EBA allows alternative treatment of institutions’ exposures to tri-party repo

As part of the ‘Risk Reduction Measures Package’ adopted by European legislators in May 2019, Regulation (EU) 2019/876 has amended Part Four on Large Exposures of Regulation (EU) No 575/2013 (CRR).

Pursuant to Article 403(3) of the CRR and in the context of the mandatory substitution approach set forth in Article 403(1) of the CRR, an institution may replace the total amount of its exposures to a collateral issuer due to tri-party repurchase agreements facilitated by a tri-party agent, using as an alternative treatment the full amount of the limits that the institution has instructed the tri-party agent to apply to the securities issued by that collateral issuer. The amount of such a limit must be added to any other exposures to the same collateral issuer (direct loans, participations, etc.) with the overall amount (including exposures to a relevant group of connected clients, if available) complying with the large exposure limits. Irrespective of the use of this treatment, institutions remain responsible for monitoring their exposures and complying at all times with the large exposure limits.

To be able to conduct the aforementioned replacement, institutions must observe certain conditions. The EBA is mandated, under Article 403(4) of the CRR, to issue guidelines specifying those conditions, including the frequency for determining, monitoring and revising the full amount of the limits specified by the institution to the tri-party agent.

In particular, the guidelines recommend a set of elements that an institution and a tri-party agent should include in their service agreement for the use of the alternative treatment. The guidelines establish a set of safeguards that the tri-party agent has to put in place and for which the institution needs to verify the appropriateness for the use of the alternative treatment. Furthermore, the guidelines specify how institutions should determine the limits to be applied by a tri-party agent with regard to the securities of a collateral issuer, as well as the general framework under which such limits can be revised.

Finally, the guidelines include a non-exhaustive list of circumstances that could lead the competent authority to raise material concerns and that would prevent the use of the alternative treatment by institutions. A procedure for dealing with those material concerns is also specified.

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