in force 2025-01-01 MODIFIED+2,241 −1,665§
Amended by Regulation (EU) 2024/1623 32024R1623 · Regulation (EU) 2024/2987 32024R2987 · Regulation (EU) 2024/2795 32024R2795
applies from: unchanged
The provision now describes eligible hedges as positions in hedging instruments meeting a set of listed requirements, including that they may be entered into with third parties or as internal hedges complying with Article 106(7), replacing the prior simpler list of single-name and index credit default swaps and the basis-reflection and 50% notional rules.
The text now splits eligible hedge categories between paragraph 2, covering instruments hedging counterparty credit spread or exposure-component variability for Article 383 purposes, and paragraph 3, covering single-name and index credit default swaps (including contingent ones referencing related or sector/region entities) for Article 384 purposes, whereas the earlier version grouped single-name and index instruments together under one paragraph with the basis and over-hedging rules.
The former paragraphs on excluding tranched or nth-to-default swaps and credit linked notes, and on not double-counting eligible hedges in specific risk or credit risk mitigation, are replaced by new paragraphs 4 and 5 stating that recognised eligible hedge positions are excluded from Title IV market risk own funds requirements while non-recognised hedge positions remain subject to those requirements.
Cited: Art. 386, v2 · Art. 386, v1
text before / after
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before (02013R0575-20240709)
Article 386 Eligible hedges 1. Hedges shall be eligible hedges for the purposes of the calculation of own funds requirements for CVA risk in accordance with Articles 383 and 384 only where they are used for the purpose of mitigating CVA risk and managed as such, and are one of the following: (a) single-name credit default swaps or other equivalent hedging instruments referencing the counterparty directly; (b) index credit default swaps, provided that the basis between any individual counterparty spread and the spreads of index credit default swap hedges is reflected, to the satisfaction of the competent authority, in the value-at-risk and the stressed value-at-risk. The requirement in point (b) that the basis between any individual counterparty spread and the spreads of index credit default swap hedges is reflected in the value-at-risk and the stressed value-at-risk shall also apply to cases where a proxy is used for the spread of a counterparty. For all counterparties for which a proxy is used, an institution shall use reasonable basis time series out of a representative group of similar names for which a spread is available. If the basis between any individual counterparty spread and the spreads of index credit default swap hedges is not reflected to the satisfaction of the competent authority, then an institution shall reflect only 50 % of the notional amount of index hedges in the value-at-risk and the stressed value-at-risk. Over-hedging of the exposures with single name credit default swaps under the method laid out in Article 383 is not allowed. 2. An institution shall not reflect other types of counterparty risk hedges in the calculation of the own funds requirements for CVA risk. In particular, tranched or nth-to-default credit default swaps and credit linked notes are not eligible hedges for the purposes the calculation of the own funds requirements for CVA risk. 3. Eligible hedges that are included in the calculation of the own funds requirements for CVA risk shall not be included in the calculation of the own funds requirements for specific risk as set out in Title IV or treated as credit risk mitigation other than for the counterparty credit risk of the same portfolio of transaction.
after (02013R0575-20250101)
Article 386 Eligible hedges 1. Positions in hedging instruments shall be recognised as eligible hedges for the calculation of the own funds requirements for CVA risk in accordance with Articles 383 and 384 where those positions meet all of the following requirements: (a) they are used for the purpose of mitigating CVA risk and are managed as such; (b) they can be entered into with third parties or with the institution’s trading book as an internal hedge, in which case they are to comply with Article 106(7); (c) only positions in hedging instruments as referred to in paragraphs 2 and 3 of this Article can be recognised as eligible hedges for the calculation of the own funds requirements for CVA risk in accordance with Articles 383 and 384, respectively. For the purpose of calculating the own funds requirements for CVA risk in accordance with Article 383, positions in hedging instruments shall be recognised as eligible hedges where, in addition to the conditions set out in points (a) to (c) of this paragraph, such hedging instruments form a single position in an eligible hedge and are not split into more than one position in more than one eligible hedge. 2. For the calculation of the own funds requirements for CVA risk in accordance with Article 383, only positions in the following hedging instruments shall be recognised as eligible hedges: (a) instruments that hedge variability of the counterparty credit spread, with the exception of instruments referred to in Article 325(5); (b) instruments that hedge variability of the exposure component of CVA risk, with the exception of the instruments referred to in Article 325(5). 3. For the calculation of the own funds requirements for CVA risk in accordance with Article 384, only positions in the following hedging instruments shall be recognised as eligible hedges: (a) single-name credit default swaps and single-name contingent-credit default swaps, referencing: (i) the counterparty directly; (ii) an entity legally related to the counterparty, where legally related refers to cases where the reference name and the counterparty are either a parent undertaking and its subsidiary or two subsidiaries of a common parent; (iii) an entity that belongs to the same sector and region as the counterparty; (b) index credit default swaps. 4. Positions in hedging instruments entered into with third parties that are recognised as eligible hedges in accordance with paragraphs 1, 2 and 3 and included in the calculation of the own funds requirements for CVA risk shall not be subject to the own funds requirements for market risk set out in Title IV. 5. Positions in hedging instruments that are not recognised as eligible hedges in accordance with this Article shall be subject to the own funds requirements for market risk set out in Title IV.