Article 106
1.
An internal hedge shall in particular meet the following requirements:
(a)
it shall not be primarily intended to avoid or reduce own funds requirements;
(b)
it shall be properly documented and subject to particular internal approval and audit procedures;
(c)
it shall be dealt with at market conditions;
(d)
the market risk that is generated by the internal hedge shall be dynamically managed in the trading book within the authorised limits;
(e)
it shall be carefully monitored in accordance with adequate procedures.
2.
The requirements set out in paragraph 1 shall apply without prejudice to the requirements applicable to the hedged position in the non-trading book or in the trading book, where relevant.
3.
Where an institution hedges a non-trading book credit risk exposure or counterparty risk exposure using a credit derivative booked in its trading book, that credit derivative position shall be recognised as an internal hedge of the non-trading book credit risk exposure or counterparty risk exposure for the purpose of calculating the risk-weighted exposure amounts referred to in Article 92(4), point (a), where the institution enters into another credit derivative transaction with an eligible third party protection provider that meets the requirements for unfunded credit protection in the non-trading book and perfectly offsets the market risk of the internal hedge.
Both an internal hedge recognised in accordance with the first subparagraph and the credit derivative entered into with the eligible third party protection provider shall be included in the trading book for calculating the own funds requirements for market risk. For calculating the own funds requirements for market risk using the approach referred to in Article 325(1), point (b), both positions shall be assigned to the same trading desk that manages similar risks.
4.
Where an institution hedges a non-trading book equity risk exposure using an equity derivative booked in its trading book, that equity derivative position shall be recognised as an internal hedge of the non-trading book equity risk exposure for the purpose of calculating the risk-weighted exposure amounts referred to in Article 92(4), point (a), where the institution enters into another equity derivative transaction with an eligible third party protection provider that meets the requirements for unfunded credit protection in the non-trading book and perfectly offsets the market risk of the internal hedge.
Both an internal hedge recognised in accordance with the first subparagraph of this paragraph and the equity derivative entered into with the eligible third party protection provider shall be included in the trading book for calculating the own funds requirements for market risk. For calculating the own funds requirements for market risk using the approach referred to in Article 325(1), point (b), both positions shall be assigned to the same trading desk that manages similar risks.
4a.
For the purposes of paragraphs 3 and 4, the credit or equity derivative transaction entered into by an institution may be composed of multiple transactions with multiple eligible third party protection providers, provided that the resulting aggregated transaction meets the conditions set out in those paragraphs.
5.
Where an institution hedges non-trading book interest rate risk exposures using an interest rate risk position booked in its trading book, that interest rate risk position shall be considered to be an internal hedge to assess the interest rate risk arising from non-trading book positions in accordance with Articles 84 and 98 of Directive 2013/36/EU where the following conditions are met:
(a)
for calculating the own funds requirements for market risk using the approaches referred to in Article 325(1), points (a), (b) and (c), the position has been assigned to a separate portfolio from the other trading book positions, the business strategy of which is solely dedicated to managing and mitigating the market risk of internal hedges of interest rate risk exposure;
(b)
for calculating the own funds requirements for market risk using the approach referred to in Article 325(1), point (b), the position has been assigned to a trading desk the business strategy of which is solely dedicated to managing and mitigating the market risk of internal hedges of interest rate risk exposure;
(c)
the institution has fully documented how the position mitigates the interest rate risk arising from non-trading book positions for the purposes of the requirements laid down in Articles 84 and 98 of Directive 2013/36/EU.
5a.
For the purposes of paragraph 5, point (a), the institution may assign to that portfolio other interest rate risk positions entered into with third parties, or with its own trading book, as long as the institution perfectly offsets the market risk of those interest rate risk positions entered into with its own trading book by entering into opposite interest rate risk positions with third parties.
5b.
The following requirements shall apply to the trading desk referred to in paragraph 5, point (b), of this Article:
(a)
that trading desk may enter into other interest rate risk positions with third parties or with other trading desks of the institution, as long as those positions meet the requirements for inclusion in the trading book referred to in Article 104 and those other trading desks perfectly offset the market risk of those other interest rate risk positions by entering into opposite interest rate risk positions with third parties;
(b)
no trading book positions other than those referred to in point (a) of this paragraph are assigned to that trading desk;
(c)
by way of derogation from Article 104b, that trading desk shall not be subject to the requirements set out in paragraphs 1, 2 and 3 of that Article.
6.
The own funds requirements for the market risk of all positions assigned to the separate portfolio referred to in paragraph 5, point (a), or to the trading desk referred to in point (b) of that paragraph, shall be calculated on a stand-alone basis, in addition to the own funds requirements for the other trading book positions.
7.
Where an institution hedges a credit valuation adjustment (CVA) risk exposure using a derivative instrument entered into with its trading book, the position in that derivative instrument shall be recognised as an internal hedge for the CVA risk exposure for the purpose of calculating the own funds requirements for CVA risk in accordance with the approaches set out in Article 383 or 384, where the following conditions are met:
(a)
the derivative position is recognised as an eligible hedge in accordance with Article 386;
(b)
where the derivative position is subject to any of the requirements set out in Article 325c(2), point (b) or (c), or in Article 325e(1), point (c), the institution perfectly offsets the market risk of that derivative position by entering into opposite positions with third parties.
The opposite trading book position of the internal hedge recognised in accordance with the first subparagraph shall be included in the institution’s trading book to calculate the own funds requirements for market risk.