CRR2 - Own funds requirement by exposure type


A common question we are asked is the basis on which own funds requirement has to be calculated for the various types of exposures on the non-trading and trading book. The below table provides a high-level summary of this mapping of the exposure types to the risk assessment to be used. This is based on Article 92 of the CRR.

Exposure type to risk category mapping_v0.1.JPG

The bank’s trading book (on- and off-balance sheet) qualifies for small trading book derogation if it meets the following conditions, as evaluated at the end of each month [Article 94]:-

  • trading book size is less than 5% of total assets; and

  • is less than GBP 44 million.

Under the small trading book derogation, the bank can calculate its own funds requirement for the small trading book based on the following:-

1) For interest rate contracts, equities derivatives and credit derivatives - no market risk own fund requirement needs to be calculated

2) For other trading book exposures (other than FX and commodities; and those not listed in (1) above) - the market risk own funds requirement can be “replaced” by Credit or Counterparty Credit risk own funds requirement (e.g. for traded debt instruments in the trading book).

Note: For FX and commodities, even with small trading book derogation, market risk own funds requirement should still be calculated (in addition to credit/counterparty credit risk assessment).

The size of the trading book (on- and off-balance sheet) will be the sum of the market value of all trading book positions, excluding foreign exchange and commodities and credit derivatives that act as internal hedges against non-trading book exposures. In the event market value is not available, banks can use the fair value of the position.

Implementation date: The above requirements came into effect on 1 January 2022.

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Funds Transfer Pricing

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CRR2 - Risk weight for CIU exposures