(1)

Institutions should identify the risk drivers of a derivative transaction by determining the risk factors on which the cash flows of that transaction depend. To ensure that institutions follow a harmonised approach for this identification, they should at least consider the risk factors listed in Section 3, Chapter 1a of Title IV of Part Three of Regulation (EU) No 575/2013.

(2)

The method for identifying derivative transactions with only one material risk driver, for the purpose of mapping those derivative transactions to the relevant risk category, should be simple for all cases where the primary and only material risk driver of the derivative transaction is immediately discernible from the nature and cash flows of that transaction.

(3)

Cross-currency interest rate swaps are used by institutions to hedge the foreign exchange risk arising from funding or investment in foreign currencies. Although such transactions primarily depend on foreign exchange risk drivers, they can depend also on other risk drivers, such as interest rate risk drivers. Nevertheless, as market experience shows that the effect of these other risk drivers is very often immaterial for these particular transaction types, if a transaction falls under this type, this should suffice for identifying such transactions as derivative transactions with only one material risk driver.

(4)

Irrespective of the nature and cash flows of a derivative transaction, the interest rates used to discount the cash flows of the transaction (‘the discount rate’) should not be considered as a material risk driver. Requiring institutions to take into account the discount rate in the method for identifying derivative transactions with only one material risk driver would be disproportionate and burdensome, as empirical experience shows that that risk driver has usually a more limited effect on the value of derivative transactions than the other risk drivers from which their cash flows are derived.

(5)

For derivative transactions that have more than one risk driver, institutions should take into account the sensitivities and the volatility of the underlying to identify those risk drivers that are material in each risk category and the most material of those risk drivers in each risk category.

(6)

For derivative transactions that have more than one risk driver and where those risk drivers refer to different risk categories, it may not be possible to conclude which of those risk drivers are material, even after taking into account sensitivities and the volatility of the underlying of the transaction. In such cases, institutions should, as a simple, conservative fallback approach, consider all the risk drivers of the transaction material and, consequently, allocate the derivative transaction to the risk categories corresponding to these risk drivers on the basis of the most material risk drivers within each risk category.

(7)

The method for identifying derivative transactions with only one material risk driver should be performed at inception only, where such derivative transactions have been identified at inception as having only one risk driver, because that single risk driver is a basic characteristic of those transactions and is therefore not expected to change. Where, at inception, derivative transactions have been identified as having more than one risk driver, the process for identifying the material and most material of those risk drivers should be undertaken on a quarterly basis so that any changes in those transactions can be appropriately reflected in the mapping of those derivative transaction to the relevant risk categories.

(8)

Article 279a(3), point (a), of Regulation (EU) No 575/2013 requires that the formula to be used for the calculation of the supervisory delta of call and put options, when mapped to the interest rate risk category, that is compatible with market conditions in which interest rates may be negative, is to be specified in accordance with international regulatory developments. On 22 March 2018, the Basel Committee on Banking Supervision (BCBS) (2) published the ‘Frequently asked questions on the Basel III standardised approach for measuring counterparty credit risk exposures’, explaining that the supervisory delta for interest rate options in the case of a negative interest rate environment should be determined in accordance with a specific formula, in which a lambda (λ) shift is applied to the spot or forward interest rate and to the strike of the option used in that formula to ensure that that spot or forward interest rate and strike of the option are positive.

(9)

In order to render the spot or forward interest rate and the strike of the option positive, the λ shift should be large enough to enable institutions to calculate the supervisory delta of a transaction in accordance with the formula laid down in Article 279a(1) of Regulation (EU) No 575/2013, but at the same time small enough not to introduce unnecessary bias in the outcome of the supervisory delta calculation.

(10)

The supervisory volatility, being one of the parameters for the calculation of the supervisory delta, should be determined in light of the specific formula for the calculation of the supervisory delta for put and call options in the interest rate risk category. In that respect, the value of the supervisory volatility for put and call options in the interest rate risk category as determined in the international standards adopted by the BCBS is deemed suitable for its use under Union law.

(11)

To enable institutions to determine whether a transaction is a long or short position in the primary risk driver, in a material risk driver or in the most material risk driver of a given risk category, it should be laid down which information concerning a transaction institutions should use for making such a determination. To avoid unnecessary burdens for institutions, they should be allowed to use the same information as the information they use for the identification of material risk drivers.

(12)

This Regulation is based on the draft regulatory technical standards submitted by the European Banking Authority to the Commission.

(13)

The European Banking Authority has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the advice of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 (3),