On 1 February 2024, the European Banking Authority (EBA) issued a consultation paper containing draft regulatory technical standards (RTS) on the exemption from the residual risk add-on own funds requirements for certain type of hedges under Article 325u(4a) of the Capital Requirements Regulation (CRR).
The residual risk add on (RRAO) is a key pillar of the standardised approach (SA) under the new fundamental review of the trading book (FRTB). The residual add on is calculated for all those instruments the risk of which is not sufficiently covered by the sensitivity-based method and the default risk charge. As part of the CRR3 package, the co-legislators introduced a provision in the RRAO framework allowing the exemptions from the RRAO charge for those instruments bearing residual risks taken as a hedge for hedging instruments bearing residual risks too. What is subject to the exemption is just the hedge, i.e. the hedged position must always be capitalised with an RRAO charge. Along with such provision, the co-legislators mandated the EBA to develop RTS specifying when an instrument qualifies as a hedge for the purpose of the exemption and when not.
The mandate has been accordingly included in the EBA roadmap on Basel 3 implementation, and this consultation paper is a first step towards delivering that mandate. Given the importance of the exemption in terms of capital requirements, the RTS proposed for consultation also include a revision of the fulfilment of the conditions set out in the RTS from an independent reviewer. The consultation paper poses several questions aimed at understanding cases where institutions intend to use the exemption provided in the CRR and assessing whether the provisions proposed in the RTS address those cases in a suitable manner.
The EBA will assess the feedback received during the consultation, before submitting the final draft to the European Commission.