shall submit those draft regulatory technical standards to the Commission by [six months after the entry into force of this Regulation].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

Table 2

Broad risk factor categories

Broad risk factor subcategories

Liquidity horizons

Length of the liquidity horizon (in days)

Interest rate

Most liquid currencies and domestic currency

1

10

Other currencies (excluding most liquid currencies)

2

20

Volatility

4

60

Other types

4

60

Credit spread

Central government, including central banks, of Member States of the Union

2

20

Covered bonds issued by credit institutions established in Member States of the Union (Investment Grade)

2

20

Sovereign (Investment Grade)

2

20

Sovereign (High Yield)

3

40

Corporate (Investment Grade)

3

40

Corporate (High Yield)

4

60

Volatility

5

120

Other types

5

120

Equity

Equity price (Large capitalisation)

1

10

Equity price (Small capitalisation)

2

20

Volatility (Large capitalisation)

2

20

Volatility (Small capitalisation)

4

60

Other types

4

60

Foreign Exchange

Most liquid currency pairs

1

10

Other currency pairs (excluding most liquid currency pairs)

2

20

Volatility

3

40

Other types

3

40

Commodity

Energy price and carbon emissions price

2

20

Precious metal price and non-ferrous metal price

2

20

Other commodity prices (excluding Energy price, carbon emissions price, precious metal price and non-ferrous metal price)

4

60

Energy volatility and carbon emissions volatility

4

60

Precious metal volatility and non-ferrous metal volatility

4

60

Other commodity volatilities (excluding Energy volatility, carbon emissions volatility, precious metal volatility and non-ferrous metal volatility)

5

120

Other types

5

120

Article 325bfAssessment of the modellability of risk factors

1.  Institutions shall assess, on a monthly basis, the modellability of all the risk factors of the positions attributed to trading desks for which they have been granted the permission referred to in Article 325ba(1) or are in the process of being granted that permission.

2.  An institution shall consider a risk factor of a trading book position as modellable where all the following conditions are met:

(a)  the institution has identified at least 24 verifiable prices which contained that risk factor over the preceding 12-months period;

(b)  there is no more than one month between the dates of two consecutive observations of verifiable prices identified by the institution in accordance with point (a);

(c)  there is a clear and apparent relationship between the value of the risk factor and each verifiable price identified by the institution in accordance with point (a), which means that any verifiable price that is observed for a transaction should be counted as an observation for all of the risk factors concerned.

3.  For the purposes of paragraph 2, a verifiable price means any one of the following:

(a)  the market price of an actual transaction to which the institution was one of the parties;

(b)  the market price of an actual transaction that was entered into by third parties and for which price and trade date are publicly available or have been provided by a third party;

(c)  the price obtained from a committed quote provided by a third party.

4.  For the purposes of points (b) and (c) of paragraph 3, institutions may consider a price or a committed quote provided by a third party as a verifiable price, provided that the third party agrees to provide evidence of the transaction or a committed quote to competent authorities upon request.

As evidence, the third party shall provide details of the transaction amount (needed to test that the transaction was not a negligible amount) and the transaction price (to assess the ‘realness’ of the transactions).

5.  An institution may identify a verifiable price for the purpose of point (a) of paragraph 2 for more than one risk factor.

6.  Institutions shall consider risk factors derived from a combination of modellable risk factors as modellable.

7.  Where an institution considers a risk factor to be modellable in accordance with paragraph 1, the institution may use data other than the verifiable prices it used to prove that the risk factor is modellable in accordance with paragraph 2 to calculate the scenarios of future shocks applied to that risk factor for the purpose of calculating the partial expected shortfall referred to in Article 365 as long as that data inputs fulfils the relevant requirements set out in Article 325bd.

8.  Institutions shall consider as non-modellable a risk factor that does not fulfil all the conditions set out in paragraph 2 and shall calculate the own funds requirements for that risk factor in accordance with Article 325bl.

9.  Institutions shall consider risk factors derived from a combination of modellable and non-modellable risk factors as non-modellable.

Institutions may add modellable risk factors, and replace non-modellable risk factors by a basis between these additional modellable risk factors and these non-modellable risk factors. This basis will then be considered as a non-modellable risk factor.

10.  By way of derogation from paragraph 2, competent authorities may permit an institution to consider a risk factor that meets all of the conditions in paragraph 2 as non-modellable for a period of less than one year.

Article 325bgRegulatory back-testing requirements and multiplication factors

1.  For any given date, an institution's trading desk meets the backtesting requirements referred to in Article 325ba(1) where the number of overshootings as referred to in paragraph 2 for that trading desk that occurred over the most recent 250 business days do not exceed any of the following:

(a)  12 overshootings for the value-at-risk number, calculated at a 99th percentile one tailed-confidence internal on the basis of back-testing hypothetical changes in the portfolio's value;

(b)  12 overshootings for the value-at-risk number, calculated at a 99th percentile one tailed-confidence internal on the basis of back-testing actual changes in the portfolio's value;

(c)  30 overshootings for the value-at-risk number, calculated at a 97,5th percentile one tailed-confidence internal on the basis of back-testing hypothetical changes in the portfolio's value;

(d)  30 overshootings for the value-at-risk number, calculated at a 97,5th percentile one tailed-confidence internal on the basis of back-testing actual changes in the portfolio's value;

2.  For the purpose of paragraph 1, institutions shall count daily overshootings on the basis of back-testing hypothetical and actual changes in the portfolio's value composed of all the positions attributed to the trading desk. An overshooting shall mean a one-day change in that portfolio's value that exceeds the related value-at-risk number calculated by the institution's internal model in accordance with the following requirements:

(a)  a one-day holding period;

(b)  scenarios of future shocks shall apply to the risk factors of the trading desk's positions referred to in Article 325bh(3) and which are considered modellable in accordance with Article 325bf;

(c)  data inputs used to determine the scenarios of future shocks applied to the modellable risk factors shall be calibrated to historical data from the preceding 12-months period. Those data shall be updated at least on a monthly basis;

(d)  unless stated otherwise in this Article, the institution's internal model shall be based on the same modelling assumptions as those used for the calculation of the expected shortfall risk measure referred to in point (a) of Article 325bb(1).

3.  Institutions shall count the daily overshootings referred to in paragraph 2in accordance with the following:

(a)  back-testing hypothetical changes in the portfolio's value shall be based on a comparison between the portfolio's end-of-day value and, assuming unchanged positions, its value at the end of the subsequent day;

(b)  back-testing actual changes in the portfolio's value shall be based on a comparison between the portfolio's end-of-day value and its actual value at the end of the subsequent day excluding fees, commissions, and net interest income;

(c)  an overshooting shall be counted each day the institution is not able to assess the portfolio's value or is not able to calculate the value-at-risk number referred to in paragraph 1;

4.  An institution shall calculate, in accordance with paragraphs 5 and 6, the multiplication factor (mc) referred to in Article 325bb for the portfolio of all the positions attributed to trading desks for which it has been granted the permission referred to in Article 325ba(1). That calculation shall be updated on at least a monthly basis.

5.  The multiplication factor (mc) shall be the sum of the value of 1,5 and an add-on between 0 and 0,5 in accordance with Table 3. For the portfolio referred to in paragraph 4, this add-on shall be calculated by the number of overshootings that occurred over the most recent 250 business days as evidenced by the institution's back-testing of the value-at-risk number calculated in accordance with point (a) of this paragraph in accordance with the following:

(a)  an overshooting shall be a one-day change in the portfolio's value that exceeds the related value-at-risk number calculated by the institution's internal model in accordance with the following :

(i)  a one-day holding period;

(ii)  a 99th percentile, one tailed confidence interval;

(iii)  scenarios of future shocks shall apply to the risk factors of the trading desks' positions referred to in Article 325bh(3) and which are considered modellable in accordance with Article 325bf;

(iv)  data inputs used to determine the scenarios of future shocks applied to the modellable risk factors shall be calibrated to historical data from the preceding 12-months period. Those data shall be updated on at least a monthly basis;

(v)  unless stated otherwise in this Article, the institution's internal model shall be based on the same modelling assumptions as those used for the calculation of the expected shortfall risk measure referred to in point (a) of Article 325bb(1);

(b)  the number of overshootings shall be equal to the higher of the number of overshootings under hypothetical and actual changes in the value of the portfolio;

(c)  in counting daily overshootings, institutions shall apply the provisions set out in paragraph 3.

Table 3

Number of overshootings

Add-on

Fewer than 5

0,00

5

0,20

6

0,26

7

0,33

8

0,38

9

0,42

More than 9

0,50

7.  Competent authorities shall monitor the appropriateness of the multiplication factor referred to in paragraph 4 or a trading desk's compliance with the backtesting requirements referred to in paragraph 1. Institutions shall notify promptly, and in any case no later than within five working days after the occurrence of an overshooting, the competent authorities of overshootings that result from their back-testing programme and provide an explanation for those overshootings.

8.  By way of derogation from paragraphs 2 and 5, competent authorities may permit an institution not to count an overshooting where a one-day change in its portfolio's value exceeds the related value-at-risk number calculated by that institution's internal model is attributable to a non-modellable risk factor. To do so, the institution shall substantiate to the competent authorities that the stress scenario risk measure calculated in accordance with Article 325bl for this non-modellable risk factor is higher than the positive difference between the institution's portfolio's value and the related value-at-risk number.

9.  EBA shall develop draft regulatory technical standards to further specify the technical elements that shall be included in the actual and hypothetical changes the portfolio's value of an institution for the purpose of this Article.

EBA shall submit those draft regulatory technical standards to the Commission by [six months after the entry into force of this Regulation].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

Article 325bhProfit and loss attribution requirement

1.  For any given month, an institution's trading desk meets the profit and loss (P&L) attribution requirements for the purpose of Article 325ba(1) where that trading desk complies with the requirements set out in this Article.

2.  The P&L attribution requirement shall ensure that the theoretical changes in a trading desk portfolio's value, based on the institution's risk-measurement model, are sufficiently close to the hypothetical changes in the trading desk portfolio's value, based on the institution's pricing model.

3.  An institution's compliance with the P&L attribution requirement shall lead, for each position in a given trading desk, to the identification of a precise list of risk factors that are deemed appropriate for verifying the institution's compliance with the backtesting requirement set out in Article 325bg.

4.  EBA shall develop draft regulatory technical standards to further specify:

(a)  in light of international regulatory developments, the technical criteria that shall ensure that the theoretical changes in a trading desk portfolio's value is sufficiently close to the hypothetical changes in the trading desk portfolio's value for the purposes of paragraph 2;

(b)  the technical elements that shall be included in the theoretical and hypothetical changes in a trading desk portfolio's value for the purpose of this Article.

EBA shall submit those draft regulatory technical standards to the Commission by [six months after the entry into force of this Regulation].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

Article 325biRequirements on risk measurement

1.  Institutions using an internal risk-measurement model used to calculate the own funds requirements for market risks as referred to in Article 325bb shall ensure that that model meets all of the requirements:

(a)  the internal risk-measurement model shall capture a sufficient number of risk factors, which shall include at least the risk factors referred to in subsection 1 of section 3 of Chapter 1a unless the institution demonstrates to the competent authorities that the omission of those risk factors does not have a material impact on the results of the P&L attribution requirement as referred to in Article 325bh. An institution shall be able to explain to the competent authorities why it has incorporated a risk factor in its pricing model but not in its internal risk-measurement model.

(b)  the internal risk-measurement model shall capture nonlinearities for options and other products as well as correlation risk and basis risk. Proxies used for risk factors shall show a good track record for the actual position held.

(c)  the internal risk-measurement model shall incorporate a set of risk factors corresponding to the interest rates in each currency in which the institution has interest rate sensitive on- or off-balance sheet positions. The institution shall model the yield curves using one of the generally accepted approaches. For material exposures to interest-rate risk in the major currencies and markets, the yield curve shall be divided into a minimum of six maturity segments, to capture the variations of volatility of rates along the yield curve and the number of risk factors used to model the yield curve shall be proportionate to the nature and complexity of the institution's trading strategies The model shall also capture the risk of less than perfectly correlated movements between different yield curves;

(d)  the internal risk-measurement model shall incorporate risk factors corresponding to gold and to the individual foreign currencies in which the institution's positions are denominated. For CIUs the actual foreign exchange positions of the CIU shall be taken into account. Institutions may rely on third party reporting of the foreign exchange position of the CIU, where the correctness of that report is adequately ensured. Foreign exchange positions of a CIU of which an institution is not aware of shall be carved out from the internal models approach and treated in accordance with Chapter 1a of this Title;

(e)  the internal risk-measurement model shall use a separate risk factor for at least each of the equity markets in which the institution holds significant positions. The sophistication of the modelling technique shall be proportionate to the materiality of the institutions' activities in the equity markets. The model shall incorporate at least one risk factor that captures systemic movements in equity prices and the dependency of that risk factor with the individual risk factors for each equity markets For material exposures to equity markets, the model shall incorporate at least one idiosyncratic risk factor for each equity exposure.

(f)  the internal risk-measurement model shall use a separate risk factor for at least each commodity in which the institution holds significant positions unless the institution has a small aggregate commodity position compared to all its trading activities in which case a separate risk factor for each broad commodity type will be acceptable. For material exposures to commodity markets, the model shall capture the risk of less than perfectly correlated movements between similar, but not identical, commodities, the exposure to changes in forward prices arising from maturity mismatches and the convenience yield between derivative and cash positions.

(g)  proxies shall be appropriately conservative and shall be used only where available data are insufficient, including during the period of stress.

(h)  for material exposures to volatility risks in instruments with optionality, the internal risk-measurement model shall capture the dependency of implied volatilities across strike prices and options' maturities.

2.  Institutions may use empirical correlations within broad risk factor categories and, for the purposes of calculating the unconstrained expected shortfall measure as referred to in Article 325bc(1), across broad risk factor categories only where the institution's approach for measuring those correlations is sound, consistent with the applicable liquidity horizons, and implemented with integrity.

Article 325bjQualitative requirements

1.  Any internal risk-measurement model used for the purposes of this Chapter shall be conceptually sound and implemented with integrity and shall comply with all of the following qualitative requirements:

(a)  any internal risk-measurement model used to calculate capital requirements for market risks shall be closely integrated into the daily risk-management process of the institution and serve as the basis for reporting risk exposures to senior management;

(b)  an institution shall have a risk control unit that is independent from business trading units and that reports directly to senior management. That unit shall be responsible for designing and implementing any internal risk-measurement model. That unit shall conduct the initial and on-going validation of any internal model used for purposes of this Chapter and shall be responsible for the overall risk management system. That unit shall produce and analyse daily reports on the output of any internal model used to calculate capital requirements for market risks, and on the appropriateness of measures to be taken in terms of trading limits;

(c)  the institution's management body and senior management shall be actively involved in the risk-control process and the daily reports produced by the risk-control unit shall be reviewed by a level of management with sufficient authority to enforce reductions of positions taken by individual traders and reductions in the institution's overall risk exposure;

(d)  the institution shall have a sufficient number of staff skilled to a level appropriate to the sophistication of any internal risk-measurement models, and being skilled in the trading, risk-control, audit and back-office areas;

(e)  the institution shall have in place a documented set of internal policies, procedures and controls for monitoring and ensuring compliance with the overall operation of any internal risk-measurement models;

(f)  any internal risk-measurement model shall have a proven track record of reasonable accuracy in measuring risks;

(g)  the institution shall frequently conduct a rigorous programme of stress testing, including reverse stress tests, which shall encompass any internal risk-measurement model. The results of these stress tests shall be reviewed by senior management at on at least a monthly basis and comply with the policies and limits approved by the institution's management body. The institution shall take appropriate actions where the results of those stress tests show excessive losses arising from the trading's business of the institution under certain circumstances;

(h)  the institution shall conduct an independent review of any internal risk-measurement models, either as part of its regular internal auditing process, or by mandating a third-party undertaking to conduct that review, to the satisfaction of competent authorities.

For the purpose of point (h), a third-party undertaking means an undertaking that provides auditing or consulting services to institutions and that has staff that is sufficiently skilled in the area of market risks in trading activities.

2.  The review referred to in point (h) of paragraph 1 shall include both the activities of the business trading units and the independent risk-control unit. The institution shall conduct a review of its overall risk-management process at least once a year. That review shall assess the following:

(a)  the adequacy of the documentation of the risk-management system and process and the organisation of the risk-control unit;

(b)  the integration of risk measures into daily risk management and the integrity of the management information system;

(c)  the processes the institution employs for approving risk-pricing models and valuation systems that are used by front and back-office personnel;

(d)  the scope of risks captured by the model, the accuracy and appropriateness of the risk-measurement system and the validation of any significant changes to the internal risk-measurement model;

(e)  the accuracy and completeness of position data, the accuracy and appropriateness of volatility and correlation assumptions, the accuracy of valuation and risk sensitivity calculations and the accuracy and appropriateness for generating data proxies where the available data are insufficient to meet the requirement set out in this Chapter;

(f)  the verification process the institution employs to evaluate the consistency, timeliness and reliability of data sources used to run any of its internal risk-measurement models, including the independence of those data sources;

(g)  the verification process the institution employs to evaluate back-testing requirements and P&L attribution requirements that are conducted in order to assess the internal risk-measurement models' accuracy.

(h)  where the review is performed by a third-party undertaking in accordance to point (h) of paragraph 1, the verification that the internal validation process set out in Article 325bk fulfils its objectives.

3.  Institutions shall update the techniques and practices they use for any of the internal risk-measurement models used for the purposes of this Chapter in line with the evolution of new techniques and best practices that develop in respect of those internal risk-measurement models.

Article 325bkInternal Validation

1.  Institutions shall have processes in place to ensure that any internal risk-measurement model used for purposes of this Chapter has been adequately validated by suitably qualified parties independent of the development process to ensure that any such models are conceptually sound and adequately capture all material risks.

2.  Institutions shall conduct the validation referred to in paragraph 1 in the following circumstances:

(a)  when any internal risk-measurment model is initially developed and when any significant changes are made to that model;

(b)  on a periodic basis and especially where there have been significant structural changes in the market or changes to the composition of the portfolio which might lead to the internal risk-measurment model no longer being adequate.

3.  The validation of any internal risk-measurement model of an institution shall not be limited to back-testing and P&L attribution requirements, but shall, as a minimum, includes the following:

(a)  tests to verify whether the assumptions made in the internal model are appropriate and do not underestimate or overestimate the risk;

(b) own internal model validation tests, including back-testing in addition to the regulatory back-testing programmes, in relation to the risks and structures of their portfolios;

(c)  the use of hypothetical portfolios to ensure that the internal risk-measurment model is able to account for particular structural features that may arise, for example material basis risks and concentration risk or the risks associated with the use of proxies.

Article 325blCalculation of stress scenario risk measure

1.  At time t, an institution shall calculate the stress scenario risk measure for all the non-modellable risk factors of the trading book positions in a given portfolio as follows:

Where:

m    = the index that denotes all the non-modellable risk factors of the

positions in the portfolio which represent an idyosyncratic risk which has been mapped to the credit spread broad risk factor category in accordance with Article 325be(1) and for which the institution has demonstrated, to the satisfaction of the competent authorities, that those risk factors are uncorrelated;

l    =  the index that denotes all the non-modellable risk factors of the positions in the portfolio other than those denoted by the index 'm';

ICSStm   =   the stress scenario risk measure, as determined in accordance with paragraphs 2 and 3, of the non-modellable risk factor 'm';

SStl    =   the stress scenario risk measure, as determined in accordance with paragraphs 2 and 3, of the non-modellable risk factor 'l';

2.  The stress scenario risk measure of a given non-modellable risk factor means the loss that is incurred in all the trading book positions of the portfolio which includes that non-modellable risk factor where an extreme scenario of future shock is applied to that risk factor.

3.  Institutions shall determine to the satisfaction of competent authorities appropriate extreme scenarios of future shock for all the modellable risk-factors.

4.  EBA shall develop draft regulatory technical standards to specify in greater details:

(a)  how institutions shall determine the extreme scenario of future shock applicable to non-modellable risk factors and how they shall apply that extreme scenario of future shock to those risk factors;

(b)  a regulatory extreme scenario of future shock for each broad risk factor subcategory listed in Table 2 of Article 325be which institutions may use when they cannot determine an extreme scenario of future shock in accordance with point (a), or which competent authorities may require the institution to apply when those authorities are not satisfied with the extreme scenario of future shock determined by the institution.

In developing those draft regulatory technical standards, EBA shall take into consideration that the level of own funds requirements for market risk of a non-modellable risk factor as set out in this Article shall be as high as the level of own funds requirements for market risks that would be calculated under this Chapter were this risk factor modellable.

EBA shall submit those draft regulatory technical standards to the Commission by [six months after the entry into force of this Regulation].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

SECTION 2INTERNAL DEFAULT RISK MODEL

Article 325bmScope of the internal default risk model

5.  All the institution's positions that have been attributed to trading desks for which the institution has been granted the permission referred to in Article 325ba(1) shall be subject to an own funds requirement for default risk where the positions contain at least one risk factor mapped to the broad risk categories 'equity' or 'credit spread' in accordance with Article 325be(1). That own funds requirement, which is incremental to the risks captured by the own funds requirements referred to in Article 325bb(1), shall be calculated with the institution's internal default risk model which shall comply with the requirements laid down in this Section

6.  There shall be one issuer of traded debt or equity instruments related to at least one risk factor for each of the positions referred to in paragraph 1.

Article 325bnPermission to use an internal default risk model

1.  Competent authorities shall grant an institution permission to use an internal default risk model to calculate the own funds requirements referred to in Article 325bb(2) for all the trading book positions referred to in Article 325bm that are assigned to a given trading desk provided that the internal default risk model complies with Articles 325bo, 325bp, 325bq, Articles 325bj and 325bk for that trading desk.

2.  EBA shall issue guidelines on the requirements of Articles 325bo, 325bp and 325bq by [two years after the entry into force of this Regulation].

3.  Where an institution's trading desk, for which at least one of the trading book positions referred to in Article 325bm has been assigned to, do not meet the requirements set out in paragraph 1, the own funds requirements for market risks of all the positions in this trading desk shall be calculated in accordance with the approach set out in Chapter 1a.

Article 325boOwn funds requirements for default risk using an internal default risk model

1.  Institutions shall calculate the own funds requirements for default risk using an internal default risk model for the portfolio of all the positions referred to in Article 325bm as follows:

(a)  the own funds requirements shall be equal to a value-at-risk number measuring potential losses in the market value of the portfolio caused by the default of issuers related to those positions at the 99,9 % confidence interval over a time horizon of one year;

(b)  the potential loss referred to in point (a) means a direct or indirect loss in the market value of a position caused by the default of the issuers and which is incremental to any losses already taken into account in the current valuation of the position. The default of the issuers of equity positions shall be represented by the issuers' equity prices dropping to zero;

(c)  institutions shall determine default correlations between different issuers based on a conceptually sound methodolgy and using objective historical data of market credit spreads and equity prices covering at least a 10 year time period including the stress period identified by the institution in accordance with Article 325bd(2). The calculation of default correlations between different issuers shall be calibrated to a one-year time horizon;

(d)  the internal default risk model shall be based on a one-year constant position assumption.

2.  Institutions shall calculate the own funds requirement for default risk using an internal default risk model as referred to in paragraph 1 on at least a weekly basis.

3.  By way of derogation from points (a) and (c) of paragraph 1, an institution may replace the time horizon of one year by a time horizon of sixty days for the purpose of calculating the default risk of equity positions, in which case the calculation of default correlations between equity prices and default probabilities shall be consistent with a time horizon of sixty days and the calculation of default correlations between equity prices and bond prices shall be consistent with a time horizon of one year.

Article 325bpRecognition of hedges in an internal default risk model

1.  Institutions may incorporate hedges in their internal default risk model and they may net positions where the long and short positions refer to the same financial instrument.

2.  Institutions may in their internal default risk model only recognise hedging or diversification effects associated with long and short positions involving different instruments or different securities of the same obligor, as well as long and short positions in different issuers by explicitly modelling the gross long and short positions in the different instruments, including modelling of basis risks between different issuers.

3.  Institutions shall capture in their internal default risk model material risks that could occur during the interval between the hedge's maturity and the one year time horizon as well as the potential for significant basis risks in hedging strategies by product, seniority in the capital structure, internal or external rating, maturity, vintage and other differences in their instruments. Institutions shall recognise a hedge only to the extent that it can be maintained even as the obligor approaches a credit or other event.

Article 325bqParticular requirements for an internal default risk model

1.  The internal default risk model referred to in Article 325bn(1) shall be capable of modelling the default of individual issuers as well as the simultaneous default of multiple issuers and take into account the impact of those defaults in the market values of the positions included in the scope of that model . For that purpose, the default of each individual issuer shall be modelled using at least two types of systematic risk factors and at least one idiosyncratic risk factor.

2.  The internal default risk model shall reflect the economic cycle, including the dependence between recovery rates and the systematic risk factors referred to in paragraph 1.

3.  The internal default risk model shall reflect the nonlinear impact of options and other positions with material nonlinear behaviour with respect to price changes. Institutions shall also have due regard to the amount of model risk inherent in the valuation and estimation of price risks associated with those products.

4.  The internal default risk model shall be based on data that are objective and up-to-date.

5.  To simulate the default of issuers in the internal default risk model, the institution’s estimates of default probabilities shall meet the following requirements:

(a)  the default probabilities shall be floored at 0,03%;

(b)  the default probabilities shall be based on a one-year time horizon, unless stated otherwise in this Section;

(c)  default probabilities shall be measured using, solely or in combinaison with current market prices, default data from a historical time period of at least five years; default probabilities shall not be inferred solely from current market prices.

(d)  an institution that has been granted the permission to estimate default probabilities in accordance with Section 1, Chapter 3, Title II, Part 3 shall use the methodology set out in Section 1, Chapter 3, Title II, Part 3 to calculate default probabilities;

(e)  an institution that has not been granted the permission to estimate default probabilities in accordance with Section 1, Chapter 3, Title II, Part 3 shall develop an internal methodology or use external sources to estimate default probabilities. In both situations, the estimates of default probabilities shall be consistent with the requirements set out in this Article.

6.  To simulate the default of issuers in the internal default risk model, the institution’s estimates of loss given default shall meet the following requirements :

(a)  the loss given default estimates are floored at 0%;

(b)  the loss given default estimates shall reflect the seniority of each position;

(c)  an institution that has been granted the permission to estimate loss given default in accordance with Section 1, Chapter 3, Title II, Part 3 shall use the methodology set out in Section 1, Chapter 3, Title II, Part 3 to calculate loss given default estimates;

(d)  an institution that has not been granted the permission to estimate loss given default in accordance with Section 1, Chapter 3, Title II, Part 3 shall develop an internal methodology or use external sources to estimate default probabilities. In both situations, the estimates of loss given default shall be consistent with the requirements set out in this Article.

7.   As part of the independent review and validation of their internal models used for the purposes of this Chapter, including for the risk measurement system, institutions shall do all of the following:

(a)  verify that their modelling approach for correlations and price changes is appropriate for their portfolio, including the choice and weights of thesystematic risk factors of the model;

(b)  perform a variety of stress tests, including sensitivity analysis and scenario analysis, to assess the qualitative and quantitative reasonableness of the internal default risk model, in particular with regard to the treatment of concentrations. Those tests shall not be limited to the range of past events experienced;

(a)  apply appropriate quantitative validation including relevant internal modelling benchmarks.

8.  The internal default risk model shall appropriately reflect issuer concentrations and concentrations that can arise within and across product classes under stressed conditions.

9.  The internal default risk model shall be consistent with the institution's internal risk management methodologies for identifying, measuring, and managing trading risks.

10.  Institutions shall have clearly defined policies and procedures for determining the default correlation assumptions between different issuers in accordance with Article 325bo(2).

11.  Institutions shall document their internal models so that their correlation and other modelling assumptions are transparent for the competent authorities.

12.  EBA shall develop draft regulatory technical standards to specify the requirements that have to be fulfilled by an institution's internal methodology or external sources for estimating default probabilities and loss given default in accordance with point (e) of paragraph 5 and point (d) of paragraph 6.

EBA shall submit those draft regulatory technical standards to the Commission by [15 months after the entry into force of this Regulation].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.".

(85)  In Title IV of Part Three, the Title of Chapter 2 is replaced by the following:

“Chapter 2Own funds requirements for position risks under the simplified standardised approach”.

(86)  In Title IV of Part Three, the Title of Chapter 3 is replaced by the following:

“Chapter 3 Own funds requirements for foreign-exchange risk under the simplified standardised approach”.

(87)  In Title IV of Part Three, the Title of Chapter 4 is replaced by the following:

“Chapter 4Own funds requirements for commodity risks under the simplified standardised approach”.

(88)  In Title IV of Part Three, the Title of Chapter 5 is replaced by the following:

“Chapter 5Own funds requirements using the simplified internal models approach”.

(89)  The introductory part in Article 384(1) is replaced by the following:

“ 1. An institution which does not calculate the own funds requirements for CVA risk for its counterparties in accordance with Article 383 shall calculate a portfolio own funds requirements for CVA risk for each counterparty in accordance with the following formula, taking into account CVA hedges that are eligible in accordance with Article 386:”

(90)  The definition of EADitotal in Article 384(1) is replaced by the following:

“ EADitotal = the total counterparty credit risk exposure value of counterparty ‘I’ (summed across its netting sets) including the effect of collateral in accordance with the methods set out in Sections 3 to 6 of Title II, Chapter 6 as applicable to the calculation of the own funds requirements for counterparty credit risk for that counterparty.”

(91)  Article 390 is replaced by the following:

"Article 390Calculation of the exposure value

1.  The exposures to a group of connected clients shall be calculated by adding the exposures to individual clients in that group.

2.  The overall exposures to individual clients shall be calculated by adding the exposures of the trading book and those of the non-trading book.

3.  For exposures in the trading book institutions may:

(a)  offset their long positions and short positions in the same financial instruments issued by a given client with the net position in each of the different instruments being calculated in accordance with the methods laid down in Part Three, Title IV, Chapter 2;

(b)  offset their long positions and short positions in different financial instruments issued by a given client but only where the short position is junior to the long position or the positions are of the same seniority.

For the purposes of point (a) and (b), securities may be allocated into buckets based on different degrees of seniority in order to determine the relative seniority of positions.

4.  Institutions shall calculate exposures arising from derivatives contracts referred to in Annex II and credit derivatives directly entered into with a client in accordance with one of the methods set out in Part Three, Title II, Chapter 6, Section 3 to Section 5, as applicable.

When calculating the exposure value for the contracts referred to in the first subparagraph which are allocated to the trading book, institutions shall also comply with the principles set out in Article 299. By derogation from the first subparagraph of this paragraph, institutions with a permission to use the Internal Model Method in accordance with Article 283 may use the method referred to in Part Three, Title II, Chapter 6, Section 6 for calculating the exposure value for securities financing transactions.

5.  Institutions shall add to the exposures to a client the exposures arising from contracts referred to in Annex II and credit derivatives not directly entered into with that client but underlying a debt or equity instrument issued by that client.

6.  Exposures shall not include any of the following:

(a)  in the case of foreign exchange transactions, exposures incurred in the ordinary course of settlement during the two working days following payment;

(b)  in the case of transactions for the purchase or sale of securities, exposures incurred in the ordinary course of settlement during the five working days following payment or delivery of the securities, whichever is the earlier;

(c)  in the case of the provision of money transmission including the execution of payment services, clearing and settlement in any currency and correspondent banking or financial instruments clearing, settlement and custody services to clients, delayed receipts in funding and other exposures arising from client activity which do not last longer than the following business day;

(d)  in the case of the provision of money transmission including the execution of payment services, clearing and settlement in any currency and correspondent banking, intra-day exposures to institutions providing those services;

(e)  exposures deducted from CET 1 items or Additional Tier 1 items in accordance with Articles 36 and 56 or any other deduction from those items that reduces the solvency ratio disclosed in accordance to Article 437.

7.  To determine the overall exposure to a client or a group of connected clients, in respect of clients to which the institution has exposures through transactions referred to in points (m) and (o) of Article 112 or through other transactions where there is an exposure to underlying assets, an institution shall assess its underlying exposures taking into account the economic substance of the structure of the transaction and the risks inherent in the structure of the transaction itself, in order to determine whether it constitutes an additional exposure.

8.  EBA shall develop draft regulatory technical standards to specify:

(a)  the conditions and methodologies to be used to determine the overall exposure to a client or a group of connected clients for the types of exposures referred to in paragraph 7;

(b)  the conditions under which the structure of the transactions referred to in paragraph 7 do not constitute an additional exposure.

EBA shall submit those draft regulatory technical standards to the Commission by 1 January 2014.

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

9.  EBA shall develop draft regulatory technical standards to specify, for the purpose of paragraph 5, how to determine the exposures arising from contracts referred to in Annex II and credit derivatives not directly entered into with a client but underlying a debt or equity instrument issued by that client for their inclusion into the exposures to the client.

EBA shall submit those draft regulatory technical standards to the Commission by [9 months after entry into force].

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.".

(92)  In Article 391 the following paragraph is added:

“For the purposes of the first paragraph, the Commission may adopt, by way of implementing acts, a decision as to whether a third country applies prudential supervisory and regulatory requirements at least equivalent to those applied in the Union. Those implementing acts shall be adopted in accordance with the examination procedure referred to in Article 464(2).”.

(93)  Article 392 is replaced by the following:

“Article 392Definition of large exposure

An institution’s exposure to a client or a group of connected clients shall be considered a large exposure where its value is equal to or exceeds 10 % of its Tier 1 capital.”.

(94)  Article 394 is replaced by the following:

"Article 394Reporting requirements

1.  Institutions shall report to their competent authorities the following information for each large exposure that they hold, including large exposures exempted from the application of Article 395(1):

(a)  the identity of the client or the group of connected clients to which the institution has a large exposure;

(b)  the exposure value before taking into account the effect of the credit risk mitigation, where applicable;

(c)  where used, the type of funded or unfunded credit protection;

(d)  the exposure value, after taking into account the effect of the credit risk mitigation calculated for the purposes of Article 395(1), where applicable.

Institutions subject to Part Three, Title II, Chapter 3 shall report to their competent authorities their 20 largest exposures on a consolidated basis, excluding the exposures exempted from the application of Article 395(1).

Institutions shall also report to their competent authorities exposures of a value larger than or equal to EUR 300 million but less than 10 % of the institution’s Tier 1 capital.

2.  In addition to the information referred to in paragraph 1, institutions shall report the following information to their competent authorities in relation to their 10 largest exposures on a consolidated basis to institutions and to shadow banking entities which carry out baking activities outside the regulated framework, including large exposures exempted from the application of Article 395(1):

(a)  the identity of the client or the group of connected clients to which an institution has a large exposure;

(b)  the exposure value before taking into account the effect of the credit risk mitigation, where applicable;

(c)  where used, the type of funded or unfunded credit protection;

(d)  the exposure value after taking into account the effect of the credit risk mitigation calculated for the purposes of Article 395(1), where applicable.

3.  The information referred to in paragraphs 1 and 2 shall be reported to competent authorities with the following frequency:

(a)  small institutions as defined in Article 430a shall report on an annual basis;

(b)  subject to paragraph 4, other institutions shall report on a semi-annual basis or more frequently.

4.  EBA shall develop draft implementing technical standards to specify the following:

(a)  the uniform formats for the reporting referred to in paragraph 3 and the instructions for using those formats;

(b)  the frequencies and dates of the reporting referred to in paragraph 3;

(c)  the IT solutions to be applied for the reporting referred to in paragraph 3.

The reporting requirements specified in the draft implementing technical standards shall be proportionate, having regard to the institutions' size, complexity and the nature and level of risk of their activities.

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first Paragraph in accordance with Article 15 of Regulation (EU) No 1093/2010. The implementing technical standards shall enter into force one year after their adoption by the Commission.

5.  EBA shall develop draft regulatory technical standards to specify the criteria for the identification of shadow banking entities referred to in paragraph 2.

In developing those draft regulatory technical standards, EBA shall take into account international developments and internationally agreed standards on shadow banking and shall consider whether:

(a)  the relation with an individual or a group of entities may carry risks to the institution's solvency or liquidity position;

(b)  entities that are subject to solvency or liquidity requirements similar to those imposed by this Directive and Regulation (EU) No 1093/2010 shall be entirely or partially excluded from the reporting obligations referred to in paragraph 2 on shadow banking entities.

EBA shall submit those draft regulatory technical standards to the Commission by [one year after entry into force of the Amending Regulation].

Power is conferred on the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.".

(95)  Article 395 is amended as follows:

(a)  Paragraph 1 is replaced by the following:

"1. An institution shall not incur an exposure, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403, to a client or group of connected clients the value of which exceeds 25 % of its Tier 1 capital. Where that client is an institution or where a group of connected clients includes one or more institutions, that value shall not exceed 25 % of the institution's Tier 1 capital or EUR 150 million, whichever is higher, provided that the sum of exposure values, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403, to all connected clients that are not institutions does not exceed 25 % of the institution's Tier 1 capital.

Where the amount of EUR 150 million is higher than 25 % of the institution's Tier 1 capital, the value of the exposure, after having taken into account the effect of credit risk mitigation in accordance with Articles 399 to 403, shall not exceed a reasonable limit in terms of that institution's Tier 1 capital. That limit shall be determined by the institution in accordance with the policies and procedures referred to in Article 81 of Directive 2013/36/EU, to address and control concentration risk. That limit shall not exceed 100 % of the institution's Tier 1 capital.

Competent authorities may set a lower limit than EUR 150 million and shall inform EBA and the Commission thereof.

By way of derogation from the first subparagraph, an institution identified as G-SII in accordance with Article 131 of Directive 2013/36/EU shall not incur an exposure to another institution identified as G-SII the value of which, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403, exceeds 15 % of its Tier 1 capital. An institution shall comply with such limit no later than within 12 months after it is identified as G-SII.".

(b)  Paragraph 5 is replaced by the following:

"5. The limits laid down in this Article may be exceeded for the exposures on the institution's trading book where the following conditions are met:

(a)  the exposure on the non-trading book to the client or group of connected clients in question does not exceed the limit laid down in paragraph 1, this limit being calculated with reference to Tier 1 capital, so that the excess arises entirely on the trading book;

(b)  the institution meets an additional own funds requirement on the part of the exposure in excess of the limit laid down in paragraph 1 which is calculated in accordance with Articles 397 and 398;

(c)  where 10 days or less have elapsed since the excess referred to in point (b) occurred, the trading-book exposure to the client or group of connected clients in question shall not exceed 500 % of the institution's Tier 1 capital;

(d)  any excesses that have persisted for more than 10 days shall not, in aggregate, exceed 600 % of the institution's Tier 1 capital.

Every time the limit has been exceeded, the institution shall report without delay to the competent authorities the amount of the excess and the name of the client concerned and, where applicable, the name of the group of connected clients concerned.".

(96)  Article 396 is amended as follows:

(a)  paragraph 1 is amended as follows:

(i)  the first subparagraph is replaced by the following:

"Where the amount of EUR 150 million referred to in Article 395(1) is applicable, the competent authorities may allow on a case-by-case basis the 100 % limit in terms of the institution's Tier 1 capital to be exceeded."

(ii)  the following subparagraph is added:

"Where a competent authority, in the exceptional cases referred to in the first and second subparagraph, allows an institution to exceed the limit set out in Article 395(1) for a period longer than 3 months, the institution shall present to the satisfaction of the competent authority a plan for a timely return to compliance with that limit and carry out that plan within the time period agreed with the competent authority. Competent authorities shall monitor the implementation of the plan and shall require a more speedy return to compliance if appropriate.".

(b)  the following paragraph 3 is added:

"3. For the purposes of paragraph 1, EBA shall issue guidelines specifying:

(a)  the exceptional cases in which the competent authority may allow the limit to be exceeded in accordance with paragraph 1;

(b)  the time considered appropriate for returning to compliance;

(c)  the measures to be taken by competent authorities to ensure the timely return to compliance of the institution.

Those guidelines shall be adopted in accordance with Article 16 of Regulation (EU) No 1093/2010.".

(97)  In Article 397, Column 1 of Table 1, the term ‘eligible capital’ is replaced by the term ‘Tier 1 capital’.

(98)  Article 399 is amended as follows:

(a)  paragraph 1 is replaced by the following:

"1. An institution shall use a credit risk mitigation technique in the calculation of an exposure where it has used this technique to calculate capital requirements for credit risk in accordance with Part Three, Title II and provided it meets the conditions set out in this Article.

For the purposes of Articles 400 to 403, the term 'guarantee' shall include credit derivatives recognised under Part Three, Title II, Chapter 4 other than credit linked notes.";

(aa)  the following paragraph is inserted:

  "1a. By way of derogation from paragraph 1 and by authorisation of the competent authority, institutions that used a credit risk mitigation technique to calculate capital requirements for credit risk in accordance with Part Three, Title II may not use this technique for the purpose of Article 395(1) to exposures in the form of a collateral or a guarantee provided by an official export credit agency or by an eligible protection provider referred to in Article 201 qualifying for the credit quality step 2 or above, for officially supported export credits and residential loans."

(b)  in paragraph 2, the following subparagraph is added:

"Where an institution uses the standardised approach for credit risk mitigation purposes, point (a) of Article 194(3) shall not apply for the purposes of this paragraph.".

(c)  paragraph 3 is replaced by the following:

"3. Credit risk mitigation techniques which are available only to institutions using one of the IRB approaches shall not be eligible to reduce exposure values for large exposure purposes, except for exposures secured by immovable properties in accordance with Article 402.".

(99)  Article 400 is amended as follows:

(a)  the first subparagraph of paragraph 1 is amended as follows:

(i)  point (j) is replaced by the following:

"(j) trade exposures and default fund contributions to qualified central counterparties;".

(ii)  the following points (l) and (la) are added:

"(l) Holdings by resolution entities of the instruments and eligible own funds instruments referred to in point (g) of Article 45(3) of Directive 2014/59/EU issued by other entities belonging to the same resolution group.

(la) Exposures arising from a minimum value commitment that meets all of the requirements according to Article 132(8).".

(aa)  in paragraph 2, point (c) is replaced by the following:

  "(c) exposures, including participations or other kinds of holdings, incurred by an institution to its parent undertaking, to other subsidiaries of that parent undertaking, or to its own subsidiaries and qualifying holdings, in so far as those undertakings are covered by the supervision on a consolidated basis to which the institution itself is subject, in accordance with this Regulation, Directive 2002/87/EC or with equivalent standards in force in a third country. Exposures that do not meet these criteria, whether or not exempted from Article 395(1), shall be treated as exposures to a third party;”

(b)  in paragraph 2, point (k) is deleted.

(c)  in paragraph 3, the second subparagraph is replaced by the following:

"Competent authorities shall inform EBA of whether or not they intend to use any of the exemptions provided for in paragraph 2 in accordance with points (a) and (b) of this paragraph and provide EBA with the reasons substantiating the use of those exemptions.".

(d)  the following paragraph 4 is added:

"4. The simultaneous application of more than one exemption set out in paragraphs 1 and 2 to the same exposure shall not be permitted."

(100)  Article 401 is replaced by the following:

"Article 401Calculating the effect of the use of credit