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EBA Publishes Final Guidelines On The Treatment Of Structural FX Positions

Date 01/07/2020

The European Banking Authority (EBA) published today its final Guidelines on the treatment of structural FX positions. The aim of these Guidelines is to establish a harmonised framework for the application of the structural FX waiver, which will allow its consistent application going forward. The Guidelines will be applicable from 1 January 2022, one year later than originally envisaged to ensure that institutions have time to prepare for the introduction of the requirements.

The structural FX provision, as laid down in Article 352(2) of the Capital Requirements Regulation (CRR), allows Competent Authorities to authorise, on an ad hoc basis, the exclusion of FX-risk positions deliberately taken by firms to hedge against the adverse effect of exchange rates on capital ratios from the calculation of the net open currency positions where those positions are of a structural nature. Considering that the application of the waiver can have a significant impact on capital requirements, these Guidelines identify objective criteria to assist Competent Authorities in their assessment of the structural nature of a foreign-exchange position and to understand whether such position has been deliberately taken for hedging the capital ratio.

The Guidelines have been developed considering also changes to the market risk framework introduced in the CRR2 and the new structural FX treatment envisaged in the Fundamental Review of the Trading Book (FRTB) standards.  As a result, these Guidelines have been designed in a way that institutions will not be required to ask for a new permission once they will switch to the FRTB framework for computing the own funds requirements for market risk.

Legal Basis and background

The EBA has developed the Guidelines on its own initiative, in accordance with Article 16 of its founding Regulation, which mandates the Authority to issue guidelines and recommendations addressed to competent authorities or financial institutions with a view to establishing consistent, efficient and effective supervisory practices within the ESFS, and to ensuring the common, uniform and consistent application of Union law.

These Guidelines set out the criteria under which a position in the foreign currency should be considered as structural and taken for the purpose of hedging the capital ratio in accordance with Article 352(2) of Regulation (EU) No 575/2013 (CRR).

In June 2017, the EBA published a Discussion Paper on Structural FX to gather feedback on current stakeholders' practices and interpretations of the Structural FX provision. In January 2019, the final Basel FRTB standards were published setting out a new provision with respect to the Structural FX treatment. In October 2019, the EBA published a Consultation Paper on which these Guidelines are based.