On September 26, 2022, ISDA and the Association for Financial Markets in Europe published a whitepaper on the prudential boundary between the banking and trading books in Europe and how that relates to instruments with embedded derivatives.
New requirements under the EU’s third Capital Requirements Regulation (CRR 3) that are related to the prudential allocation of risks between the banking book and trading book, and internal risk transfers between them, could cause unintended consequences for the capital treatment of instruments with embedded derivatives. This could lead to a disproportionately high risk-weighted assets calculation, which could render certain activities uneconomic.
This paper provides an overview of the different types of instruments with embedded derivatives, as well as the accounting and current prudential treatment of these products. The paper also provides an analysis of the various business and booking models for structured issuances to ensure a correct prudential book allocation. The industry believes that policymakers should consider the recommendations in the paper and amend the European Commission’s proposed CRR 3 accordingly.
Documents (1) for Treatment of Instruments with Embedded Derivatives
Latest
Future Path - IQ December 2025
At the start of ISDA’s 40th anniversary year, IQ convened the pioneers of the association to reflect on how a desperate need for standardization in the early days of the derivatives market brought dealers together to develop a dictionary of...
Steps to a Vibrant Derivatives Market: SOM Remarks
Steps to a Vibrant and Resilient Derivatives Market December 4, 2025 Remarks at the Mediterranean Partnership of Securities Regulators Scott O’Malia ISDA Chief Executive Officer Good afternoon and thank you to the Mediterranean Partnership of Securities Regulators (MPSR) for...
ISDA Response to BoE on Gilt Market Resilience
On November 28, ISDA responded to the Bank of England’s discussion paper on gilt market resilience. ISDA encourages the Bank of England, before introducing any significant policy changes that would affect the functioning of the gilt repo market, to consider...
Addressing Termination Troubles
When Enron announced a shock $618 million loss on October 16, 2001, it took a further 47 days until it filed for bankruptcy. For Bear Stearns, it took 266 days between its bailout of a structured credit fund run by...