Foreign Exchange Committee
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Search Type keyword or phrase: What is discusion forex current practice regarding the treatment of FX non-monetary items held at the historic FX? In particular, do you include these discusion forex in the overall net foreign exchange position pursuant to Article CRR? If you include them, what value i. How do you manage such positions from an FX point of view? AEB, as a national banking association, has among its members a very diverse range of entities.
However, we can confirm that, in the current consolidated financial statement of our members there have no significant discusion forex items such as buildings held at the historic FX. In the consolidation process the balances in the financial statements discusion forex consolidated entities or entities accounted for using the equity method whose functional currency is not the euro are translated to euros as follows: As a result, there is no relevant position of FX non-monetary items held at historic FX in the consolidated financial statements.
However, our entities include these non-monetary items in the net foreign exchange position. In the separate financial statements, in particular, in the parent company, there are significant non-monetary items, mainly participations in subsidiaries.
Most of these participations are not or are only partially fair value hedged discusion forex changes discusion forex FX so the net long open positions provide an effective hedge for the consolidated capital ratio.
In this regard, and in line with the provisions in the Basel text, we note that participations denominated in foreign currencies which are accounted at historic cost should not discusion forex any capital charge. The underlying risks are not affected by the regulatory approach for calculate capital requirements, consequently there should be a single rule for net open position in each currency and a single treatment of structural FX exclusion.
If you consider that it should be allowed for short discusion forex please provide rationale and examples. Discusion forex illustrative example would be discusion forex follows: The USD subsidiary operates only a trading book, i.
Note that from the perspective of the consolidated group, this group discusion forex USD investment is replaced by all external assets and liabilities of the US subsidiary as part of the consolidation process.
In the illustrative discusion forex, the only discusion forex assets and liability result from the trading discusion forex. Note however that there is no direct link between the USD investments and a specific trading book position. In this scenario, discusion forex structural FX position in the amount of the USD investment effectively results from all trading book position.
The above example demonstrates that although the structural Discusion forex position effectively results from trading book positions in a consolidated group view it is of a non-trading and structural nature as it from a management perspective relates to an investment in a subsidiary that clearly discusion forex if a non-trading discusion forex structural nature, and there is discusion forex no trading intent with discusion forex to this FX position that only arises on an aggregate level by taking all trading discusion forex positions of the subsidiary into account any additional discusion forex FX position that the USD subsidiary incurs that then is of a trading nature is included in the market risk RWA calculation Please note that the above example was on purpose simplified to stress the argument that trading book positions may qualify as structural FX positions.
In our discusion forex, there are two different ways in which changes in FX rate might impact the capital ratio when the FX position, discusion forex the CRR, is closed.
In both situations, an entity might adopt a net open position to cover its capital ratios against unwanted fluctuations in the exchange rate of the currency in question and the requisite of the long nature is only applicable to one of them.
RWA due to the variation of the amount in euros of foreign currency assets be offset by changes in the numerator CET1, T1 or OW caused by the revaluation or depreciation of the said open position, so that the ratio does not change.
In this case, we recognize that the open position adopted should discusion forex be long in the corresponding foreign currency. This impact may be, among others, due to discusion forex asymmetric taxing treatment of profits and losses discusion forex from the movement of the exchange rate or to the existence of prudential filters that limit discusion forex recognition of the capital gains derived from the repeated movement.
The open positions needed to discusion forex for these effects discusion forex be either short or long. Here are two examples Example 1: As the accounting profit before taxes has not changed, the net profit will be lower and both the CET1 and the capital ratios will also decrease as a consequence of the movement discusion forex the FX rate.
In order to hedge this position i. This short position should be excluded as it has discusion forex deliberately taken in order to hedge the effect of the exchange rates on capital ratios.
There is a prudential filter that eliminates the fair value reserves related to gains or losses on cash flow hedges of financial instruments not recognized at fair value. When the hedging options and the hedged items are denominated in foreign currency the option MtM is also an asset or liability in foreign currency, but due to the aforementioned prudential filter, the changes discusion forex its value due to movements in the FX rate will not have any effect on the Discusion forex and the capital ratios.
Consequently, we believe that the MtM due to cash flow hedging options in foreign currency must be considered as a position deliberately taken to hedge the capital ratios against the adverse impact of FX rate discusion forex and should discusion forex eliminated from the FX risk position of the bank.
A last point is the regulatory treatment of AT1 discusion forex issued in foreign currency and with write-down clause WD if reached the PONV or breach the conversion trigger. These instruments are recognized as equity, according to NIC 32, consequently, they do not seem include in the regulatory FX position defines in article CRR. We believe that, from an economic and regulatory point of view, these instruments should be treated in the same way than AT1 instruments that discusion forex be converted in CET1 instruments when reached the PONV.
What types of positions would this include? If yes, discusion forex do you argue that this is the case? The entities should define a hedging policy and hedging procedures that must be approved by the relevant bodies e.
Evidence of discusion forex with the rules set by these bodies should be at the disposition of the supervisors. In this sense, we do not believe that FX items such as real state or, in the separate financial statements, subsidiaries holdings abroad, pose discusion forex particular problem.
From our point of view the net position is the discusion forex of all of discusion forex instruments in the relevant foreign currency and it usually does not make sense to assign FX positions to some FX items, as their selection is an arbitrary process, at least if all the FX items are recognized in discusion forex same book banking or trading. Furthermore, even if there is only an FX item and this has been taken years ago, we discusion forex that the FX position should be regarded as deliberately taken i.
Firstly, yes, we do agree with paragraph In this regard, positions stemming from subsidiaries at the consolidated level assets, liabilities… should be taken into account. Fourth, the proposal of the European Commission amending the CRR changes the discusion forex of the authorization discusion forex exclude certain FX positions and limits the amount of the exclusion to the largest of: Taking into account the risk rationale of hedging the capital ratio, do you consider that it is acceptable to renounce to potential gains in order to protect the ratio from potential losses?
Do you consider that both types of hedging i. Discusion forex so, do you consider that both approaches would be acceptable under Article ?
In our discusion forex, the exclusion from the FX position only makes sense in net terms, i. We believe that both types of hedging might be discusion forex from an economic perspective. The position stemming from trading book instruments may be discusion forex as structural if it has been clearly defined and quantified in the hedging strategy and policies.
Please describe how any ratio-hedging strategies are mandated within your organisation. Are ratio-hedging strategies prescribed in risk policies approved by the board? How do you communicate structural FX risk and position taking to your external stakeholders e. The capital investment for the purchase or acquisition of subsidiaries abroad generates structural positions in foreign currency in the consolidated balance sheet of their Groups.
Discusion forex the consolidation of the financial accounts is in euros, the exchange rate fluctuations affect the value of the subsidiaries discusion forex their consolidation in Euros. The effect of this exchange rate discusion forex has a direct impact on their Group's consolidated capital. Among the alternatives for the management of structural FX hedge, there are two main types of risk management: Global governance bodies determine that the management scope for exchange rate risk is the Group's consolidated core capital ratio fully loaded.
The effect that exchange rate volatility has on the Consolidated CET1 FL Ratio is determined by each of the components of the Ratio that are defined in currency and affected by a conversion to euros at the time of consolidation. The Structural Risk departments establishes metrics and limits of risk appetite in relation to FX risk and periodically checks the efficiency of the hedges.
The targets in terms of solvency set out in discusion forex risk appetite framework lead to a structural exchange rate risk management, in line with established limits, committed to find a balance between the proportion of hedge that must be maintained to mitigate the risk and the negative impact of these hedges cost At a corporate level, structural FX risk management is focused on translation risk arising from a potential loss in the value of positions consolidated in the balance sheet as a result of adverse exchange rate movements.
Yes, our members report to their investors and market that they hedge their capital Ratio. As for communication to external stakeholders, in the financial reports it is reported: In international groups, they represent the standard to be fulfilled discusion forex the Corporate Function of Financial Management of the different groups for the correct management of the risk of structural exchange rate.
Alternatively, in the light of the reference to Article 92 1do you consider that the size of the structural position should be limited by the minimum capital ratio levels? If this is the case, which one of the three levels established in Article 92 1 do you apply?
Banks can opt for different kind of strategies when dealing with the FX risk, the amount of the structural position to be excluded depends on the strategy followed in terms of the capital ratio. When the capital ratio is fully neutralized to movements in the foreign exchange risk, discusion forex amount to be excluded should be the maximum FX position that would ideally neutralise the sensitivity of the capital ratio to FX movements but when the ratio is not fully but partially neutralized, discusion forex amount discusion forex be excluded should be limited to the amount that would act as a hedge of the capital ratio, meaning partially reducing its sensitivity Examples explained in Annex A with no change in sign.
The treatment described above is in line with the provisions in the Basel Accord that explicitly take account of this issue: Supervisory authorities are free to allow banks to protect their capital adequacy ratio in this way.
Thus, any positions which a bank has deliberately taken in order to hedge partially or totally against the adverse effect of the exchange rate on its capital ratio may be discusion forex from the discusion forex of net open currency positions, subject to each of the following conditions being met: In addition to this it should be highlighted that CRR within its scope considers positions deliberately taken in order to hedge the ratio but does not limit these positions to positions taken to totally hedge the ratio.
In this regard, partial hedges should also be considered under CRR. Any positions which an institution has deliberately taken in order to hedge against the discusion forex effect of the exchange rate on its ratios discusion forex accordance with Article 92 1 may, subject to permission by the competent authorities, be excluded from the calculation Public Policy of net open currency positions.
Such positions shall be of a non-trading or structural nature and any variation of the terms of their exclusion, subject to separate permission discusion forex the competent authorities. The same treatment subject discusion forex the same conditions may be applied to positions which an institution has which relate to items that are already deducted in the calculation of own funds.
Article 92 1 establishes the obligation for the credit entities to satisfy certain ratios discusion forex we believe that the discusion forex in article should not be understood as setting the limit for the RWA relief. With regards to minimum capital ratios, it can be mathematically proved that the use for determining the hedge would be sub-optimal. This is as discusion forex does not enable banks to neutralize the sensitivity of the current or target capital ratio, which is more appropriate economically.
In practice, hedges are calculated in reference to the actual capital discusion forex. Therefore, discusion forex do not agree to limit discusion forex size of the structural hedge to minimum capital ratio levels as it would fail the objective of neutralization of the current capital ratio to FX movements.
How do discusion forex assess the consolidated ratio? How does your treatment differ between subsidiaries and branches?
Our members have received an authorization for the consolidated level only. Our members do not deliberately hedge capital ratios on individual level neither in parent companies nor in subsidiaries although the long net open position required to hedge the consolidated capital ratio is usually maintain in the parent company.
Consequently, there is a partial hedge may be discusion forex over-hedge of the individual capital ratio, although our members do not have the capital relief due to the mentioned lack of authorization. What significant impacts might this have on your current hedging strategies?
The text seems to be written with the idea that you have to take a deliberately position. In particular in article 10 and concordant norms it is used in a restrictive way. We understand that a precise definition is required. Consequently, we suggest including these investment into the limit set discusion forex articlec: In principle, our members do not forecast a change in their hedging strategy but the lack of flexibility regarding investment in consolidated subsidiaries is an element of concern.
Additionally, as it said in the EBA paper, the hedge is a position, i. If some of the instruments have been cancelled and others have been not, should the position excluded be maintained? The CRR2 should refer to positions.