Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 Text with EEA relevance

Image omitted; see official source

where:

• mCVA = a multiplier factor which is equal to 1; the competent authority may increase the value of mCVA where the institution’s regulatory CVA model shows deficiencies preventing the appropriate measurement of the own funds requirements for CVA risk;

• Kb = the bucket-specific sensitivity of bucket b;

• γbc = the correlation parameter between buckets b and c;

- Image omitted; see official source for all risk factors in bucket b;

• Image omitted; see official source for all risk factors in bucket c.

Article 383c

Interest rate risk factors

The interest rate delta risk factors that are applicable to interest-rate sensitive instruments in the CVA portfolio shall be the risk-free rates per currency concerned and per each of the following maturities: 1 year, 2 years, 5 years, 10 years and 30 years.

The interest rate delta risk factors applicable to inflation-rate sensitive instruments in the CVA portfolio shall be the inflation rates per currency concerned and per each of the following maturities: 1 year, 2 years, 5 years, 10 years and 30 years.

Where the data on market-implied swap curves described in the first subparagraph are insufficient, the risk-free rates may be derived from the most appropriate sovereign bond curve for a given currency.

Article 383d

Foreign exchange risk factors

2. The foreign exchange vega risk factors to be applied by institutions to instruments in the CVA portfolio sensitive to foreign exchange volatility shall be the implied volatilities of foreign exchange rates between the currency pairs referred to in paragraph 1. There shall be one bucket for all currencies and maturities, containing all foreign exchange vega risk factors and a single net sensitivity.

Article 383e

Counterparty credit spread risk factors

1. The counterparty credit spread delta risk factors applicable to counterparty credit spread sensitive instruments in the CVA portfolio shall be the credit spreads of individual counterparties and reference names and qualified indices for the following maturities: 0,5 years, 1 year, 3 years, 5 years and 10 years.

Article 383f

Reference credit spread risk factors

1. The reference credit spread delta risk factors applicable to reference credit spread sensitive instruments in the CVA portfolio shall be the credit spreads of all maturities for all reference names within a bucket. There shall be one net sensitivity computed for each bucket.

Article 383g

Equity risk factors

2. The equity delta risk factors to be applied by institutions to instruments in the CVA portfolio sensitive to equity spot prices shall be the spot prices of all equities mapped to the same bucket referred to in paragraph 1. There shall be one net sensitivity computed for each bucket.

Article 383h

Commodity risk factors

2. The commodity delta risk factors to be applied by institutions to instruments in the CVA portfolio sensitive to commodity spot prices shall be the spot prices of all commodities mapped to the same sector bucket referred to in paragraph 1. There shall be one net sensitivity computed for each sector bucket.

Article 383i

Delta risk sensitivities

• (a) the delta sensitivities of the aggregate CVA to risk factors consisting of risk-free rates, as well as of an eligible hedge to those risk factors, shall be calculated as follows: Image omitted; see official source Image omitted; see official source where: Image omitted; see official source = the sensitivities of the aggregate CVA to a risk-free rate risk factor; rkt = the value of the risk-free rate risk factor k with maturity t; VCVA = the aggregate CVA calculated by the regulatory CVA model; x,y = risk factors other than rkt in VCVA; Image omitted; see official source = the sensitivities of the eligible hedge i to a risk-free rate risk factor; Vi = the pricing function of the eligible hedge i; w,z = risk factors other than rkt in the pricing function Vi;

• (b) the delta sensitivities to risk factors consisting of inflation rates as well as of an eligible hedge to those risk factors, shall be calculated as follows: Image omitted; see official source Image omitted; see official source where: Image omitted; see official source = the sensitivities of the aggregate CVA to an inflation rate risk factor; inflkt = the value of an inflation rate risk factor k with maturity t; VCVA = the aggregate CVA calculated by the regulatory CVA model; x,y = risk factors other than inflkt in VCVA; Image omitted; see official source = the sensitivities of the eligible hedge i to an inflation rate risk factor; Vi = the pricing function of the eligible hedge i; w,z = risk factors other than inflkt in the pricing function Vi.

Image omitted; see official source

Image omitted; see official source

where:

• Image omitted; see official source = the sensitivities of the aggregate CVA to a foreign exchange spot rate risk factor;

• FXk = the value of the foreign exchange spot rate risk factor k;

• VCVA = the aggregate CVA calculated by the regulatory CVA model;

• x,y = risk factors other than FXk in VCVA;

• Image omitted; see official source = the sensitivities of the eligible hedge i to a foreign exchange spot rate risk factor;

• Vi = the pricing function of the eligible hedge i;

• w,z = risk factors other than FXk in the pricing function Vi.

Image omitted; see official source

Image omitted; see official source

where:

• Image omitted; see official source = the sensitivities of the aggregate CVA to a counterparty credit spread rate risk factor;

• ccskt = the value of the counterparty credit spread rate risk factor k at maturity t;

• VCVA = the aggregate CVA calculated by the regulatory CVA model;

• x,y = risk factors other than ccskt in VCVA;

• Image omitted; see official source = the sensitivities of the eligible hedge i to a counterparty credit spread rate risk factor;

• Vi = the pricing function of the eligible hedge i;

• w,z = risk factors other than ccskt in the pricing function Vi.

Image omitted; see official source

Image omitted; see official source

where:

• Image omitted; see official source = the sensitivities of the aggregate CVA to a reference credit spread rate risk factor;

• rcskt = the value of the reference credit spread rate risk factor k at maturity t;

• VCVA = the aggregate CVA calculated by the regulatory CVA model;

• x,y = risk factors other than ccskt in VCVA ;

• Image omitted; see official source = the sensitivities of the eligible hedge i to a reference credit spread rate risk factor;

• Vi = the pricing function of the eligible hedge i;

• w,z = risk factors other than ccskt in the pricing function Vi.

Image omitted; see official source

Image omitted; see official source

where:

• Image omitted; see official source = the sensitivities of the aggregate CVA to an equity spot price risk factor;

• EQ = the value of the equity spot price;

• VCVA = the aggregate CVA calculated by the regulatory CVA model;

• x,y = risk factors other than EQ in VCVA;

• Image omitted; see official source = the sensitivities of the eligible hedge i to an equity spot price risk factor;

• Vi = the pricing function of the eligible hedge i;

• w,z = risk factors other than EQ in the pricing function Vi.

Image omitted; see official source

Image omitted; see official source

where:

• Image omitted; see official source = the sensitivities of the aggregate CVA to a commodity spot price risk factor;

• CTY = the value of the commodity spot price;

• VCVA = the aggregate CVA calculated by the regulatory CVA model;

• x,y = risk factors other than CTY in VCVA;

• Image omitted; see official source = the sensitivities of the eligible hedge i to a commodity spot price risk factor;

- Vi = the pricing function of the eligible hedge i;

• w,z = risk factors other than CTY in the pricing function Vi.

Article 383j

Vega risk sensitivities

Institutions shall calculate the vega risk sensitivities of the aggregate CVA to risk factors consisting of implied volatility, as well as of an eligible hedge instrument to those risk factors, as follows:

Image omitted; see official source

Image omitted; see official source

where:

• Image omitted; see official source = the sensitivities of the aggregate CVA to an implied volatility risk factor;

• volk = the value of the implied volatility risk factor;

• VCVA = the aggregate CVA calculated by the regulatory CVA model;

• x,y = risk factors other than volk in the pricing function VCVA;

• Image omitted; see official source = the sensitivities of the eligible hedge instrument i to an implied volatility risk factor;

- Vi = the pricing function of the eligible hedge i;

• w,z = risk factors other than volk in the pricing function Vi.

Article 383k

Risk weights for interest rate risk

Table 1

Bucket	Maturity	Risk weight
1	1 year	1,11  %
2	2 years	0,93  %
3	5 years	0,74  %
4	10 years	0,74  %
5	30 years	0,74  %

4. For inflation rate risk denominated in a currency other than the currencies referred to in Article 383c(2), the risk weight of the delta sensitivity to the inflation rate risk shall be 1,58  %.

Article 383l

Intra-bucket correlations for interest rate risk

Table 1

Bucket	1	2	3	4	5
1	100 %	91 %	72 %	55 %	31 %
2		100 %	87 %	72 %	45 %
3			100 %	91 %	68 %
4				100 %	83 %
5					100 %

2. Institutions shall apply a correlation parameter of 40 % for the aggregation of inflation rate delta risk sensitivity and risk-free rate delta sensitivity denominated in the same currency.

Article 383m

Correlation across buckets for interest rate risk

The cross-bucket correlation parameter for interest rate delta and vega risks shall be set at 0,5 for all currency pairs.

Article 383n

Risk weights for foreign exchange risk

• (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 ECB, if that fluctuation band is narrower than the fluctuation band defined under ERM II.

3. Notwithstanding paragraph 2, the risk weight of the foreign exchange risk factors concerning currencies referred to in that paragraph which participate in ERM II with a formally agreed fluctuation band narrower than the standard band of plus or minus 15 % shall equal the maximum percentage fluctuation within that narrower band.

Article 383o

Correlations for foreign exchange risk

1. A uniform correlation parameter equal to 60 % shall apply to the aggregation of sensitivities to delta foreign exchange risk factor across buckets.

Article 383p

Risk weights for counterparty credit spread risk

Table 1

Bucket number	Credit quality	Sector	Risk weight
1	All	Central government, including central banks, of Member States	0,5  %
2	Credit quality step 1 to 3	Central government, including central banks, of third countries, multilateral development banks and international organisations referred to in Article 117(2) and Article 118	0,5  %
3	Credit quality step 1 to 3	Regional government or local authority and public sector entities	1,0  %
4	Credit quality step 1 to 3	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	Credit quality step 1 to 3	Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying	3,0  %
6	Credit quality step 1 to 3	Consumer goods and services, transportation and storage, administrative and support service activities	3,0  %
7	Credit quality step 1 to 3	Technology, telecommunications	2,0  %
8	Credit quality step 1 to 3	Health care, utilities, professional and technical activities	1,5  %
9	Credit quality step 1 to 3	Covered bonds issued by credit institutions established in Member States	1,0  %
10	Credit quality step 1	Covered bonds issued by credit institutions in third countries	1,5  %
10	Credit quality steps 2 to 3	Covered bonds issued by credit institutions in third countries	2,5  %
11	Credit quality steps 1 to 3	Other sector	5,0  %
12	Credit quality steps 1 to 3	Qualified indices	1,5  %
13	Credit quality step 4 to 6 and unrated	Central government, including central banks, of third countries, multilateral development banks and international organisations referred to in Article 117(2) and Article 118	2,0  %
14	Credit quality step 4 to 6 and unrated	Regional government or local authority and public sector entities	4,0  %
15	Credit quality step 4 to 6 and unrated	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  %
16	Credit quality step 4 to 6 and unrated	Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying	7,0  %
17	Credit quality step 4 to 6 and unrated	Consumer goods and services, transportation and storage, administrative and support service activities	8,5  %
18	Credit quality step 4 to 6 and unrated	Technology, telecommunications	5,5  %
19	Credit quality step 4 to 6 and unrated	Health care, utilities, professional and technical activities	5,0  %
20	Credit quality step 4 to 6 and unrated	Other sector	12,0  %
21	Credit quality step 4 to 6 and unrated	Qualified indices	5,0  %

Where there are no external ratings for a specific counterparty, institutions may, subject to approval by the competent authorities, map the internal rating to a corresponding external rating and assign a risk weight corresponding to either credit quality step 1 to 3 or credit quality step 4 to 6. Otherwise, the risk weights for unrated exposures shall be applied.

3. Institutions shall assign to buckets 12 and 21 in Table 1 only exposures that reference qualified indices as referred to in Article 383b(4).

Article 383q

Intra-bucket correlations for counterparty credit spread risk

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where:

• Image omitted; see official source shall be equal to 1 where the two vertices of the sensitivities k and l are identical, otherwise it shall be equal to 90 %;

• Image omitted; see official source shall be equal to 1 where the two names of sensitivities k and l are identical, 90 % if the two names are distinct but legally related, otherwise it shall be equal to 50 %;

• Image omitted; see official source shall be equal to 1 where the two names are both in buckets 1 to 11 or are both in buckets 13 to 20, otherwise it shall be equal to 80 %.

Image omitted; see official source

where:

• Image omitted; see official source shall be equal to 1 where the two vertices of the sensitivities k and l are identical, otherwise it shall be equal to 90 %;

- Image omitted; see official source shall be equal to 1 where the two names of sensitivities k and l are identical and the two indices are of the same series, 90 % if the two indices are the same but of distinct series, otherwise it shall be equal to 80 %;

• Image omitted; see official source shall be equal to 1 where the two names are both in bucket 12 or both in bucket 21, otherwise it shall be equal to 80 %.

Article 383r

Correlations across buckets for counterparty credit spread risk

The cross-bucket correlations for counterparty credit spread delta risk shall be the following:

Table 1

Bucket	1, 2, 3, 13 and 14	4 and 15	5 and 16	6 and 17	7 and 18	8 and 19	9 and 10	11 and 20	12 and 21
1, 2, 3, 13 and 14	100 %	10 %	20 %	25 %	20 %	15 %	10 %	0 %	45 %
4 and 15		100 %	5 %	15 %	20 %	5 %	20 %	0 %	45 %
5 and 16			100 %	20 %	25 %	5 %	5 %	0 %	45 %
6 and 17				100 %	25 %	5 %	15 %	0 %	45 %
7 and 18					100 %	5 %	20 %	0 %	45 %
8 and 19						100 %	5 %	0 %	45 %
9 and 10							100 %	0 %	45 %
11 and 20								100 %	0 %
12 and 21									100 %

Article 383s

Risk weights for reference credit spread risk

Table 1

Bucket number	Credit quality	Sector	Risk weight
1	All	Central government, including central banks, of Member States	0,5  %
2	Credit quality step 1 to 3	Central government, including central banks, of third countries, multilateral development banks and international organisations referred to in Article 117(2) and Article 118	0,5  %
3	Credit quality step 1 to 3	Regional government or local authority and public sector entities	1,0  %
4	Credit quality step 1 to 3	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	Credit quality step 1 to 3	Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying	3,0  %
6	Credit quality step 1 to 3	Consumer goods and services, transportation and storage, administrative and support service activities	3,0  %
7	Credit quality step 1 to 3	Technology, telecommunications	2,0  %
8	Credit quality step 1 to 3	Health care, utilities, professional and technical activities	1,5  %
9	Credit quality step 1 to 3	Covered bonds issued by credit institutions established in Member States	1,0  %
10	Credit quality step 1	Covered bonds issued by credit institutions in third countries	1,5  %
10	Credit quality steps 2 to 3	Covered bonds issued by credit institutions in third countries	2,5  %
11	Credit Quality Step 1 to 3	Qualified indices	1,5  %
12	Credit quality step 4 to 6 and unrated	Central government, including central banks, of third countries, multilateral development banks and international organisations referred to in Article 117(2) and Article 118	2,0  %
13	Credit quality step 4 to 6 and unrated	Regional government or local authority and public sector entities	4,0  %
14	Credit quality step 4 to 6 and unrated	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  %
15	Credit quality step 4 to 6 and unrated	Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying	7,0  %
16	Credit quality step 4 to 6 and unrated	Consumer goods and services, transportation and storage, administrative and support service activities	8,5  %
17	Credit quality step 4 to 6 and unrated	Technology, telecommunications	5,5  %
18	Credit quality step 4 to 6 and unrated	Health care, utilities, professional and technical activities	5,0  %
19	Credit quality step 4 to 6 and unrated	Qualified indices	5,0  %
20	Other sector	Other sector	12,0  %

Where there are no external ratings for a specific counterparty, institutions may, subject to approval by the competent authorities, map the internal rating to a corresponding external rating and assign a risk weight corresponding to either credit quality step 1 to 3 or credit quality step 4 to 6. Otherwise, the risk weights for unrated exposures shall be applied.

4. Institutions shall assign to buckets 11 and 19 only exposures that reference qualified indices as referred to in Article 383b(4).

Article 383t

Intra-bucket correlations for reference credit spread risk

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where:

• Image omitted; see official source shall be equal to 1 where the two vertices of the sensitivities k and l are identical, otherwise it shall be equal to 90 %;

• Image omitted; see official source shall be equal to 1 where the two names of sensitivities k and l are identical, 90 % if the two names are distinct but legally related, otherwise it shall be equal to 50 %;

• Image omitted; see official source shall be equal to 1 where the two names are both in buckets 1 to 10, are both in buckets 12 to 18, or are both in bucket 20, otherwise it shall be equal to 80 %.

Image omitted; see official source

where:

• Image omitted; see official source shall be equal to 1 where the two vertices of the sensitivities k and l are identical, otherwise it shall be equal to 90 %;

- Image omitted; see official source shall be equal to 1 where the two names of sensitivities k and l are identical and the two indices are of the same series, 90 % if the two indices are the same but of distinct series, otherwise it shall be equal to 80 %;

• Image omitted; see official source shall be equal to 1 where the two names are both in bucket 11 or both in bucket 19, otherwise it shall be equal to 80 %.

Article 383u

Correlations across buckets for reference credit spread risk

Table 1

| Bucket | 1, 2 and 12 | 3 and 14 | 4 and 15 | 5 and 16 | 6 and 17 | 7 and 18 | 8 and 19 | 9 and 10 | 20 | 11 | 19 |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | 1, 2, and 12 | 100 % | 75 % | 10 % | 20 % | 25 % | 20 % | 15 % | 10 % | 0 % | 45 % | 45 % | | 3 and 14 | | 100 % | 5 % | 15 % | 20 % | 15 % | 10 % | 10 % | 0 % | 45 % | 45 % | | 4 and 15 | | | 100 % | 5 % | 15 % | 20 % | 5 % | 20 % | 0 % | 45 % | 45 % | | 5 and 16 | | | | 100 % | 20 % | 25 % | 5 % | 5 % | 0 % | 45 % | 45 % | | 6 and 17 | | | | | 100 % | 25 % | 5 % | 15 % | 0 % | 45 % | 45 % | | 7 and 18 | | | | | | 100 % | 5 % | 20 % | 0 % | 45 % | 45 % | | 8 and 19 | | | | | | | 100 % | 5 % | 0 % | 45 % | 45 % | | 9 and 10 | | | | | | | | 100 % | 0 % | 45 % | 45 % | | 20 | | | | | | | | | 100 % | 0 % | 0 % | | 11 | | | | | | | | | | 100 % | 75 % | | 19 | | | | | | | | | | | 100 % |

Article 383v

Risk weight buckets for equity risk

Table 1

Bucket number	Market capitalisation	Economy	Sector	Risk weight for equity spot price
1	Large	Emerging market economy	Consumer goods and services, transportation and storage, administrative and support service activities, healthcare, utilities	55 %
2	Large	Emerging market economy	Telecommunications, industrials	60 %
3	Large	Emerging market economy	Basic materials, energy, agriculture, manufacturing, mining and quarrying	45 %
4	Large	Emerging market economy	Financials, including government-backed financials, immovable property activities, technology	55 %
5	Large	Advanced economy	Consumer goods and services, transportation and storage, administrative and support service activities, healthcare, utilities	30 %
6	Large	Advanced economy	Telecommunications, industrials	35 %
7	Large	Advanced economy	Basic materials, energy, agriculture, manufacturing, mining and quarrying	40 %
8	Large	Advanced economy	Financials, including government-backed financials, immovable property activities, technology	50 %
9	Small	Emerging market economy	All sectors described under bucket numbers 1, 2, 3 and 4	70 %
10	Small	Advanced economy	All sectors described under bucket numbers 5, 6, 7 and 8	50 %
11	Other sector	Other sector	Other sector	70 %
12	Large	Advanced economy	Qualified indices	15 %
13	Other	Other	Qualified indices	25 %

4. When assigning a risk exposure to a sector, institutions shall rely on a classification that is commonly used in the market for grouping issuers by industry sector. Institutions shall assign each issuer to one of the sector buckets in paragraph 1, Table 1, and shall assign all issuers from the same industry to the same sector. Risk exposures from any issuer that an institution cannot assign to a sector in that manner 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 383w

Correlations across buckets for equity risk

The cross-bucket correlation parameter for equity delta and vega risk shall be set at:

• (a) 15 %, where the two buckets fall within buckets 1 to 10 in Article 383v(1), Table 1;

• (b) 75 %, where the two buckets are buckets 12 and 13 in Article 383v(1), Table 1;

- (c) 45 %, where one of the buckets is bucket 12 or 13 in Article 383v(1), Table 1, and the other bucket falls within buckets 1 to 10 in Article 383v(1), Table 1;

• (d) 0 %, where one of the two buckets is bucket 11 in Article 383v(1), Table 1.

Article 383x

Risk weight buckets for commodity risk

Table 1

| Bucket number | Bucket name | Risk weight for commodity spot price |

| --- | --- | --- | | 1 | Energy — solid combustibles | 30 % | | 2 | Energy — liquid combustibles | 35 % | | 3 | Energy — electricity | 60 % | | 4 | Energy — EU ETS carbon trading | 40 % | | 5 | Energy — non-EU ETS carbon trading | 60 % | | 6 | Freight | 80 % | | 7 | Metals — non-precious | 40 % | | 8 | Gaseous combustibles | 45 % | | 9 | Precious metals, including gold | 20 % | | 10 | Grains and oilseed | 35 % | | 11 | Livestock and dairy | 25 % | | 12 | Softs and other agricultural commodities | 35 % | | 13 | Other commodity | 50 % |

Article 383z

Correlations across buckets for commodity risk

• (a) 20 %, where the two buckets fall within buckets 1 to 12 in Article 383x(1), Table 1;

• (b) 0 %, where one of the two buckets is bucket 13 in Article 383x(1), Table 1.

- (a) 20 %, where the two buckets fall within buckets 1 to 12 in Article 383x(1), Table 1;

• (b) 0 %, where one of the two buckets is bucket 13 in Article 383x(1), Table 1.

Article 384

Basic approach

• (a) the formula set out in paragraph 2 of this Article, where the institution includes in the calculation one or more eligible hedges recognised in accordance with Article 386;

• (b) the formula set out in paragraph 3 of this Article, where the institution does not include in the calculation any eligible hedges recognised in accordance with Article 386.

The approaches set out in the first subparagraph, points (a) and (b), shall not be used in combination.

BACVA^total = β · BACVA^{csr–unhedged} + DSCVA · (1 – β) · BACVA^csr–hedged

where:

• BACVA^total = the own funds requirements for CVA risk under the basic approach;

• BACVA^{csr–unhedged} = the own funds requirements for CVA risk under the basic approach as calculated in accordance with paragraph 3 for an institution that meets the condition set out in paragraph 1, point (b);

• DSCVA = 0,65 ;

• β = 0,25 ;

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where:

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• α = 1,4 ;

• ρ = 0,5 ;

• c = the index that denotes all counterparties for which the institution calculates the own funds requirements for CVA risk using the approach laid down in this Article;

• NS = the index that denotes all netting sets with a given counterparty for which the institution calculates the own funds requirements for CVA risk using the approach laid down in this Article;

• h = the index that denotes all single-name instruments recognised as eligible hedges in accordance with Article 386 for a given counterparty for which the institution calculates the own funds requirements for CVA risk using the approach laid down in this Article;

• I = the index that denotes all index instruments recognised as eligible hedges in accordance with Article 386 for all counterparties for which the institution calculates the own funds requirements for CVA risk using the approach laid down in this Article;

• RWc = the risk weight applicable to counterparty c; counterparty c shall be mapped to one of the risk weights based on a combination of sector and credit quality and determined in accordance with Table 1.

Where there are no external ratings for a specific counterparty, institutions may, subject to approval by the competent authorities, map the internal rating to a corresponding external rating and assign a risk weight corresponding to either credit quality step 1 to 3 or credit quality step 4 to 6; otherwise, the risk weights for unrated exposures shall be applied.

Image omitted; see official source= the effective maturity for the netting set NS with counterparty c;

Image omitted; see official sourceshall be calculated in accordance with Article 162; however, for that calculation, Image omitted; see official source shall not be capped at five years, but at the longest contractual remaining maturity in the netting set;

• Image omitted; see official source = the counterparty credit risk exposure value of the netting set NS with counterparty c, including the effect of collateral in accordance with the methods set out in Title II, Chapter 6, Sections 3 to 6, as applicable to the calculation of the own funds requirements for counterparty credit risk referred to in Article 92(4), points (a) and (g);

• Image omitted; see official source = the supervisory discount factor for the netting set NS with counterparty c.

For an institution, using the methods set out in Title II, Chapter 6, Section 6, the supervisory discount factor shall be set at 1; in all other cases, the supervisory discount factor shall be calculated as follows:

Image omitted; see official source

• rhc = the supervisory correlation factor between the credit spread risk of counterparty c and the credit spread risk of a single-name instrument recognised as an eligible hedge h for counterparty c, determined in accordance with Table 2;

• Image omitted; see official source = the residual maturity of a single-name instrument recognised as an eligible hedge;

• Image omitted; see official source = the notional of a single name instrument recognised as an eligible hedge;

• Image omitted; see official source = the supervisory discount factor for a single name instrument recognised as an eligible hedge, calculated as follows:

Image omitted; see official source

• Image omitted; see official source = the supervisory risk weight of a single-name instrument recognised as an eligible hedge; those risk weights shall be based on a combination of sector and credit quality of the reference credit spread of the hedging instrument and determined in accordance with Table 1;

• Image omitted; see official source = the residual maturity of one or more positions in the same index instrument recognised as an eligible hedge; in the case of more than one position in the same index instrument, Image omitted; see official source shall be the notional-weighted maturity of all those positions;

• Image omitted; see official source = the full notional of one or more positions in the same index instrument recognised as an eligible hedge;

• Image omitted; see official source = the supervisory discount factor for one or more positions in the same index instrument recognised as an eligible hedge, calculated as follows:

Image omitted; see official source

• Image omitted; see official source = the supervisory risk weight of an index instrument recognised as an eligible hedge; Image omitted; see official source shall be based on a combination of sector and credit quality of all index constituents, calculated as follows:

- (a) where all index constituents belong to the same sector and have the same credit quality, as determined in accordance with Table 1, Image omitted; see official source shall be calculated as the relevant risk weight of Table 1 for that sector and credit quality multiplied by 0,7 ;

• (b) where all index constituents do not belong to the same sector or do not have the same credit quality, Image omitted; see official source shall be calculated as a weighted average of the risk weights of all index constituents, as determined in accordance with Table 1, multiplied by 0,7 ;

Table 1

Sector of counterparty	Credit quality	Credit quality
Sector of counterparty	Credit quality step 1 to 3	Credit quality step 4 to 6 and not rated
Central government, including central banks, multilateral development banks and international organisations referred to in Article 117(2) or Article 118	0,5  %	2,0  %
Regional government or local authority and public sector entities	1,0  %	4,0  %
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  %	12,0  %
Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying	3,0  %	7,0  %
Consumer goods and services, transportation and storage, administrative and support service activities	3,0  %	8,5  %
Technology, telecommunications	2,0  %	5,5  %
Health care, utilities, professional and technical activities	1,5  %	5,0  %
Other sector	5,0  %	12,0  %

Table 2

Correlations between credit spread of counterparty and single-name hedge	Correlations between credit spread of counterparty and single-name hedge
Single-name hedge h of counterparty i	Value of rhc
Counterparties referred to in Article 386(3), point (a)(i)	100 %
Counterparties referred to in Article 386(3), point (a)(ii)	80 %
Counterparties referred to in Article 386(3), point (a)(iii)	50 %

Image omitted; see official source

where all of the terms are the ones set out in paragraph 2.

Article 385

Simplified approach

• (a) only transactions subject to the own funds requirements for CVA risk laid down in Article 382 are subject to that calculation;

- (b) credit derivatives that are recognised as internal hedges against counterparty risk exposures are not included in that calculation.

Article 386

Eligible hedges

• (a) they are used for the purpose of mitigating CVA risk and are managed as such;

• (b) they can be entered into with third parties or with the institution’s trading book as an internal hedge, in which case they are to comply with Article 106(7);

• (c) only positions in hedging instruments as referred to in paragraphs 2 and 3 of this Article can be recognised as eligible hedges for the calculation of the own funds requirements for CVA risk in accordance with Articles 383 and 384, respectively.

For the purpose of calculating the own funds requirements for CVA risk in accordance with Article 383, positions in hedging instruments shall be recognised as eligible hedges where, in addition to the conditions set out in points (a) to (c) of this paragraph, such hedging instruments form a single position in an eligible hedge and are not split into more than one position in more than one eligible hedge.

• (a) instruments that hedge variability of the counterparty credit spread, with the exception of instruments referred to in Article 325(5);

• (b) instruments that hedge variability of the exposure component of CVA risk, with the exception of the instruments referred to in Article 325(5).

• (a) single-name credit default swaps and single-name contingent-credit default swaps, referencing:
• (i) the counterparty directly;
• (ii) an entity legally related to the counterparty, where legally related refers to cases where the reference name and the counterparty are either a parent undertaking and its subsidiary or two subsidiaries of a common parent;
• (iii) an entity that belongs to the same sector and region as the counterparty;

• (b) index credit default swaps.

4. Positions in hedging instruments entered into with third parties that are recognised as eligible hedges in accordance with paragraphs 1, 2 and 3 and included in the calculation of the own funds requirements for CVA risk shall not be subject to the own funds requirements for market risk set out in Title IV.

5. Positions in hedging instruments that are not recognised as eligible hedges in accordance with this Article shall be subject to the own funds requirements for market risk set out in Title IV.

PART FOUR

LARGE EXPOSURES

Article 387

Subject matter

Institutions shall monitor and control their large exposures in accordance with this Part.

Article 389

Definition

For the purposes of this Part, ‘exposures’, means any asset or off-balance sheet item referred to in Part Three, Title II, Chapter 2, without applying the risk weights or degrees of risk.

Article 390

Calculation of the exposure value

• (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 Chapter 2 of Title IV of Part Three;

• (b) offset their long positions and short positions in different financial instruments issued by a given client, but only where the financial instrument underlying the short position is junior to the financial instrument underlying the long position or where the underlying instruments are of the same seniority.

For the purposes of points (a) and (b), financial instruments may be allocated into buckets on the basis of different degrees of seniority in order to determine the relative seniority of positions.

When calculating the exposure value for the contracts referred to in the first subparagraph, where those contracts are allocated to the trading book, institutions shall also comply with the principles set out in Article 299.

By way of derogation from the first subparagraph, institutions with permission to use the methods referred to in Section 4 of Chapter 4 of Title II of Part Three and Section 6 of Chapter 6 of Title II of Part Three may use those methods for calculating the exposure value for securities financing transactions.

• (a) in the case of foreign exchange transactions, exposures incurred in the ordinary course of settlement during the two business 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 business 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 Common Equity Tier 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.

• (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.

EBA shall submit those draft regulatory technical standards to the Commission by 28 March 2020.

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

Article 391

Definition of an institution for large exposures purposes

For the purposes of calculating the value of exposures in accordance with this Part the term ‘institution’ shall include a private or public undertaking, including its branches, which, were it established in the Union, would fulfil the definition of the term ‘institution’ and has been authorised in a third country that applies prudential supervisory and regulatory requirements at least equivalent to those applied in the Union.

For the purposes of the first paragraph, the Commission may adopt, by means of implementing acts, and subject to the examination procedure referred to in Article 464(2), decisions as to whether a third country applies prudential supervisory and regulatory requirements at least equivalent to those applied in the Union.

Article 392

Definition of a large exposure

An institution's exposure to a client or a group of connected clients shall be considered a large exposure where the value of the exposure is equal to or exceeds 10 % of its Tier 1 capital.

Article 393

Capacity to identify and manage large exposures

An institution shall have sound administrative and accounting procedures and adequate internal control mechanisms for the purposes of identifying, managing, monitoring, reporting and recording all large exposures and subsequent changes to them, in accordance with this Regulation.

Article 394

Reporting requirements

• (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 that are subject to Chapter 3 of Title II of Part Three shall report their 20 largest exposures to their competent authorities on a consolidated basis, excluding the exposures exempted from the application of Article 395(1).

Institutions shall also report exposures of a value greater than or equal to EUR 300 million but less than 10 % of the institution's Tier 1 capital to their competent authorities on a consolidated basis.

• (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.

In addition to the information referred to in the first subparagraph, institutions shall report to their competent authorities their aggregate exposure to shadow banking entities.

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 entity 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 Regulation and Directive 2013/36/EU should be entirely or partially excluded from the obligation to be reported referred to in paragraph 2 on shadow banking entities.

EBA shall submit those draft regulatory technical standards to the Commission by 28 June 2020.

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

Article 395

Limits to large exposures

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 of this Regulation, 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 in order 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, in which case they shall inform EBA and the Commission thereof.

By way of derogation from the first subparagraph of this paragraph, a G-SII shall not incur an exposure to another G-SII or a non-EU 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. A G-SII shall comply with such limit no later than 12 months from the date on which it came to be identified as a G-SII. Where the G-SII has an exposure to another institution or group which comes to be identified as a G-SII or as a non-EU G-SII, it shall comply with such limit no later than 12 months from the date on which that other institution or group came to be identified as a G-SII or as a non-EU G-SII.

In developing those guidelines, EBA shall consider whether the introduction of additional limits would have a material detrimental impact on the risk profile of institutions established in the Union, on the provision of credit to the real economy or on the stability and orderly functioning of financial markets.