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Capital Requirements Regulation (CRR)
Article 220

Article 220 — Using the Supervisory Volatility Adjustments Approach or the Own Estimates Volatility Adjustments Approach for master netting agreements

  1. When institutions calculate the 'fully adjusted exposure value' (E*) for the exposures subject to an eligible master netting agreement covering repurchase transactions or securities or commodities lending or borrowing transactions or other capital market-driven transactions, they shall calculate the volatility adjustments that they need to apply either by using the Supervisory Volatility Adjustments Approach or the Own Estimates Volatility Adjustments Approach ('Own Estimates Approach') as set out in Articles 223 to 226 for the Financial Collateral Comprehensive Method.

    The use of the Own Estimates Approach shall be subject to the same conditions and requirements as apply under the Financial Collateral Comprehensive Method.

  2. For the purpose of calculating E*, institutions shall:
    1. calculate the net position in each group of securities or in each type of commodity by subtracting the amount in point (ii) from the amount in point (i):
      1. the total value of a group of securities or of commodities of the same type lent, sold or provided under the master netting agreement;
      2. the total value of a group of securities or of commodities of the same type borrowed, purchased or received under the master netting agreement;
    2. calculate the net position in each currency, other than the settlement currency of the master netting agreement, by subtracting the amount in point (ii) from the amount in point (i):
      1. the sum of the total value of securities denominated in that currency lent, sold or provided under the master netting agreement and the amount of cash in that currency lent or transferred under that agreement;
      2. the sum of the total value of securities denominated in that currency borrowed, purchased or received under the master netting agreement and the amount of cash in that currency borrowed or received under that agreement;
    3. apply the volatility adjustment appropriate to a given group of securities or to a cash position to the absolute value of the positive or negative net position in the securities in that group;
    4. apply the foreign exchange risk (fx) volatility adjustment to the net positive or negative position in each currency other than the settlement currency of the master netting agreement.
  3. Institutions shall calculate E* in accordance with the following formula:
    $${E ^{*}} = {\max \left \{{0, \left (\sum E _{i} - \sum C _{i}\right )} + {\sum |E _{j} ^{\mathrm{sec}}| \cdot H _{j} ^{\mathrm{sec}}} + {\sum |E _{k} ^{fx}| \cdot H _{k} ^{fx}}\right \}}$$

    where:

    • Ei = the exposure value for each separate exposure i under the agreement that would apply in the absence of the credit protection, where institutions calculate risk-weighted exposure amounts under the Standardised Approach or where they calculate the risk-weighted exposure amounts and expected loss amounts under the IRB Approach;
    • Ci = the value of securities in each group or commodities of the same type borrowed, purchased or received or the cash borrowed or received in respect of each exposure i;
    • \({E _{j} ^{\mathrm{sec}}}\) = the net position (positive or negative) in a given group of securities j;
    • \({E _{k} ^{fx}}\) = the net position (positive or negative) in a given currency k other than the settlement currency of the agreement as calculated under point (b) of paragraph 2;
    • \({H _{j} ^{\mathrm{sec}}}\) = the volatility adjustment appropriate to a particular group of securities j;
    • \({H _{k} ^{fx}}\) = the foreign exchange volatility adjustment for currency k.
  4. For the purpose of calculating risk-weighted exposure amounts and expected loss amounts for repurchase transactions or securities or commodities lending or borrowing transactions or other capital market-driven transactions covered by master netting agreements, institutions shall use E* as calculated under paragraph 3 as the exposure value of the exposure to the counterparty arising from the transactions subject to the master netting agreement for the purposes of Article 113 under the Standardised Approach or Chapter 3 under the IRB Approach.
  5. For the purposes of paragraphs 2 and 3, group of securities means securities which are issued by the same entity, have the same issue date, the same maturity, are subject to the same terms and conditions, and are subject to the same liquidation periods as indicated in Articles 224 and 225, as applicable.