Regulation 2019/876 - Amendment of 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 Regulation (EU) No 648/2012 - Main contents

EN

Official Journal of the European Union

L 150/1

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 international standards agreed in 2010 by the Basel Committee on Banking Supervision (BCBS), known as the Basel III framework. Among its many measures, the reform package included the adoption of Regulation (EU) No 575/2013 of the European Parliament and of the Council (4) and Directive 2013/36/EU of the European Parliament and of the Council (5), which strengthened the prudential requirements for credit institutions and investment firms (institutions).

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 BCBS 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.

In its communication of 24 November 2015 entitled ‘Towards the completion of the Banking Union’, 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 by the Council in its conclusions of 17 June 2016 and by the European Parliament in its resolution of 10 March 2016 on the Banking Union – Annual Report 2015 (6).

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, in particular 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.

The provisions of this Regulation should be equivalent to internationally agreed standards and ensure the continued equivalence of Directive 2013/36/EU and Regulation (EU) No 575/2013 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.

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.

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. By itself, a single absolute threshold does not take into account the specificities of the national banking markets. It is therefore necessary for Member States to be able to use their discretion to bring the threshold in line with domestic circumstances and adjust it downwards, as appropriate. 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 more proportionate rules where the institution fulfils all the relevant criteria.

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. The BCBS 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 ensure a level playing field internationally for institutions established inside the Union but operating outside the Union, and to ensure that leverage ratio remains an effective complement to risk-based own funds requirements. Therefore, a leverage ratio requirement should be introduced to complement the current system of reporting and disclosure of the leverage ratio.

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.

The European Supervisory Authority (European Banking Authority) (EBA), established by Regulation (EU) No 1093/2010 of the European Parliament and of the Council (7), concluded in its report of 3 August 2016 on the leverage ratio requirement 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 BCBS. The leverage ratio requirement should therefore be calibrated at 3 %.

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 supported export credits would be impacted disproportionally. The leverage ratio should therefore be adjusted for those types of exposures. Clear criteria that help ascertain the public mandate of such credit institutions should therefore be set out and cover aspects such as their establishment, the type of activities undertaken, their goal, the guarantee arrangements by public bodies and limits to deposit taking activities. The form and manner of establishment of such credit institutions should remain, however, at the discretion of Member State's central government, regional government or local authority and may consist of setting up a new credit institution, acquisition or take-over, including through concessions and in the context of resolution proceedings, of an already existing entity by such public authorities.

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

In exceptional circumstances that warrant the exclusion of certain exposures to central banks from the leverage ratio and in order to facilitate the implementation of monetary policies, competent authorities should be able to exclude such exposures from the total exposure measure on a temporary basis. For that purpose, they should publicly declare, after consultation with the relevant central bank, that such exceptional circumstances exist. The leverage ratio requirement should be recalibrated commensurately to offset the impact of the exclusion. Such recalibration should ensure the exclusion of risks to financial stability affecting the relevant banking sectors, and that the resilience provided by the leverage ratio is maintained.

It is appropriate to implement a leverage ratio buffer requirement for institutions identified as global systemically important institutions (G-SIIs) in accordance with Directive 2013/36/EU and with the BCBSs standard on a leverage ratio buffer for global systemically important banks (G-SIBs) published in December 2017. The leverage ratio buffer was calibrated by the BCBS for the specific purpose of mitigating the comparably larger risks to financial stability posed by G-SIBs and, against that background, should only apply to G-SIIs at this stage. However, further analysis should be done to determine whether it would be appropriate to apply the leverage ratio buffer requirement to other systemically important institutions (O-SIIs), as defined in Directive 2013/36/EU, and, if that is the case, in what manner the calibration should be tailored to the specific features of those institutions.

On 9 November 2015, the FSB published the Total Loss-absorbing Capacity (TLAC) Term Sheet (the ‘TLAC standard’) which was endorsed by the G20 at the November 2015 summit in Turkey. The TLAC standard requires G-SIBs, to hold a sufficient amount of highly loss absorbing (bail-inable) liabilities to ensure smooth and fast absorption of losses and recapitalisation in the event of a resolution. The TLAC standard should be implemented in Union law.

The implementation of the TLAC standard in Union law needs to take into account the existing institution-specific minimum requirement for own funds and eligible liabilities (MREL), set out in Directive 2014/59/EU of the European Parliament and of the Council (8). As the TLAC standard and the MREL pursue the same objective of ensuring that institutions have sufficient loss absorption capacity, the two requirements should be 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 institution-specific add-on for G-SIIs and the institution-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 (9). The provisions introducing the TLAC standard in Regulation (EU) No 575/2013 should be read together with the provisions that are introduced into Directive 2014/59/EU and Regulation (EU) No 806/2014, and with Directive 2013/36/EU.

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 to 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 set out in Directive 2014/59/EU.

In line with the TLAC standard, the requirement for 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 for 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.

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.

To ensure the effectiveness of the requirement for own funds and eligible liabilities, it is essential that the instruments held for meeting that requirement have a high loss absorption capacity. 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-inable in principle might raise difficulties for being bailed in in practice. Those liabilities should therefore not be considered eligible for the requirement for 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.

To avoid double counting of liabilities for the purposes of the requirement for 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 not sufficient liabilities, those eligible liabilities instruments should be deducted from Tier 2 instruments.

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.

It is necessary to provide for a clear and transparent approval process for Common Equity Tier 1 instruments that can contribute to maintaining the high quality of those instruments. To that end, competent authorities should be responsible for approving those instruments before institutions can classify them as Common Equity Tier 1 instruments. However, competent authorities should not need to require prior permission for Common Equity Tier 1 instruments that are issued on the basis of legal documentation already approved by the competent authority and governed by substantially the same provisions as those governing capital instruments for which the institution has received prior permission from the competent authority to classify as Common Equity Tier 1 instruments. In such a case, instead of requesting prior approval, it should be possible for institutions to notify their competent authorities of their intention to issue such instruments. They should do so sufficiently in advance of the instruments' classification as Common Equity Tier 1 instruments to leave time to competent authorities to review the instruments, if necessary. In view of EBA's role in furthering the convergence of supervisory practices and enhancing the quality of own funds instruments, competent authorities should consult EBA before approving any new form of Common Equity Tier 1 instruments.

Capital instruments are eligible as Additional Tier 1 or Tier 2 instruments only to the extent that they comply with the relevant eligibility criteria. Such capital instruments may consist of equity or liabilities, including subordinated loans that fulfil those criteria.

Capital instruments or parts of capital instruments should only be eligible to qualify as own funds instruments to the extent they are paid up. As long as parts of an instrument are not paid up, those parts should not be eligible to qualify as own funds instruments.

Own funds instruments and eligible liabilities should not be subject to set-off or netting arrangements which would undermine their loss absorption capacity in resolution. This should not mean that the contractual provisions governing the liabilities should contain a clause explicitly stating that the instrument is not subject to set-off or netting rights.

Due to the evolution of the banking sector in an even more digital environment, software is becoming a more important type of asset. Prudently valued software assets, the value of which is not materially affected by the resolution, insolvency or liquidation of an institution, should not be subject to the deduction of intangible assets from Common Equity Tier 1 items. That specification is important, as software is a broad concept that covers many different types of assets, not all of which preserve their value in the situation of a gone concern. In that context, differences in the valuation and amortisation of software assets and the realised sales of such assets should be taken into account. Furthermore, consideration should be given to international developments and differences in the regulatory treatment of investments in software, to different prudential rules that apply to institutions and insurance undertakings, and to the diversity of the financial sector in the Union, including non-regulated entities such as financial technology companies.

In order to avoid cliff-edge effects, it is necessary to grandfather the existing instruments with respect to certain eligibility criteria. For liabilities issued before 27 June 2019, certain eligibility criteria for own funds instruments and eligible liabilities should be waived. Such a grandfathering should apply to liabilities counting towards, where applicable, the subordinated portion of TLAC, and the subordinated portion of the MREL under Directive 2014/59/EU, as well as to liabilities counting towards, where applicable, the non-subordinated portion of TLAC, and the non-subordinated portion of the MREL under Directive 2014/59/EU. For own funds instruments, the grandfathering should end on 28 June 2025.

Eligible liabilities instruments, including those which have a residual maturity of less than one year, can only be redeemed after the resolution authority has granted its prior permission. Such prior permission could also be a general prior permission, in which case the redemption would have to occur within the limited period of time and for a predetermined amount covered by the general prior permission.

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.

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 BCBS 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.

For an institution that provides a minimum value commitment to the ultimate benefit of retail clients for an investment in a unit or share in a CIU including as part of a government-sponsored private pension scheme, no payment by the institution or undertaking included in the same scope of prudential consolidation is required unless the value of the customer's shares or units in the CIU falls below the guaranteed amount at one or more points in time specified in the contract. The likelihood of the commitment being exercised is therefore low in practice. Where an institution's minimum value commitment is limited to a percentage of the amount that a client had originally invested into shares or units in a CIU (fixed-amount minimum value commitment) or to an amount that depends on the performance of financial indicators or market indices up to a given time, any currently positive difference between the value of the customer's shares or units and the present value of the guaranteed amount at a given date constitutes a buffer and reduces the risk for the institution to have to pay out the guaranteed amount. All those reasons justify a reduced conversion factor.

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).

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 BCBS decided to replace the SM and the MtMM with a new standardised approach for computing the exposure value of derivative 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.

The SA-CCR is more risk sensitive than the SM and the MtMM and should therefore lead to own funds requirements that better reflect the risks related to institutions' derivative transactions. At the same time, for some of the institutions which currently use the MtMM the SA-CCR may prove to be too complex and burdensome to implement. For institutions that meet predefined eligibility criteria, and for institutions that are part of a group which meets those criteria on a consolidated basis, a simplified version of the SA-CCR (the ‘simplified 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 derivative transactions.

For institutions which have limited derivative exposures 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 approach for those institutions that meet predefined eligibility criteria, and for institutions that are part of a group which meets those criteria on a consolidated basis, but should be revised in order to address its major shortcomings.

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.

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 BCBS to remove a number of weaknesses in the prudential treatment for trading book positions which are the own funds requirements for market risk.

In 2009, the first set of reforms was finalised at international level and transposed into Union law by means of Directive 2010/76/EU of the European Parliament and of the Council (10). The 2009 reform, however, did not address the structural weaknesses of the own funds 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 funds requirements for market risk did not allow to capture the full range of risks to which institutions were exposed.

The BCBS initiated the fundamental review of the trading book (FRTB) to address the structural weaknesses of the own funds requirements for market risk standards. That work led to the publication in January 2016 of a revised market risk framework. In December 2017, the Group of Central Bank Governors and Heads of Supervision agreed to extend the implementation date of the revised market risk framework in order to allow institutions additional time to develop the necessary systems infrastructure but also for the BCBS to address certain specific issues related to the framework. This includes a review of the calibrations of the standardised and internal model approaches to ensure consistency with the BCBSs original expectations. Upon finalisation of that review, and before an impact assessment is performed to assess the impact of the resulting revisions to the FRTB framework on institutions in the Union, all institutions that would be subject to the FRTB framework in the Union should start reporting the calculations derived from the revised standardised approach. To that end, in order to make the calculations for reporting requirements fully operational in line with international developments, the power to adopt an act in accordance with Article 290 of the Treaty on the Functioning of the European Union (TFEU) should be delegated to the Commission. The Commission should adopt that delegated act by 31 December 2019. Institutions should start reporting that calculation no later than one year after the adoption of that delegated act. In addition, institutions that obtain approval to use the revised internal model approach of the FRTB framework for reporting purposes should also report the calculation under the internal model approach three years after its full operationalisation.

Introducing reporting requirements for the FRTB approaches should be considered as a first step towards the full implementation of the FRTB framework in the Union. Taking into account the final revisions to the FRTB framework performed by the BCBS, the results of the impact of those revisions on institutions in the Union and on the FRTB approaches already set out in this Regulation for reporting requirements, the Commission should submit, where appropriate, a legislative proposal to the European Parliament and to the Council by 30 June 2020 on how the FRTB framework should be implemented in the Union to establish the own funds requirements for market risk.

A proportionate treatment for market risk should also apply to institutions with limited trading book activities, allowing more institutions with small trading book 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. The principle of proportionality should also be taken into account when the Commission reassesses how institutions with medium-sized trading book business should calculate the own funds requirements for market risk. In particular, the calibration of the own funds requirements for market risk for institutions with medium-sized trading book business should be reviewed in light of developments at international level. In the meantime, institutions with medium-sized trading book business, as well institutions with small trading book business, should be exempted from the reporting requirements under the FRTB.

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 in accordance with the SA-CCR. Moreover, the limit on the exposures that G-SIIs may have towards other G-SIIs should be lowered to reduce systemic risks related to interlinks among large institutions and the impact that the default of G-SIIs counterparty may have on financial stability.

While the liquidity coverage ratio (LCR) ensures that institutions will be able to withstand severe stress on a short-term basis, it does not ensure that those institutions 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 Union 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.

Consistent with the BCBSs stable funding standard, 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. That binding requirement should be called the net stable funding ratio (NSFR) requirement. The amount of available stable funding should be calculated by multiplying the institution's liabilities and own funds 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.

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 over a one-year horizon under both normal and stressed conditions. Should its NSFR fall below the 100 % level, the institution should comply with the specific requirements laid down in Regulation (EU) No 575/2013 for a timely restoration of its NSFR to the minimum level. The application of supervisory measures in cases of non-compliance with the NSFR requirement should not be automatic. Competent authorities should instead assess the reasons for non-compliance with the NSFR requirement before defining potential supervisory measures.

In accordance with the recommendations made by EBA in its report of 15 December 2015 on net stable funding requirements under Article 510 of Regulation (EU) No 575/2013 the rules for calculating the NSFR should be closely aligned with the BCBSs standards, including developments in those standards regarding the treatment of derivative transactions. The necessity to take into account some European specificities to ensure that the NSFR requirement does not hinder the financing of the European real economy, however, justifies adopting some adjustments to the NSFR developed by the BCBS for the definition of the European NSFR requirement. Those adjustments due to the European context are recommended by EBA and relate mainly to specific treatments for: pass-through models in general and covered bonds issuance in particular; trade finance activities; centralised regulated savings; residential guaranteed loans; credit unions; CCPs and central securities depositories (CSDs) not undertaking any significant maturity transformation. Those proposed specific treatments broadly reflect the preferential treatment granted to those activities in the European LCR compared to the LCR developed by the BCBS. Because the NSFR complements the LCR, those two ratios should 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 should 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 horizon of the NSFR calculation.

Beyond European specificities, the treatment of derivative transactions in the NSFR developed by the BCBS could have an important impact on institutions' derivative 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 NSFR developed by BCBS without having been subject to extensive quantitative impact studies and public consultation. The additional requirement to hold between 5 % and 20 % of stable funding against gross derivative liabilities is very widely seen as a rough measure to capture additional funding risks related to the potential increase of derivative liabilities over a one-year horizon and is under review at BCBS level. That requirement, introduced at a level of 5 % in line with the discretion left to jurisdictions by the BCBS to reduce the required stable funding factor on gross derivative liabilities, could then be amended to take into account developments at the BCBS level and to avoid possible unintended consequences such as hindering 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 markets union.

The asymmetric treatment by the BCBS of 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 is intended to discourage extensive short-term funding links between financial customers, because such links 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 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, because repo markets facilitate the management of the necessary inventory, thereby contradicting the objectives of the capital markets union. To allow for sufficient time for institutions to progressively adapt to that conservative calibration, a transitional period, during which the required stable funding factors would be temporarily reduced, should be introduced. The size of the temporary reduction in the required stable funding factors should depend on the types of transactions and on the type of collateral used in those transactions.

In addition to the temporary recalibration of the BCBS required stable funding factor that applies to short-term reverse repo transactions with financial customers secured by sovereign bonds, some other adjustments have proven to be necessary to ensure that the introduction of the NSFR requirement does not hinder the liquidity of sovereign bonds markets. The BCBS 5 % required stable funding 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 those assets even in time of severe liquidity stress (0 % haircut). The required stable funding factor of level 1 HQLA as defined in the European LCR, excluding extremely high quality covered bonds, should therefore be reduced from 5 % to 0 %.

Furthermore, all level 1 HQLA as defined in the European LCR, excluding extremely high quality covered bonds, received as variation margin in derivative contracts should offset derivative assets while the NSFR developed by the BCBS only accepts cash respecting the conditions of the leverage framework to offset derivative assets. That broader recognition of assets received as variation margin will contribute to the liquidity of sovereign bonds markets, avoid penalising 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.

The NSFR requirement should apply to institutions both on an individual and a consolidated basis, unless competent authorities waive the application of the NSFR requirement on an individual basis. Where the application of the NSFR requirement on an individual basis 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 cannot 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.

Small and non-complex institutions should be given the opportunity to use a simplified version of the NSFR requirement. A simplified, less granular version of the NSFR should involve collecting a limited number of data points, which would, reduce the complexity of the calculation for those institutions in accordance with the principle of proportionality, while ensuring that those institutions still maintain a sufficient stable funding factor by means of a calibration that should be at least as conservative as the one of the fully-fledged NSFR requirement. However, competent authorities should be able to require small and non-complex institutions to apply the fully-fledged NSFR requirement instead of the simplified version.

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.

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 requirement 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.

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 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.

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, small and non-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.

Some clarifications should be made to the remuneration disclosures. The disclosure requirements relating to remuneration as set out 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 institution's risk profile, 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.

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. Given that the threshold of EUR 1,5 million for an SME exposure is not indicative of a change in riskiness of an SME, reduction in capital requirements should be extended to SME exposures of up to EUR 2,5 million and the part of an SME exposure exceeding EUR 2,5 million should be subject to a 15 % reduction in capital requirements.

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, in particular broadband and energy networks, as well as transport infrastructure including 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 mobilisation of additional private sources 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.

In order to encourage private and public investments in infrastructure projects it is essential to lay down a regulatory environment that is able to promote high quality infrastructure projects and reduce risks for investors. In particular, own funds requirements 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 on high quality infrastructure projects in order to assess: its impact on the volume of infrastructure investments by institutions and the quality of investments having regard to Union's objectives to move towards a low-carbon, climate-resilient and circular economy; and its adequacy from a prudential standpoint. The Commission should also consider whether the scope of those provisions should be extended to infrastructure investments by corporates.

As recommended by EBA, the European Supervisory Authority (European Securities and Markets Authority) (ESMA) established by Regulation (EU) No 1095/2010 of the European Parliament and of the Council (11) and the European Central Bank, CCPs, due to their distinct business model, should be exempted from the leverage ratio requirement, because they 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.

Furthermore, exposures of CSDs authorised as credit institutions and exposures of credit institutions designated in accordance with Article 54(2) of Regulation (EU) No 909/2014 of the European Parliament and of the Council (12), such as cash balances resulting from the provision of cash accounts to, and accepting deposits from, participants in a securities settlement system and holders of securities accounts, should be excluded from the total exposure measure as they do not create a risk of excessive leverage as those cash balances are used solely for the purpose of settling transaction in securities settlement systems.

Given that the guidance on additional own funds referred to in Directive 2013/36/EU is a capital target that reflects supervisory expectations, it should not be subject either to mandatory disclosure or to the prohibition of disclosure by competent authorities under Regulation (EU) No 575/2013 or that Directive.

In order to ensure an appropriate definition of some specific technical provisions of Regulation (EU) No 575/2013 and to take into account possible developments in standards at international level, the power to adopt acts in accordance with Article 290 TFEU should be delegated to the Commission: in respect of amending the list of products or services the assets and liabilities of which can be considered as interdependent; in respect of amending the list of multilateral development banks; in respect of amending market risk reporting requirements; and in respect of specifying additional liquidity requirements. Before the adoption of those acts 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 of 13 April 2016 on Better Law-Making (13). 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.

Technical standards should ensure the consistent harmonisation of the requirements laid down in Regulation (EU) No 575/2013. As a body with highly specialised expertise, EBA should be mandated to develop draft regulatory technical standards which do not involve policy choices, for submission to the Commission. Regulatory technical standards should be developed in the areas of prudential consolidation, own funds, TLAC, the treatment of exposures secured by mortgages on immovable property, equity investment into funds, the calculation of loss given defaults under the Internal Ratings Based Approach for credit risk, market risk, large exposures and liquidity. The Commission should be empowered to adopt those regulatory technical standards by means of delegated acts pursuant to Article 290 TFEU and in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. 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.

To facilitate the comparability of disclosures, EBA should be mandated to develop draft implementing technical standards establishing standardised disclosure templates covering all substantial disclosure requirements set out in Regulation (EU) No 575/2013. When developing those standards, EBA should take into account the size and complexity of institutions, as well as the nature and level of risk of their activities. 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. EBA should be mandated to develop draft implementing technical standards that are to accompany that report. The Commission should be empowered to adopt those implementing technical standards by means of implementing acts pursuant to Article 291 TFEU and in accordance with Article 15 of Regulation (EU) No 1093/2010.

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

In addition to the report on possible cost reductions, by 28 June 2020 EBA should – in cooperation with all relevant authorities, namely those authorities that are responsible for prudential supervision, resolution and deposit guarantee schemes and in particular the European System of Central Banks (ESCB) – prepare a feasibility report regarding the development of a consistent and integrated system for collecting statistical data, resolution data and prudential data. Taking into account the previous work of the ESCB on integrated data collection, that report should provide a cost and benefit analysis regarding the creation of a central data collection point for an integrated data reporting system as regards statistical and regulatory data for all institutions located in the Union. Such a system should, amongst other things, use consistent definitions and standards for the data to be collected, and guarantee a reliable and permanent exchange of information between the competent authorities thereby ensuring strict confidentiality of the data collected, strong authentication and management of access right to the system as well as cybersecurity. By centralising and harmonising the European reporting landscape 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. If appropriate, and taking into account the feasibility report by EBA, the Commission should submit to the European Parliament and to the Council a legislative proposal.

The relevant competent or designated authorities should aim at avoiding any form of duplicative or inconsistent use of the macroprudential powers laid down in Regulation (EU) No 575/2013 and Directive 2013/36/EU. In particular, the relevant competent or designated authorities should duly consider whether the measures that they take under Article 124, 164 or 458 of Regulation (EU) No 575/2013 duplicate or are inconsistent with other existing or upcoming measures under Article 133 of Directive 2013/36/EU.

In view of the amendments to the treatment of exposures to QCCPs, specifically to the treatment of institutions' contributions to QCCPs' default funds, laid down in this Regulation, the relevant provisions in Regulation (EU) No 648/2012 (14) which were introduced therein by Regulation (EU) No 575/2013 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 therefore be amended accordingly.

Since the objectives of this Regulation, namely to reinforce and refine already existing Union legal acts ensuring uniform prudential requirements that apply to institutions 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.

In order to allow for orderly divesting from insurance holdings which are not subject to supplementary supervision, an amended version of the transitional provisions in relation to the exemption from deducting equity holdings in insurance companies should be applied, with retroactive effect from 1 January 2019.

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

Articles 1 and 2 are replaced by the following:

‘Article 1

Scope

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:

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.

Article 2

Supervisory powers

• 1. 

  For the purpose 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 purpose of ensuring compliance with this Regulation, resolution authorities shall have the powers and shall follow the procedures set out in Directive 2014/59/EU of the European Parliament and of the Council (*1) and in this Regulation.

• 3. 

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

• 4. 

  For the purpose of ensuring compliance within their respective competences, the Single Resolution Board established by Article 42 of Regulation (EU) No 806/2014 of the European Parliament and of the Council (*2), and the European Central Bank with regard to matters relating to the tasks conferred on it by Council Regulation (EU) No 1024/2013 (*3), shall ensure the regular and reliable exchange of relevant information.

(*1)  Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council (OJ L 173, 12.6.2014, p. 190)."

(*2)  Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010 (OJ L 225, 30.7.2014, p. 1)."

(*3)  Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (OJ L 287, 29.10.2013, p. 63).’;"

Article 4 is amended as follows:

Article 6 is amended as follows:

Article 8 is amended as follows:

in Article 10(1), the introductory phrase of the first subparagraph is replaced by the following:

‘1.   Competent authorities may, in accordance with national law, partially or fully waive the application of the requirements set out in Parts Two to Eight of this Regulation and Chapter 2 of Regulation (EU) 2017/2402 to one or more credit institutions situated in the same Member State and which are permanently affiliated to a central body which supervises them and which is established in the same Member State, if the following conditions are met:’;

Article 11 is amended as follows:

Article 12 is deleted;

the following article is inserted:

‘Article 12a

Consolidated calculation for G-SIIs with multiple resolution entities

Where at least two G-SII entities belonging to the same G-SII are 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) of this Regulation. That calculation shall be undertaken on the basis of 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 paragraph of this Article is lower than the sum of the amounts of own funds and eligible liabilities referred to in point (a) of Article 92a(1) of this Regulation of all resolution entities belonging to that G-SII, the resolution authorities shall act in accordance with Articles 45d(3) and 45h(2) of Directive 2014/59/EU.

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

Articles 13 and 14 are replaced by the following:

‘Article 13

Application 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 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 G-SIIs or that are part of a G-SII shall comply with Article 437a and point (h) of Article 447 on the basis of the consolidated situation of their resolution group.

• 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 applies, 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.

Article 14

Application of requirements of Article 5 of Regulation (EU) 2017/2402 on a consolidated basis

• 1. 

  Parent undertakings and their subsidiaries that are subject to this Regulation shall be required to meet the obligations laid down in Article 5 of Regulation (EU) 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 that are 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 of this Regulation when applying Article 92 of this Regulation on a consolidated or sub-consolidated basis if the requirements laid down in Article 5 of Regulation (EU) 2017/2402 are breached at the level of an entity established in a third country included in the consolidation in accordance with Article 18 of this Regulation if the breach is material in relation to the overall risk profile of the group.’;

in Article 15(1), the introductory phrase of the first subparagraph is replaced by the following:

‘1.   The consolidating supervisor may waive, on a case-by-case basis, the application of Part Three, the associated reporting requirements in Part Seven A of this Regulation, and Chapter 4 of Title VII of Directive 2013/36/EU, with the exception of point (d) of Article 430(1) of this Regulation on a consolidated basis, provided that the following conditions exist:’;

Article 16 is replaced by the following:

‘Article 16

Derogation from the application of the leverage ratio requirements on a consolidated basis for groups of investment firms

Where all entities in a group of investment firms, including the parent entity, are investment firms that are exempt from the application of the requirements laid down in Part Seven on an individual basis in accordance with Article 6(5), the parent investment firm may choose not to apply the requirements laid down in Part Seven and the associated leverage ratio reporting requirements in Part Seven A on a consolidated basis.’;

Article 18 is replaced by the following:

‘Article 18

Methods of prudential consolidation

• 1. 

  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 6 and paragraph 9 of this Article shall not apply where Part Six and point (d) of Article 430(1) apply 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.

For the purposes of Article 11(3a), institutions that are required to comply with the requirements referred to in Article 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. 

  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 related 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, competent authorities shall determine whether and how consolidation is to be carried out. In particular, they may permit or require the use of the equity method. That method shall not, however, constitute inclusion of the undertakings concerned in supervision on a consolidated basis.

• 6. 

  Competent authorities shall determine whether and how consolidation is to be carried out in the following cases:

In particular, competent authorities may permit or require the use of the method provided for in Article 22(7), (8) and (9) of Directive 2013/34/EU. That method shall not, however, constitute inclusion of the undertakings concerned in consolidated supervision.

• 7. 

  Where an institution has a subsidiary which is an undertaking other than an institution, a financial institution or an ancillary services undertaking or holds a participation in such an undertaking, it shall apply to that subsidiary or participation the equity method. That method shall not, however, constitute inclusion of the undertakings concerned in supervision on a consolidated basis.

By way of derogation from the first subparagraph, competent authorities may allow or require institutions to apply a different method to such subsidiaries or participations, including the method required by the applicable accounting framework, provided that:

• 8. 

  Competent authorities may require full or proportional consolidation of a subsidiary or an undertaking in which an institution holds a participation where that subsidiary or undertaking is not an institution, financial institution or ancillary services undertaking and where all the following conditions are met:

• 9. 

  EBA shall develop draft regulatory technical standards to specify conditions in accordance with which consolidation shall be carried out in the cases referred to in paragraphs 3 to 6 and paragraph 8.

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 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 22 is replaced by the following

‘Article 22

Sub-consolidation in case of entities in third countries

• 1. 

  Subsidiary institutions shall apply the requirements laid down in Articles 89, 90 and 91 and Parts Three, Four and Seven and the associated reporting requirements laid down in Part Seven A 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 of this Article, subsidiary institutions may choose not to apply the requirements laid down in Articles 89, 90 and 91 and Parts Three, Four and Seven and the associated reporting requirements laid down in Part Seven A on the basis of their sub-consolidated situation where the total assets and off-balance-sheet items of their subsidiaries and participations in third countries are less than 10 % of the total amount of the assets and off-balance-sheet items of the subsidiary institution.’;

the title of Part Two is replaced by the following:

‘OWN FUNDS AND ELIGIBLE LIABILITIES’;

in Article 26, paragraph 3 is replaced by the following:

‘3.   Competent authorities shall evaluate whether issuances of capital instruments meet the criteria set out in Article 28 or, where applicable, Article 29. Institutions shall classify issuances of capital instruments as Common Equity Tier 1 instruments only after permission is granted by the competent authorities.

By way of derogation from the first subparagraph, institutions may classify as Common Equity Tier 1 instruments subsequent issuances of a form of Common Equity Tier 1 instruments for which they have already received that permission, provided that both of the following conditions are met:

Competent authorities shall consult EBA before granting permission for new forms of capital instruments to be classified as Common Equity Tier 1 instruments. Competent authorities shall have due regard to EBA's opinion and, where they decide to deviate from it, shall write to EBA within three months from the date of receipt of EBA's opinion setting out the rationale for deviating from the relevant opinion. This subparagraph does not apply to the capital instruments referred to in Article 31.

On the basis of information collected from competent authorities, EBA shall establish, maintain and publish a list of all forms of capital instruments in each Member State that qualify as Common Equity Tier 1 instruments. In accordance with Article 35 of Regulation (EU) No 1093/2010, EBA may collect any information in connection with Common Equity Tier 1 instruments that it considers necessary to establish compliance with the criteria set out in Article 28 or, where applicable, Article 29 of this Regulation and for the purpose of maintaining and updating the list referred to in this subparagraph.

Following the review process set out in Article 80 and where there is sufficient evidence that the relevant capital instruments do not meet or have ceased to meet the criteria set out in Article 28 or, where applicable, Article 29, EBA may decide not to add those instruments to the list referred to in the fourth subparagraph or remove them from that list, as the case may be. EBA shall make an announcement to that effect that shall also refer to the relevant competent authority's position on the matter. This subparagraph does not apply to the capital instruments referred to in Article 31.’;

Article 28 is amended as follows:

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

Article 36 is amended as follows:

in Article 37, the following point is added:

in Article 39(2), in the first subparagraph 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 which were created before 23 November 2016 and which arise from temporary differences, where all the following conditions are met:’;

in Article 45, point (a)(i) is replaced by the following:

Article 49 is amended as follows:

Article 52(1) is amended as follows:

in Article 54(1), the following point is added:

in Article 59, point (a)(i) is replaced by the following:

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

Article 63 is amended as follows:

Article 64 is replaced by the following:

‘Article 64

Amortisation 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 referred to in point (a) by the amount referred to in point (b) as follows:

in Article 66, the following point is added:

in Article 69, point (a)(i) is replaced by the following:

the following chapter is inserted after Article 72:

‘CHAPTER 5a

Eligible liabilities

Section 1

Eligible liabilities items and instruments

Article 72a

Eligible 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 of this Article, and to the extent specified in Article 72c:

• 2. 

  The following liabilities shall be excluded from eligible liabilities items:

For the purposes of point (l) of the first subparagraph, debt instruments containing early redemption options exercisable at the discretion of the issuer or of the holder, and debt instruments with variable interests derived from a broadly used reference rate such as Euribor or Libor, shall not be considered as debt instruments with embedded derivatives solely because of such features.

Article 72b

Eligible liabilities instruments

• 1. 

  Liabilities shall qualify as eligible liabilities instruments, provided that they comply with the conditions set out in this Article and only to the extent specified in this Article.

• 2. 

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

For the purposes of point (a) of the first subparagraph, only the parts of liabilities that are fully paid up shall be eligible to qualify as eligible liabilities instruments.

For the purposes of point (d) of the first subparagraph of this Article, 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 close links 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 those 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 of this Article, 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 Article 92(3) and (4), provided that:

• 4. 

  The resolution authority may permit liabilities to qualify as eligible liabilities instruments in addition to the liabilities referred to in paragraph 2, provided that:

• 5. 

  The resolution authority may only permit an institution to include liabilities referred to either in paragraph 3 or 4 as eligible liabilities items.

• 6. 

  The resolution authority shall consult the competent authority when examining whether the conditions set out in this Article are fulfilled.

• 7. 

  EBA shall develop draft regulatory technical standards to specify:

Those draft regulatory technical standards shall be fully aligned with the delegated act referred to in point (a) of Article 28(5) and in point (a) of Article 52(2).

EBA shall submit those draft regulatory technical standards to the Commission by 28 December 2019.

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 72c

Amortisation 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 of less than 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.

• 3. 

  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 that option and request redemption or repayment of the instrument.

• 4. 

  For the purposes of paragraph 1, where an eligible liabilities instrument includes early redemption options that are exercisable at the sole discretion of the issuer prior to the original stated maturity of the instrument, but where the provisions governing the instrument do not include any incentive for the instrument to be called, redeemed, repaid or repurchased prior to its maturity and do not include any option for redemption or repayment at the discretion of the holders, the maturity of the instrument shall be defined as the original stated maturity.

Article 72d

Consequences of the eligibility conditions ceasing to be met

Where, in the case of an eligible liabilities instrument, the applicable conditions set out 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 (4).

Section 2

Deductions from eligible liabilities items

Article 72e

Deductions from eligible liabilities items

• 1. 

  Institutions that are subject to Article 92a shall deduct the following from eligible liabilities items:

• 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:

• 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, after duly considering the opinion of the resolution authorities of any subsidiaries concerned, may permit the parent institution to deduct such holdings by deducting a lower amount specified by the resolution authority of that parent institution. That adjusted amount shall be at least equal to the amount (m) calculated as follows:

Where the parent institution is allowed to deduct the adjusted amount in accordance with the first subparagraph, the difference between the amount of holdings of own funds instruments and eligible liabilities instruments referred to in the first subparagraph and that adjusted amount shall be deducted by the subsidiary.

Article 72f

Deduction 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:

Article 72g

Deduction 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 and 72i.

Article 72h

Deduction of holdings of eligible liabilities of other G-SII entities

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

Article 72i

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

• 1. 

  For the purposes of point (c) 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:

• 2. 

  Institutions shall exclude underwriting positions held for five business days or fewer from the amounts referred to in point (a) of paragraph 1 and from the calculation of the factor in accordance with 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:

• 4. 

  The amount of holdings referred to in point (c) 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), (a)(ii) and (a)(iii) of paragraph 1 of this Article 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 specified in point (b) of paragraph 3.

Article 72j

Trading 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 the following conditions are met:

• 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 not deducted in accordance with paragraph 1, the conditions set out 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 3

Own funds and eligible liabilities

Article 72k

Eligible 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 72l

Own 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.

(*11)  Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit guarantee schemes (OJ L 173, 12.6.2014, p. 149)."

(*12)  Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems (OJ L 166, 11.6.1998, p. 45).’;"

in Title I of Part Two, the title of Chapter 6 is replaced by the following:

‘ General requirements for own funds and eligible liabilities ’;

Article 73 is amended as follows:

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 the following conditions are met:’;

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 the following conditions are met:

• 2. 

  Where the competent authority has granted 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 more of the following points:

• 3. 

  Competent authorities shall grant the prior 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 more of the points of paragraph 2, as applicable.’;

Article 77 is replaced by the following:

‘Article 77

Conditions for reducing own funds and eligible liabilities

• 1. 

  An institution shall obtain the prior permission of the competent authority to do any of the following:

• 2. 

  An institution shall obtain the prior permission of the resolution authority to 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.’;

Article 78 is replaced by the following:

‘Article 78

Supervisory permission to reduce own funds

• 1. 

  The competent authority shall grant permission for an institution to reduce, call, redeem, repay or repurchase Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments, or to reduce, distribute or reclassify related share premium accounts, where either of the following conditions is met:

Where an institution provides sufficient safeguards as to its capacity to operate with own funds above the amounts required in this Regulation and in Directive 2013/36/EU, the competent authority may grant that institution a general prior permission to take any of the actions set out in Article 77(1) of this Regulation, subject to criteria that ensure that any such future action will be in accordance with the conditions set out in points (a) and (b) of this paragraph. That general prior permission shall be granted only for a specified 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 the 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 Directives 2013/36/EU and 2014/59/EU by a margin that the competent authority considers necessary. In the case of Additional Tier 1 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 or Tier 2 instruments, as applicable.

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 the sustainability of the replacement instruments for the income capacity of the institution referred to in point (a) of paragraph 1, competent authorities shall consider the extent to which those replacement capital instruments would be more costly for the institution than those capital instruments or share premium accounts they would replace.

• 3. 

  Where an institution takes an action referred to in point (a) of Article 77(1) 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 set out 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 or related share premium accounts during the five years following their date of issuance where the conditions set out in paragraph 1 and one of the following conditions is met:

• 5. 

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

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.

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.’;

the following article is inserted:

‘Article 78a

Permission to reduce eligible liabilities instruments

• 1. 

  The resolution authority shall grant permission for an institution to call, redeem, repay or repurchase eligible liabilities instruments where one of the following conditions is met:

Where an institution provides sufficient safeguards as to its capacity to operate with own funds and eligible liabilities above the amount of the requirements laid down in this Regulation and in Directives 2013/36/EU and 2014/59/EU, the resolution authority, after consulting the competent authority, may grant that institution a general prior permission to effect calls, redemptions, repayments or repurchases of eligible liabilities instruments, subject to criteria that ensure that any such future action will be in accordance with the conditions set out in points (a) and (b) of this paragraph. That general prior permission shall be granted only for a specified 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 resolution authority. Resolution authorities shall inform the competent authorities about any general prior permission granted.

The resolution authority shall withdraw the general prior permission where an institution breaches any of the criteria provided for the purposes of that permission.

• 2. 

  When assessing the sustainability of the replacement instruments for the income capacity of the institution referred to in point (a) of paragraph 1, resolution authorities shall consider the extent to which those replacement capital instruments or replacement eligible liabilities would be more costly for the institution than those they would replace.

• 3. 

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

For the purposes of point (d) of the first subparagraph of this paragraph, the draft regulatory technical standards shall be fully aligned with the delegated act referred to in Article 78.

EBA shall submit those draft regulatory technical standards to the Commission by 28 December 2019.

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 79 is amended as follows:

the following article is inserted:

‘Article 79a

Assessment of compliance with the conditions for own funds and eligible liabilities instruments

Institutions shall have regard to the substantial features of instruments and not only their legal form when assessing compliance with the requirements laid down in Part Two. The assessment of the substantial features of an instrument shall take into account all arrangements related to the instruments, even where those are not explicitly set out in the terms and conditions of the instruments themselves, for the purpose of determining that the combined economic effects of such arrangements are compliant with the objective of the relevant provisions.’;

Article 80 is amended as follows:

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:

Article 82 is replaced by the following:

‘Article 82

Qualifying 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:

in Article 83(1), the introductory phrase 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:’;

the following article is inserted:

‘Article 88a

Qualifying eligible liabilities instruments

Liabilities issued by a subsidiary established in the Union that belongs to the same resolution group as the resolution entity shall qualify for inclusion in the consolidated eligible liabilities instruments of an institution subject to Article 92a, provided that all the following conditions are met:

Article 92 is amended as follows:

the following articles are inserted:

‘Article 92a

Requirements for own funds and eligible liabilities for G-SIIs

• 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:

• 2. 

  The requirements laid down in paragraph 1 shall not apply in the following cases:

• 3. 

  Where the aggregate resulting from the application of the requirement laid down in point (a) of paragraph 1 of this Article to each resolution entity of the same G SII exceeds the requirement for own funds and eligible liabilities calculated in accordance with Article 12a of this Regulation, the resolution authority of the EU parent institution may, after having consulted the other relevant resolution authorities, act in accordance with Article 45d(4) or 45h(1) of Directive 2014/59/EU.

Article 92b

Requirement for own funds and eligible liabilities for non-EU G-SIIs

• 1. 

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

• 2. 

  For the purpose of complying with paragraph 1, Additional Tier 1, Tier 2 and eligible liabilities instruments shall only be taken into account where those instruments are owned by the ultimate parent undertaking of the non-EU G-SII and have been issued directly or indirectly through other entities within the same group, provided that all such entities are established in the same third country as that ultimate parent undertaking or in a Member State.

• 3. 

  An eligible liabilities instrument shall only be taken into account for the purpose of complying with paragraph 1 where it fulfils all the following additional conditions:

Article 94 is replaced by the following:

‘Article 94

Derogation for small trading book business

• 1. 

  By way of derogation from point (b) of Article 92(3), institutions may calculate the own funds requirement for their trading-book business in accordance with paragraph 2 of this Article, 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:

• 2. 

  Where both conditions set out in points (a) and (b) of paragraph 1 are met, institutions may calculate the own funds requirement for their trading-book business as follows:

• 3. 

  Institutions shall calculate the size of their on- and off-balance-sheet trading book business on the basis of data as of the last day of each month for the purposes of paragraph 1 in accordance with the following requirements:

• 4. 

  Where both conditions set out in points (a) and (b) of paragraph 1 of this Article are met, irrespective of the obligations set out in Articles 74 and 83 of Directive 2013/36/EU, Article 102(3) and (4), Articles 103 and 104b of this Regulation shall not apply.

• 5. 

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

• 6. 

  An institution that no longer meets one or more of the conditions set out in paragraph 1 shall immediately notify the competent authority thereof.

• 7. 

  An institution shall cease to calculate the own funds requirements of its trading-book business in accordance with paragraph 2 within three months of one of the following occurring:

• 8. 

  Where an institution has ceased to calculate the own funds 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.

• 9. 

  Institutions shall not enter into, buy or sell a trading-book position for the sole purpose of complying with any of the conditions set out in paragraph 1 during the monthly assessment.’;

in Title I of Part Three, Chapter 2 is deleted;

Article 102 is amended as follows:

Article 103 is replaced by the following:

‘Article 103

Management of the trading book

• 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:

• 2. 

  In managing its positions or portfolios of positions in the trading book, the institution shall comply with all the following requirements:

in Article 104, paragraph 2 is deleted;

the following articles are inserted:

‘Article 104a

Reclassification of a position

• 1. 

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

EBA shall monitor the range of supervisory practices and shall issue guidelines in accordance with Article 16 of Regulation (EU) No 1093/2010 by 28 June 2024 on the meaning of exceptional circumstances for the purposes of the first subparagraph of this paragraph. Until EBA issues those guidelines, competent authorities shall notify EBA of, and shall provide a rationale for, their decisions on whether or not to permit an institution to reclassify a position as referred to in paragraph 2 of this Article.

• 2. 

  Competent authorities shall grant permission to reclassify a trading book position as a non-trading book position or conversely a non-trading book position as a trading book position for the purpose of determining their own funds requirements only where the institution has provided the competent authorities with written evidence that its decision to reclassify that position is the result of an exceptional circumstance that is consistent with the policies the institution has in place in accordance with paragraph 1 of this Article. 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 position pursuant to Article 104.

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

• 3. 

  Where the competent authority has granted permission for the reclassification of a position in accordance with paragraph 2, the institution which received that permission shall:

• 4. 

  The institution shall calculate the net change in the amount of its own funds requirements arising from the reclassification of the position as the difference between the own funds requirements immediately after the reclassification and the own funds requirements immediately before the reclassification, each calculated in accordance with Article 92. The calculation shall not take into account the effects of any factors other than the reclassification.

• 5. 

  The reclassification of a position in accordance with this Article shall be irrevocable.

Article 104b

Requirements for trading desk

• 1. 

  For the purposes of the reporting requirements set out in Article 430b(3), institutions shall establish trading desks and shall assign each of their trading book positions to one of those 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 of this Article.

• 2. 

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

• 3. 

  By way of derogation from point (b) of paragraph 2, an institution may assign a dealer to more than one trading desk, provided that the institution demonstrates to the satisfaction of its competent authority that the assignment has been made due to business or resource considerations and the assignment preserves the other qualitative requirements set out in this Article applicable to dealers and trading desks.

• 4. 

  Institutions shall notify the competent authorities of 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.’;

Article 105 is amended as follows:

Article 106 is amended as follows:

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.’;

in Article 117, paragraph 2 is amended as follows:

in Article 118, point (a) is replaced by the following:

in Article 123, the following paragraph is added:

‘Exposures due to loans granted by a credit institution to pensioners or employees with a permanent contract against the unconditional transfer of part of the borrower's pension or salary to that credit institution shall be assigned a risk weight of 35 %, provided that all the following conditions are met:

Article 124 is replaced by the following:

‘Article 124

Exposures secured by mortgages on immovable property

• 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 set out in Article 125 or 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 immovable property shall be assigned the risk weight applicable to the unsecured exposures of the counterparty involved.

The part of an exposure that is treated as fully secured by immovable property shall not be greater 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 immovable property in question.

1a.   Member States shall designate an authority to be responsible for the application of paragraph 2. That authority shall be the competent authority or the designated authority.

Where the authority designated by the Member State for the application of this Article is the competent authority, it shall ensure that the relevant national bodies and authorities which have a macroprudential mandate are duly informed of the competent authority's intention to make use of this Article, and are appropriately involved in the assessment of financial stability concerns in its Member State in accordance with paragraph 2.

Where the authority designated by the Member State for the application of this Article is different from the competent authority, the Member State shall adopt the necessary provisions to ensure proper coordination and exchange of information between the competent authority and the designated authority for the proper application of this Article. In particular, authorities shall be required to cooperate closely and to share all the information that may be necessary for the adequate performance of the duties imposed upon the designated authority pursuant to this Article. That cooperation shall aim at avoiding any form of duplicative or inconsistent action between the competent authority and the designated authority, as well as ensuring that the interaction with other measures, in particular measures taken under Article 458 of this Regulation and Article 133 of Directive 2013/36/EU, is duly taken into account.

• 2. 

  Based on the data collected under Article 430a and on any other relevant indicators, the authority designated in accordance with paragraph 1a of this Article shall periodically, and at least annually, assess whether the risk weight of 35 % for exposures to one or more property segments secured by mortgages on residential property referred to in Article 125 located in one or more parts of the territory of the Member State of the relevant authority and the risk weight of 50 % for exposures secured by mortgages on commercial immovable property referred to in Article 126 located in one or more parts of the territory of the Member State of the relevant authority are appropriately based on:

Where, on the basis of the assessment referred to in the first subparagraph of this paragraph, the authority designated in accordance with paragraph 1a of this Article concludes that the risk weights set out in Article 125(2) or 126(2) do not adequately reflect the actual risks related to exposures to one or more property segments fully secured by mortgages on residential property or on commercial immovable property located in one or more parts of the territory of the Member State of the relevant authority, and if it considers that the inadequacy of the risk weights could adversely affect current or future financial stability in its Member State, it may increase the risk weights applicable to those exposures within the ranges determined in the fourth subparagraph of this paragraph or impose stricter criteria than those set out in Article 125(2) or 126(2).

The authority designated in accordance with paragraph 1a of this Article shall notify EBA and the ESRB of any adjustments to risk weights and criteria applied pursuant to this paragraph. Within one month of receipt of that notification, EBA and the ESRB shall provide their opinion to the Member State concerned. EBA and the ESRB shall publish the risk weights and criteria for exposures referred to in Articles 125, 126 and point (a) of Article 199(1) as implemented by the relevant authority.

For the purposes of the second subparagraph of this paragraph, the authority designated in accordance with paragraph 1a may set the risk weights within the following ranges:

• 3. 

  Where the authority designated in accordance with paragraph 1a sets higher risk weights or stricter criteria pursuant to the second subparagraph of paragraph 2, institutions shall have a six-month transitional period to apply them.

• 4. 

  EBA, in close 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 types of factors to be considered for the assessment of the appropriateness of the risk weights referred in the first subparagraph of paragraph 2.

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2019.

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.

• 5. 

  The ESRB may, by means of recommendations in accordance with Article 16 of Regulation (EU) No 1092/2010, and in close cooperation with EBA, give guidance to authorities designated in accordance with paragraph 1a of this Article on the following:

• 6. 

  The institutions of a Member State shall apply the risk weights and criteria that have been determined by the authorities of another Member State in accordance with paragraph 2 to all their corresponding exposures secured by mortgages on residential property or commercial immovable property located in one or more parts of that Member State.’;

in 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 any of the following exposures as exposures associated with particularly high risks:

Article 132 is replaced by the following:

‘Article 132

Own 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 of this Article 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 a CIU's exposures in accordance with the approaches set out in Article 132a where all the following conditions are met:

By way of derogation from point (a) of the first subparagraph of this paragraph, multilateral and bilateral development banks and other institutions that co-invest in a CIU with multilateral or bilateral development banks may determine the risk-weighted exposure amount of that CIU's exposures in accordance with the approaches set out in Article 132a, provided that the conditions set out in points (b) and (c) of the first subparagraph of this paragraph are met and that the CIU's investment mandate limits the types of assets that the CIU can invest in to assets that promote sustainable development in developing countries.

Institutions shall notify their competent authority of the CIUs to which they apply the treatment referred to in the second subparagraph.

By way of derogation from point (c)(i) of the first subparagraph, where the institution determines the risk-weighted exposure amount of a CIU's exposures in accordance with the mandate-based approach, the reporting by the CIU or the CIU management company to the institution may be limited to the investment mandate of the CIU and any changes thereof and may be done only when the institution incurs the exposure to the CIU for the first time and when there is a change in the investment mandate of the CIU.

• 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 the following conditions are met:

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.

By way of derogation from the second subparagraph, where the institution has unrestricted access to the detailed calculations carried out by the third party, the factor of 1,2 shall not apply. The institution shall provide those calculations to its competent authority upon request.

• 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 of this Article. 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 set out in Article 132a(1) and (2) 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 of this Article, institutions that apply 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 () calculated in accordance with the formula set out in Article 132c, provided that the following conditions are met:

the following articles are inserted:

‘Article 132a

Approaches for calculating risk-weighted exposure amounts of CIUs

• 1. 

  Where the conditions set out in 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 set out in 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 law.

Institutions shall carry out the calculations referred to in the first subparagraph under the assumption that the CIU first incurs exposures to the maximum extent allowed under its mandate or relevant law 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, and that the CIU applies leverage to the maximum extent allowed under its mandate or relevant law, where applicable.

Institutions shall carry out the calculations referred to in the first subparagraph in accordance with the methods set out in this Chapter, in Chapter 5, and in Section 3, 4 or 5 of Chapter 6 of this Title.

• 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 paragraph 1 or 2 of this Article may calculate the own funds requirement for the credit valuation adjustment risk of derivative exposures of that CIU as an amount equal to 50 % of the own funds requirement for those derivative 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 derivative 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 one or more of the inputs required for that calculation are not available.

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 132b

Exclusions from the approaches for calculating risk-weighted exposure amounts of CIUs

• 1. 

  Institutions may exclude from the calculations referred to in Article 132 Common Equity Tier 1, Additional Tier 1, Tier 2 instruments and eligible liabilities instruments held by a CIU which institutions shall deduct in accordance with Article 36(1) and Articles 56, 66 and 72e respectively.

• 2. 

  Institutions may exclude from the calculations referred to in Article 132 exposures in the form of units or shares in CIUs referred to in points (g) and (h) of Article 150(1) and instead apply the treatment set out in Article 133 to those exposures.

Article 132c

Treatment of off-balance-sheet exposures to CIUs

• 1. 

  Institutions shall calculate the risk-weighted exposure amount for their off-balance-sheet items with the potential to be converted into 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 following risk weight:

• 2. 

  Institutions shall calculate the exposure value of a minimum value commitment that meets the conditions set out in paragraph 3 of this Article as the discounted present value of the guaranteed amount using a default risk-free discount factor. Institutions may reduce the exposure value of the minimum value commitment by any losses recognised with respect to the minimum value commitment under the applicable accounting standard.

Institutions shall calculate the risk-weighted exposure amount for off-balance-sheet exposures arising from minimum value commitments that meet all the conditions set out in paragraph 3 of this Article by multiplying the exposure value of those exposures by a conversion factor of 20 % and the risk weight derived under Article 132 or 152.

• 3. 

  Institutions shall determine the risk-weighted exposure amount for off-balance-sheet exposures arising from minimum value commitments in accordance with paragraph 2 where all the following conditions are met:

in Article 144(1), point (g) is replaced by the following:

Article 152 is replaced by the following:

‘Article 152

Treatment 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 paragraphs 2 and 5, with the percentage of units or shares held by those institutions.

• 2. 

  Where the conditions set out 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 paragraph 1 or 2 of this Article may calculate the own funds requirement for credit valuation adjustment risk of derivative exposures of that CIU as an amount equal to 50 % of the own funds requirement for those derivative 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 derivative 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 of this Article and that meet 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 or one or more of the methods set out in Chapter 5 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:

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 set out in 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 points (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 paragraphs 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 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 Article, provided that the conditions for using those approaches are met.

• 8. 

  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 the following conditions are met:

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.

By way of derogation from the second subparagraph, where the institution has unrestricted access to the detailed calculations carried out by the third party, the 1,2 factor shall not apply. The institution shall provide those calculations to its competent authority upon request.

• 9. 

  For the purposes of this Article, Article 132(5) and (6) and Article 132b shall apply. For the purposes of this Article, Article 132c shall apply, using the risk weights calculated in accordance with Chapter 3 of this Title.’;

in Article 158, the following paragraph is inserted:

‘9a.   The expected loss amount for a minimum value commitment that meets all the requirements set out in Article 132c(3) shall be zero.’;

Article 164 is replaced by the following:

‘Article 164

Loss Given Default (LGD)

• 1. 

  Institutions shall provide own estimates of LGDs subject to the requirements specified in Section 6 of this Chapter and permission of the competent authorities granted in accordance with Article 143. For dilution risk of purchased receivables, an LGD value of 75 % shall be used. If an institution can decompose its EL estimates for dilution risk of purchased receivables into PDs and LGDs in a reliable manner, the institution may use its own LGD estimate.

• 2. 

  Unfunded credit protection may be recognised as eligible by adjusting PD or LGD estimates subject to requirements as specified in Article 183(1), (2) and (3) and the permission of the competent authorities either in support of an individual exposure or a pool of exposures. An institution shall not assign guaranteed exposures an adjusted PD or LGD such that the adjusted risk weight would be lower than that of a comparable, direct exposure to the guarantor.

• 3. 

  For the purposes of Article 154(2), the LGD of a comparable direct exposure to the protection provider referred to in Article 153(3) shall either be the LGD associated with an unhedged facility to the guarantor or the unhedged facility of the obligor, depending upon whether, in the event both the guarantor and obligor default during the life of the hedged transaction, available evidence and the structure of the guarantee indicate that the amount recovered would depend on the financial condition of the guarantor or obligor, respectively.

• 4. 

  The exposure-weighted average LGD for all retail exposures secured by residential property and not benefiting from guarantees from central governments shall not be lower than 10 %.

The exposure-weighted average LGD for all retail exposures secured by commercial immovable property and not benefiting from guarantees from central governments shall not be lower than 15 %.

• 5. 

  Member States shall designate an authority to be responsible for the application of paragraph 6. That authority shall be the competent authority or the designated authority.

Where the authority designated by the Member State for the application of this Article is the competent authority, it shall ensure that the relevant national bodies and authorities which have a macroprudential mandate are duly informed of the competent authority's intention to make use of this Article, and are appropriately involved in the assessment of financial stability concerns in its Member State in accordance with paragraph 6.

Where the authority designated by the Member State for the application of this Article is different from the competent authority, the Member State shall adopt the necessary provisions to ensure proper coordination and exchange of information between the competent authority and the designated authority for the proper application of this Article. In particular, authorities shall be required to cooperate closely and to share all the information that may be necessary for the adequate performance of the duties imposed upon the designated authority pursuant to this Article. That cooperation shall aim at avoiding any form of duplicative or inconsistent action between the competent authority and the designated authority, as well as ensuring that the interaction with other measures, in particular measures taken under Article 458 of this Regulation and Article 133 of Directive 2013/36/EU, is duly taken into account.

• 6. 

  Based on the data collected under Article 430a and on any other relevant indicators, and taking into account forward-looking immovable property market developments the authority designated in accordance with paragraph 5 of this Article shall periodically, and at least annually, assess whether the minimum LGD values referred to in paragraph 4 of this Article, are appropriate for exposures secured by mortgages on residential property or commercial immovable property located in one or more parts of the territory of the Member State of the relevant authority.

Where, on the basis of the assessment referred to in the first subparagraph of this paragraph, the authority designated in accordance with paragraph 5 concludes that the minimum LGD values referred to in paragraph 4 are not adequate, and if it considers that the inadequacy of LGD values could adversely affect current or future financial stability in its Member State, it may set higher minimum LGD values for those exposures located in one or more parts of the territory of the Member State of the relevant authority. Those higher minimum values may also be applied at the level of one or more property segments of such exposures.

The authority designated in accordance with paragraph 5 shall notify EBA and the ESRB before making the decision referred to in this paragraph. Within one month of receipt of that notification EBA and the ESRB shall provide their opinion to the Member State concerned. EBA and the ESRB shall publish those LGD values.

• 7. 

  Where the authority designated in accordance with paragraph 5 sets higher minimum LGD values pursuant to paragraph 6, institutions shall have a six-month transitional period to apply them.

• 8. 

  EBA, in close cooperation with the ESRB, shall develop draft regulatory technical standards to specify the conditions that the authority designated in accordance with paragraph 5 shall take into account when assessing the appropriateness of LGD values as part of the assessment referred to in paragraph 6.

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2019.

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.

• 9. 

  The ESRB may, by means of recommendations in accordance with Article 16 of Regulation (EU) No 1092/2010, and in close cooperation with EBA, give guidance to authorities designated in accordance with paragraph 5 of this Article on the following:

• 10. 

  The institutions of a Member State shall apply the higher minimum LGD values that have been determined by the authorities of another Member State in accordance with paragraph 6 to all their corresponding exposures secured by mortgages on residential property or commercial immovable property located in one or more parts of that Member State.’;

in Article 201(1), point (h) is replaced by the following:

the following article is inserted:

‘Article 204a

Eligible 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 shall 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.’;

Article 223 is amended as follows:

Article 272 is amended as follows:

Article 273 is amended as follows:

the following articles are inserted:

‘Article 273a

Conditions for using simplified methods for calculating the exposure value

• 1. 

  An institution may calculate the exposure value of its 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 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:

• 2. 

  An institution may calculate the exposure value of its 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 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:

• 3. 

  For the purposes of paragraphs 1 and 2, institutions shall calculate the size of their on- and off-balance-sheet derivative business on the basis of data as of the last day of each month in accordance with the following requirements:

• 4. 

  By way of derogation from paragraph 1 or 2, as applicable, where the derivative business on a consolidated basis does not exceed the thresholds set out in paragraph 1 or 2, as applicable, an institution which is included in the consolidation and which would have to apply the method set out in Section 3 or 4 because it exceeds those thresholds on an individual basis, may, subject to the approval of competent authorities, instead choose to apply the method that would apply on a consolidated basis.

• 5. 

  Institutions shall notify the competent authorities of the methods set out in Section 4 or 5 that they use, or cease to use, as applicable, to calculate the exposure value of their derivative positions.

• 6. 

  Institutions shall not enter into a derivative transaction or buy or sell a derivative instrument for the sole purpose of complying with any of the conditions set out in paragraphs 1 and 2 during the monthly assessment.

Article 273b

Non-compliance with the conditions for using simplified methods for calculating the exposure value of derivatives

• 1. 

  An institution that no longer meets one or more of the conditions set out in Article 273a(1) or (2) shall immediately notify the competent authority thereof.

• 2. 

  An institution shall cease to calculate the exposure values of its derivative positions in accordance with Section 4 or 5, as applicable, within three months of one of the following occurring:

• 3. 

  Where an institution has ceased to calculate the exposure values of its derivative positions in accordance with Section 4 or 5, as applicable, it shall only be permitted to resume calculating the exposure value of its derivative positions as set out in Section 4 or 5 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 period of one year.’;

in Chapter 6 of Title II of Part Three, Sections 3, 4 and 5 are replaced by the following:

‘Section 3

Standardised 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:

Where any of the conditions set out in the first subparagraph 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 as follows:

• 3. 

  The exposure value of a netting set that is 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 the following conditions:

• 6. 

  In a netting set, institutions shall replace a transaction which is a finite 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. Each such combination of options shall be treated as an individual transaction in the netting set in which the combination is included for the purpose of calculating the exposure value.

• 7. 

  The exposure value of a credit derivative transaction representing a long position in the underlying may be capped to the amount of outstanding unpaid premium provided it is treated as its own netting set that is not subject to a margin agreement.

Article 275

Replacement cost

• 1. 

  Institutions shall calculate the replacement cost RC for netting sets that are not subject to a margin agreement, in accordance with the following formula:

• 2. 

  Institutions shall calculate the replacement cost for single netting sets that are subject to a margin agreement in accordance with the following formula:

• 3. 

  Institutions shall calculate the replacement cost for multiple netting sets that are subject to the same margin agreement in accordance with the following formula:

where:

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 the following requirements:

• 2. 

  For the calculation of the volatility-adjusted value of collateral posted referred to in point (d) of paragraph 1 of this Article, institutions shall replace the formula set out in Article 223(2) with the following formula:

• 3. 

  For the purposes of point (d) of 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 horizons:

Article 277

Mapping of transactions to risk categories

• 1. 

  Institutions shall map each transaction of a netting set to one of the following risk categories to determine the potential future exposure of the netting set referred to in Article 278:

• 2. 

  Institutions shall conduct the mapping referred to in paragraph 1 on the basis of the primary risk driver of a derivative transaction. The primary risk driver shall be the only material risk driver of a derivative transaction.

• 3. 

  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 that transaction once to that risk category on the basis of 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 once to each risk category for which the transaction has at least one material risk driver, on the basis of the most material of the risk drivers in that risk category.

• 4. 

  Notwithstanding paragraphs 1, 2 and 3, when mapping transactions to the risk categories listed in paragraph 1, institutions shall apply the following requirements:

• 5. 

  EBA shall develop draft regulatory technical standards to specify:

EBA shall submit those draft regulatory technical standards to the Commission by 28 December 2019.

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 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:

For the purposes of point (a) of the first subparagraph of this paragraph, 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 do not 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, or the most material risk driver in the given risk category for transactions referred to in Article 277(3), is denominated in the same currency.

• 2. 

  By way of derogation from paragraph 1 of this Article, institutions shall establish separate individual hedging sets in each risk category for the following transactions:

For the purposes of point (a) of the first subparagraph of this paragraph, institutions shall assign transactions to the same hedging set of the relevant risk category only where their primary risk driver, or the most material risk driver in the given risk category for transactions referred to in Article 277(3), 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 therein is identical and the two risk drivers contained in this pair are positively correlated. Otherwise, institutions shall assign transactions referred to in point (b) of the first subparagraph 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) of the first subparagraph.

• 3. 

  Institutions shall make available upon request by the competent authorities the number of hedging sets established in accordance with paragraph 2 of this Article for each risk category, with the primary risk driver, or the most material risk driver in the given risk category for transactions referred to in Article 277(3), 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 of a netting set as follows:

where:

For the purpose 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 that are subject to one margin agreement, as referred in Article 275(3), shall be calculated as the sum of the potential future exposures of all the individual netting sets as if they were not subject to any form of a margin agreement.

• 3. 

  For the purposes of paragraph 1, the multiplier shall be calculated as follows:

where:

Article 279

Calculation of the risk position

For the purpose 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:

Article 279a

Supervisory delta

• 1. 

  Institutions shall calculate the supervisory delta as follows:

• 2. 

  For the purposes of this Section, a long position in the primary risk driver or in the most material risk driver in the given risk category for transactions referred to in Article 277(3) means that the market value of the transaction increases when the value of that risk driver increases and a short position in the primary risk driver or in the most material risk driver in the given risk category for transactions referred to in Article 277(3) means that the market value of the transaction decreases when the value of that risk driver increases.

• 3. 

  EBA shall develop draft regulatory technical standards to specify:

EBA shall submit those draft regulatory technical standards to the Commission by 28 December 2019.

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 279b

Adjusted notional amount

• 1. 

  Institutions shall calculate the adjusted notional amount as follows:

• 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:

• 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 279c

Maturity Factor

• 1. 

  Institutions shall calculate the maturity factor as follows:

• 2. 

  For the purposes 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 purpose of calculating the add-on of a hedging set as referred to in Articles 280a to 280f, the hedging set supervisory factor coefficient ‘є’ shall be the following:

Article 280a

Interest rate risk category add-on

• 1. 

  For the purposes of Article 278, institutions shall calculate the interest rate risk category add-on for a given netting set as follows:

where:

• 2. 

  Institutions shall calculate the interest rate risk category add-on for hedging set j as follows:

where:

• 3. 

  For the purpose of calculating the effective notional amount of hedging set j, institutions shall first map 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

Institutions shall then calculate the effective notional amount of hedging set j in accordance with the following formula:

where:

where:

Article 280b

Foreign exchange risk category add-on

• 1. 

  For the purposes of Article 278, institutions shall calculate the foreign exchange risk category add-on for a given netting set as follows:

where:

• 2. 

  Institutions shall calculate the foreign exchange risk category add-on for hedging set j as follows:

where:

where:

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:

• 2. 

  For the purposes of Article 278, institution shall calculate the credit risk category add-on for a given netting set as follows:

where:

• 3. 

  Institutions shall calculate the credit risk category add-on for hedging set j as follows:

where:

• 4. 

  Institutions shall calculate the add-on for the credit reference entity k as follows:

where:

• 5. 

  Institutions shall calculate the supervisory factor applicable to the credit reference entity k as follows:

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: