Changes from report parliamentary committee draft to plenary report

Added1b. Institutions shall calculate the risk weight and expected loss applicable to the covered portion of the underlying exposure using the PD, the LGD specified in paragraph 1a, and the same risk weight function as the ones used for a comparable direct exposure to the protection provider, and shall, where applicable, use the maturity M related to the underlying exposure, calculated in accordance with Article 162.

Added1c. Institutions that apply to comparable direct exposures to the protection provider the IRB Approach using the method provided for in Article 153(5), shall use the risk weight and expected loss applicable to the covered portion of the exposure that correspond to the ones provided for in Articles 153(5) and 158(6).

Added1d. Notwithstanding paragraph 1c, institutions that apply to guaranteed exposures the IRB Approach using the method provided for in Article 153(5) shall calculate the risk weight and expected loss applicable to the covered portion of the exposure using the PD, the LGD applicable for a comparable direct exposure to the protection provider as referred to in Article 161(1), in accordance with paragraph 1b, and the same risk weight function as the ones used for a comparable direct exposure to the protection provider, and shall, where applicable, use the maturity M related to the underlying exposure, calculated in accordance with Article 162. For subordinated exposures and non-subordinated unfunded credit protection, the LGD to be applied by institutions to the covered portion of the exposure value is the LGD associated with senior claims and that may account for any collateralisation of the underlying exposure in accordance with this Chapter.’;

Added(d) paragraph 2 is replaced by the following:

Added‘2. For any uncovered portion of the exposure value (E), institutions shall use the risk weight and the expected loss corresponding to the underlying exposure. For the calculation laid down in Article 159, institutions shall assign any general and specific credit risk adjustments, additional value adjustments related to the non-trading book business of the institution as referred to in Article 34 and other own funds reductions related to the exposure other than the deductions made in accordance with Article 36(1), point (m), to the uncovered portion of the exposure value.’;

Added(126) the following Article 236a is inserted:

Added‘Article 236a Calculating risk-weighted exposure amounts and expected loss amounts under the substitution approach when the guaranteed exposure is treated under the IRB Approach using own estimates of loss given default (LGD) and a comparable direct exposure to the protection provider is treated under the IRB Approach

Added1. For an exposure with unfunded credit protection to which an institution applies the IRB Approach referred to in Chapter 3 using its own estimates of loss given default (LGD) and where comparable direct exposures to the protection provider are treated under the IRB Approach referred to in Chapter 3, without the use of own estimates of LGD, institutions shall determine the covered portion of the exposure as the lower of the exposure value E and the adjusted value of the unfunded credit protection GA calculated in accordance with Article 235a(1). The risk-weighted exposure amount and the expected loss amount for the covered portion of the exposure value shall be calculated by using the PD, the LGD and the same risk weight function as the ones used for a comparable direct exposure to the protection provider, and shall, where applicable, use the maturity M related to the underlying exposure, calculated in accordance with Article 162.

Added2. Institution that apply the IRB Approach referred to in Chapter 3 but without using their own estimates of loss given default (LGD) to comparable direct exposures to the protection provider, shall determine the LGD in accordance with Article 161. For subordinated exposures and non-subordinated unfunded credit protection, the LGD to be applied by institutions to the covered portion of the exposure value is the LGD associated with senior claims and that may account for any collateralisation of the underlying exposure in accordance with this Chapter.

Added3. Institutions that apply the IRB Approach referred to in Chapter 3 using their own estimates of LGD to comparable direct exposures to the protection provider, shall calculate the risk weight and the expected loss applicable to the covered portion of the underlying exposure using the PD, the LGD and the same risk weight function as the ones used for such a comparable direct exposure to the protection provider, and shall use the maturity M related to the underlying exposure, calculated, where applicable, in accordance with Article 162.

Added4. Institution that apply to comparable direct exposures to the protection provider the IRB Approach using the method provided for in Article 153(5), shall apply the risk weight and expected loss applicable to the covered portion of the exposure that correspond to the ones provided in Articles 153(5) and 158(6).

Added5. For any uncovered portion of the exposure value (E), institutions shall use the risk weight and the expected loss corresponding to the underlying exposure. For the calculation laid down in Article 159, institutions shall assign any general and specific credit risk adjustments, additional value adjustments related to the non-trading book business of the institution as referred to in Article 34 and other own funds reductions related to the exposure other than the deductions made in accordance with Article 36(1), point (m), to the uncovered portion of the exposure value.’;

Added(127) in Part three, Title II, Chapter 4, Section 6 is deleted;

Added(128) in Article 273(3), point (b) is replaced by the following:

Added‘(b) in accordance with Article 183, where permission has been granted in accordance with Article 143.’

Added(129) Article 273b is amended as follows:

Added(a) the title is replaced by the following:

Added‘Article 273b Non-compliance with the conditions for using simplified methods for calculating the exposure value of derivatives and the simplified approach for calculating the own funds requirement for CVA risk’;

Added(b) in paragraph 2, the introductory wording is replaced by the following:

Added‘Institutions shall cease to calculate the exposure values of its derivative positions in accordance with Section 4 or 5 and to calculate the own funds requirement for CVA risk in accordance with Article 385, as applicable, within three months of one of the following occurring:’;

Added(c) paragraph 3 is replaced by the following:

Added‘3. Institutions that have ceased to calculate the exposure values of its derivative positions in accordance with Section 4 or 5 and to calculate the own funds requirement for CVA risk in accordance with Article 385, as applicable, shall only be permitted to resume calculating the exposure value of their derivative positions as set out in Section 4 or 5 and the own funds requirement for CVA risk in accordance with Article 385 where they demonstrate to the competent authority that all the conditions set out in Article 273a, paragraphs 1 or 2, have been met for an uninterrupted period of one year.’;

Added(130) Article 274 is amended as follows:

Added(a) paragraph 4 is replaced by the following:

Added‘4. Where multiple margin agreements apply to the same netting set, or the same netting set includes both transactions subject to a margin agreement and transactions not subject to a margin agreement, an institution shall calculate its exposure value as follows:

Added(a) the institution shall establish the hypothetical sub-netting sets concerned, composed of transactions included in the netting set, as follows:

Added(i) all transactions subject to a margin agreement and to the same margin period of risk as determined in accordance with Article 285, paragraphs 2 to 5, shall be allocated to the same sub-netting set;

Added(ii) all transactions not subject to a margin agreement shall be allocated to the same sub-netting set, distinct from the sub-netting sets established in accordance with point (i).

Added(b) the institution shall calculate the replacement cost of the netting set referred to in the introductory sentence of this paragraph in accordance with Article 275(2) by taking into account all the transactions within the netting set, subject to a margin agreement or not, and apply all of the following:

Added(i) CMV shall be calculated for 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;

Added(ii) NICA, VM, TH, and MTA, where applicable, shall be calculated separately as the sum across the same inputs applicable to each individual margin agreement of the netting set.

Added(c) the institution shall calculate the potential future exposure of the netting set referred to in Article 278 by applying all of the following:

Added(i) the multiplier referred to in Article 278(1) shall be based on the inputs CMV, NICA and VM, as applicable, in accordance with point (b) of this paragraph;

Added(ii) shall be calculated in accordance with Article 278, separately for each hypothetical sub-netting set referred to in point (a)’;

Added(b) in paragraph 6, the following subparagraph is added:

Added‘By way of derogation from the first sub-paragraph, institutions shall replace a vanilla digital option whose strike equals to K with the relevant collar combination of two sold and bought vanilla call or put options that meet with the following requirements:

Added(a) the two options of the collar combination shall have:

Added(i) the same expiry date and same spot or forward price of the underlying instrument as the vanilla digital option;

Added(ii) strikes equal to 0.95∙K and 1.05∙K respectively;

Added(b) the collar combination exactly replicates the vanilla digital option payoff outside the range between the two strikes referred to in point (a);

AddedThe risk position of the two options of the collar combination shall be calculated separately in accordance with Article 279.’;

Added(130a) in Article 291(5), point (f) is replaced by the following:

Added‘(f) to the extent that this uses existing market risk calculations for own funds requirements for default risk as set out in Title IV, Chapter 1a, Section 4 or 5 or for default risk using an internal default risk model as set out in Title IV, Chapter 1b, Section 3 that already contain an LGD assumption, the LGD in the formula used shall be 100 %.’;

Added(131) in Part Three, Title III is replaced by the following:

Added‘TITLE III OWN FUNDS REQUIREMENTS FOR OPERATIONAL RISK

AddedFor the purposes of this Title, the following definitions shall apply:

Added(a) ‘operational risk event’ means any event linked to an operational risk which generates a loss or multiple losses, within one or multiple financial years;

Added(b) ‘aggregated gross loss’ means the sum of all gross losses linked to the same operational risk event over one or multiple financial years;

Added(c) ‘aggregated net loss’ means the sum of all net losses linked to the same operational risk event over one or multiple financial years.

AddedThe own funds requirement for operational risk shall be the business indicator component calculated in accordance with Article 313.

AddedInstitutions shall calculate their business indicator component in accordance with the following formula:

Addedwhere:

AddedBIC = the business indicator component;

AddedBI = the business indicator, expressed in billions of euro, calculated in accordance with Article 314.

Added1. Institutions shall calculate their business indicator in accordance with the following formula:

Addedwhere:

AddedBI = the business indicator, expressed in billions of euro;

AddedILDC = the interest, leases and dividend component, expressed in billions of euros and calculated in accordance with paragraph 2;

AddedSC = the services component, expressed in billions of euros and calculated in accordance with paragraph 3;

AddedFC = the financial component, expressed in billions of euros and calculated in accordance with paragraph 4.