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Capital Requirements Regulation (CRR)
Article 106

Article 106 — Internal Hedges

  1. An internal hedge shall in particular meet the following requirements:
    1. it shall not be primarily intended to avoid or reduce own funds requirements;
    2. it shall be properly documented and subject to particular internal approval and audit procedures;
    3. it shall be dealt with at market conditions;
    4. the market risk that is generated by the internal hedge shall be dynamically managed in the trading book within the authorised limits;
    5. it shall be carefully monitored in accordance with adequate procedures.
  2. The requirements set out in paragraph 1 shall apply without prejudice to the requirements applicable to the hedged position in the non-trading book or in the trading book, where relevant.
  3. Where an institution hedges a non-trading book credit risk exposure or counterparty risk exposure using a credit derivative booked in its trading book, that credit derivative position shall be recognised as an internal hedge of the non-trading book credit risk exposure or counterparty risk exposure for the purpose of calculating the risk-weighted exposure amounts referred to in point (a) of Article 92(3) where the institution enters into another credit derivative transaction with an eligible third party protection provider that meets the requirements for unfunded credit protection in the non-trading book and perfectly offsets the market risk of the internal hedge.

    Both an internal hedge recognised in accordance with the first subparagraph and the credit derivative entered into with the third party shall be included in the trading book for the purpose of calculating the own funds requirements for market risk.

  4. Where an institution hedges a non-trading book equity risk exposure using an equity derivative booked in its trading book, that equity derivative position shall be recognised as an internal hedge of the non-trading book equity risk exposure for the purpose of calculating the risk-weighted exposure amounts referred to in point (a) of Article 92(3) where the institution enters into another equity derivative transaction with an eligible third party protection provider that meets the requirements for unfunded credit protection in the non-trading book and perfectly offsets the market risk of the internal hedge.

    Both an internal hedge recognised in accordance with the first subparagraph and the equity derivative entered into with the eligible third party protection provider shall be included in the trading book for the purpose of calculating the own funds requirements for market risk.

  5. Where an institution hedges non-trading book interest rate risk exposures using an interest rate risk position booked in its trading book, that interest rate risk position shall be considered to be an internal hedge for the purpose of assessing the interest rate risk arising from non-trading positions in accordance with Articles 84 and 98 of Directive 2013/36/EU where the following conditions are met:
    1. the position has been assigned to a separate portfolio from the other trading book position, the business strategy of which is solely dedicated to manage and mitigate the market risk of internal hedges of interest rate risk exposure; for that purpose, the institution may assign to that portfolio other interest rate risk positions entered into with third parties, or its own trading book as long as the institution perfectly offsets the market risk of those interest rate risk positions entered into with its own trading book by entering into opposite interest rate risk positions with third parties;
    2. for the purposes of the reporting requirements set out in Article 430b(3), the position has been assigned to a trading desk established in accordance with Article 104b the business strategy of which is solely dedicated to manage and mitigate the market risk of internal hedges of interest rate risk exposure; for that purpose, that trading desk may enter into other interest rate risk positions with third parties or other trading desks of the institution, as long as those other trading desks perfectly offset the market risk of those other interest rate risk positions by entering into opposite interest rate risk positions with third parties;
    3. the institution has fully documented how the position mitigates the interest rate risk arising from non-trading book positions for the purposes of the requirements laid down in Articles 84 and 98 of Directive 2013/36/EU.
  6. The own funds requirements for the market risk of all the positions assigned to a separate portfolio as referred to in point (a) of paragraph 5 shall be calculated on a stand-alone basis and shall be in addition to the own funds requirements for the other trading book positions.
  7. For the purposes of the reporting requirements set out in Article 430b, the calculation of the own funds requirements for market risk of all the positions assigned to the separate portfolio as referred to in point (a) of paragraph 5 of this Article or to the trading desk or entered into by the trading desk referred to in point (b) of paragraph 5 of this Article, where appropriate, shall be calculated on a stand-alone basis as a separate portfolio and shall be additional to the calculation of own funds requirements for the other trading book positions.