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
Refreshing the FX Definitions
A lot has changed in the FX derivatives market since 1998, when the last set of standard definitions for FX transactions were published. Trading volumes have grown substantially, and average daily turnover has risen by six times. Market practices have...
ISDA & EMTA Publish New FX Definitions
ISDA and EMTA, Inc., the trade association for emerging markets, have jointly published a revised set of standard definitions for foreign exchange (FX) derivatives transactions, which update key market practices and consolidate various FX and FX-related product templates and provisions...
ISDA Position Paper on SFDR Review
On February 27, ISDA and the Association for Financial Markets in Europe (AFME) published a position paper on the European Commission’s (EC) proposed revisions to the Sustainable Finance Disclosure Regulation (SFDR 2.0). The paper welcomes the EC’s proposal as a...
ISDA Response to HKMA SFC Consultation on Clearing Rules
On February 27, ISDA responded to a joint consultation by the Hong Kong Monetary Authority (HKMA) and the Securities Futures Commission (SFC) on proposed amendments to schedule 2 of the clearing rules for over-the-counter (OTC) derivatives. The proposed amendments introduce...