Updated 17/10/2024
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CRR ToolDelegated Regulation 2024/1085
Article 51

Article 51 - Assessment of the hedging recognition

Article 51

Assessment of the hedging recognition

When assessing whether the recognition of hedges in the institution’s internal default risk model complies with Article 325bo of Regulation (EU) No 575/2013, competent authorities shall:

(a)

verify whether the institution’s internal policies:

(i)

describe how the netting is performed;

(ii)

specify:

(1)

those basis risks that are implicitly captured in the model by modelling two different positions;

(2)

those basis risk that are instead explicitly captured by introducing a basis risk factor;

(b)

review the internal policies of the institution, and verify the criteria envisaged in those internal policies to recognise netting and hedging or diversification effects;

(c)

assess whether the monitoring of potential significant basis risk that may arise in the interval between the maturity of an instrument and the one-year time horizon is robust;

(d)

require the institution to provide:

(i)

a sample of positions in the default risk model;

(ii)

the list of risk factors corresponding to the positions referred to in point (i).

When requesting the sample referred to in point (d)(i), competent authorities shall ensure that there is variety in the positions provided, and that, where applicable, both positions that are netted and positions that are not netted are included.

For the purposes of point (b), competent authorities shall verify whether the criteria in the internal policies of the institution ensure that the netting and hedging are efficient, also where a credit or any other event occurs.

For the purposes of point (d), competent authorities shall verify whether:

(a)

the institution’s mapping of positions to risk factors ensures that exposures to different obligors are not netted, and that such netting only takes place for positions that relate to the same financial instruments of the same obligor;

(b)

either exposures to different obligors are mapped to different risk factors, or there is a basis risk factor to capture the differences in those exposures, and the basis risk between obligors that are constituents of credit indices and other obligors is captured;

(c)

for positions in different financial instruments of the same obligor, the analysis performed by the institution to assess whether significant basis risk in the hedging strategies may arise due to different type of products, seniority in the capital structure, internal or external ratings, maturity, or vintage, is robust.