General requirements for allocating notional repricing cash flows
1. When using the standardised methodology for evaluating the risks arising from potential changes in interest rates that affect the economic value of equity of their non-trading book positions, institutions shall allocate the notional repricing cash flows of their non-trading book positions to the relevant repricing time buckets referred to in point 1 of the Annex, as follows:
(a)
for fixed rate instruments, in accordance with Article 6;
(b)
for floating rate instruments, in accordance with Article 7;
(c)
for non-maturity deposits, in accordance with Article 8;
(d)
for fixed rate loans subject to the risk of early repayment, in accordance with Article 9;
(e)
for fixed rate term deposits subject to the risk of early redemption, in accordance with Article 10;
(f)
for derivative instruments without optionality, in accordance with Article 11;
(g)
for instruments other than those referred to in points (a) to (f), in accordance with Article 12.
2. Institutions shall treat commercial margins and other spread components in interest payments, in terms of their exclusion from or inclusion in the notional repricing cash flows, in accordance with their internal risk management and measurement approach for interest rate risk in the non-trading book.
Institutions that exclude commercial margins and other spread components from the notional repricing cash flows shall perform all of the following:
(a)
use a transparent methodology to identify the risk-free interest rate at origination of each instrument, and apply that methodology consistently across business units;
(b)
ensure that the exclusion of commercial margins and other spread components from the notional repricing cash flows is consistent with how the institution manages and hedges interest rate risk in the non-trading book;
(c)
notify the exclusion of commercial margins and other spread components to the competent authority.
3. When allocating the notional repricing cash flows of their non-trading book positions as referred to in paragraph 1, institutions shall:
(a)
not take into account the impact of an embedded optionality of an automatic interest rate option on notional repricing cash flows;
(b)
take into account the impact of an embedded optionality of a behavioural interest rate option on notional repricing cash flows.
Fixed rate instruments
1. Institutions shall allocate the notional repricing cash flows deriving from interest payments of non-trading book positions in fixed rate instruments to the relevant repricing time buckets referred to in point 1 of the Annex by repricing date, thereby taking into account any of the exclusions referred to in Article 5(2), second subparagraph.
2. Institutions shall allocate cash flows deriving from the intermediate and final repayments of the principal of non-trading book positions in fixed rate instruments to the relevant repricing time buckets referred to in point 1 of the Annex by repricing date.
Floating rate instruments
Institutions shall allocate the notional repricing cash flows deriving from non-trading book positions in floating rate instruments to the relevant repricing time buckets referred to in point 1 of the Annex by repricing date, as follows:
(a)
cash flows deriving from interest payments other than payments of the spread component up to the next repricing date, as per the contractual agreement;
(b)
the remaining principal amount, as per the contractual agreement;
(c)
spread components up to the final contractual maturity, irrespective of any repricing of the non-amortised principal, except where those spread components are excluded in accordance with Article 5(2), second subparagraph.
Non-maturity deposits
1. Institutions shall classify non-maturity deposits, depending on the type of counterparty, into the following categories:
(a)
retail non-maturity deposits, further classified into the following:
(i)
retail transactional deposits;
(ii)
retail non-transactional deposits;
(b)
wholesale non-maturity deposits, further classified into the following:
(i)
wholesale deposits of financial customers;
(ii)
wholesale non-financial deposits.
2. Institutions shall distinguish:
(a)
the stable from the non-stable part of the deposits referred to in paragraph 1, points (a)(i), (a)(ii), and (b)(ii) using observed changes of the volume of the deposits due to upward and downward movements of the risk-free interest rate for a period of at least the preceding 10 years;
(b)
the core and the non-core component of the stable part of the non-maturity deposits referred to in paragraph 1.
To determine the amount of the non-core component of the stable part of the non-maturity deposits as referred to in point (b), institutions shall multiply the amount of all stable non-maturity deposits by the pass-through rate.
3. When assessing the pass-through rate referred to in paragraph 2, second subparagraph, institutions shall consider the following elements, having also regard to non-trading book positions with similar characteristics:
(a)
the current level of interest rates;
(b)
the spread between the institution’s offer rate and market rate;
(c)
competition from other firms;
(d)
the institution’s geographical location;
(e)
demographic and other relevant characteristics of the institution’s customer base;
(f)
the unlikely repricing of the core component of the stable part of the non-maturity deposits, even under significant changes in the interest rate environment.
4. In shock scenarios prescribing an increase of short-term interest rates as referred to in Article 4, points (a)(i), (b)(i), and (c)(i), institutions shall multiply by 0,8 the core component of the stable part of the non-maturity deposits, calculated in accordance with paragraphs 2 and 3, and shall increase the non-core component accordingly.
5. In shock scenarios prescribing a decrease of short-term interest rates as referred to in Article 4, points (a)(ii), (b)(ii), and (c)(ii), institutions shall multiply by 1,2 the core component of the stable part of the non-maturity deposits, calculated in accordance with paragraphs 2 and 3, and shall decrease the non-core component accordingly.
6. When applying paragraphs 2 to 5, institutions shall apply the following caps on the proportion of the core component of the stable part of the non-maturity deposits, calculated in accordance with paragraphs 2 and 3:
(a)
90 % for retail transactional deposits as referred to in paragraph 1, point (a)(i);
(b)
70 % for retail non-transactional deposits as referred to in paragraph 1, point (a)(ii);
(c)
50 % for wholesale non-financial deposits as referred to in paragraph 1, point (b)(ii).
7. Institutions shall treat all wholesale deposits of financial customers, as referred to in paragraph 1, point (b)(i), as non-core non-maturity deposits.
8. Institutions shall allocate the non-core component of the non-maturity deposits to the repricing time bucket referred to in point 1(a) of the Annex.
9. Institutions shall allocate the core components of the non-maturity deposits consistently over time to the relevant repricing time buckets referred to in point 1 of the Annex, based on observed internal data and subject to the following maturity restrictions calculated on a weighted average basis:
(a)
5 years, for the non-maturity deposits referred to in paragraph 1, point (a)(i);
(b)
4,5 years, for the non-maturity deposits referred to in paragraph 1, point (a)(ii);
(c)
4 years, for the non-maturity deposits referred to in paragraph 1, point (b)(ii).
10. Institutions shall identify non-maturity deposits as non-core non-maturity deposits where the total of non-maturity deposits is smaller than 2 % of the non-trading book positions that are accounted for as a liability in accordance with the applicable accounting framework.
Fixed rate loans that are subject to the risk of early repayment
1. Institutions shall consider fixed rate loans to retail customers as subject to the risk of early repayment where the borrower is able to repay part or all of the outstanding principal before the contractually agreed repayment date or the contractual maturity date of the principal either:
(a)
without bearing the economic costs for such repayment; or
(b)
bearing the economic costs only above a prepayment threshold.
2. Institutions shall, for the non-trading book positions referred to in paragraphs 1 and 7, estimate the baseline annual conditional prepayment rate per currency, in a way that is consistent over time and appropriate for an average prepayment rate. Institutions shall estimate that average prepayment rate separately for each portfolio of homogeneous non-trading book positions and under the prevailing term structure of interest rates, based on all available internal observations.
For the purposes of the first subparagraph, institutions may set the prepayment rate at 0 where the total of both the fixed rate loans referred to in paragraph 1 and of the fixed rate assets referred to in paragraph 7 is less than 5 % of the non-trading book positions that are accounted for as assets in accordance with the applicable accounting framework.
3. Institutions shall adjust the conditional prepayment rate estimated in accordance with paragraph 2 as follows:
(a)
in scenarios that prescribe an increase in interest rates as referred to in Article 4, points (a)(i), (b)(ii), and (c)(i), institutions shall multiply the conditional prepayment rate by 0,8;
(b)
in scenarios that prescribe a decrease in interest rates as referred to in Article 4, points (a)(ii), (b)(i), and (c)(ii), institutions shall multiply the conditional prepayment rate by 1,2.
4. For each repricing time bucket as referred to in point 1 of the Annex, institutions shall estimate the expected amount of prepaid loans per repricing time bucket as the product of:
(a)
the outstanding amount of the fixed rate loans referred to in paragraph 1 of a certain homogeneous product type denominated in a certain currency;
(b)
the conditional prepayment rate determined in accordance with paragraph 2, multiplied by the length of the applicable repricing time bucket referred to in point 2 of the Annex and adjusted in accordance with paragraph 3.
For the purposes of point (a), institutions shall not regard amounts matured or prepaid at a time earlier than the lower limit of the repricing time bucket as outstanding amounts.
5. Institutions shall allocate the prepaid amount of the fixed rate loans referred to in paragraph 1, including penalty fees on the prepaid amount that retail customers pay in the applicable scenario, to the relevant repricing time buckets referred to in point 1 of the Annex. Institutions shall allocate any part of the notional repricing cash flows of those fixed rate loans that they do not expect to be prepaid to the relevant repricing time buckets referred to in point 1 of the Annex on the basis of the contractual repayment schedule for the duration of contractual maturity of those loans.
6. Institutions shall treat fixed rate loans to wholesale customers, where the borrower is able to prepay part or all of the outstanding principal before the contractually agreed repayment date or the contractual maturity date of the principal, in accordance with Articles 6 and 13.
7. Where the institution is exposed to assets in the form of securities with underlying instruments in the form of fixed rate loans as referred to in paragraph 1 (‘fixed rate assets’), and the issuer of those fixed rate assets has no obligation to replace the fixed rate loans in the case of their early repayment, that institution shall apply a look-through approach and shall evaluate the non-trading book positions in those assets in accordance with paragraph 1, irrespective of whether the counterparty of that institution is a wholesale or retail customer.
Fixed rate term deposits that are subject to the risk of early redemption
1. Institutions shall consider fixed rate term deposits as fixed rate term deposits subject to the risk of early redemption where both of the following applies:
(a)
those fixed rate term deposits constitute retail deposits;
(b)
the depositor holds the option to redeem any outstanding amount of the fixed rate term deposits before the contractual maturity date of the deposit.
2. By way of derogation from paragraph 1, institutions may treat fixed rate term deposits in accordance with Article 6 where the early withdrawal of those deposits would result in a penalty for the depositor compensating both for the loss of interest between the date of the deposit’s redemption and the date of its contractual maturity and for the economic cost of redeeming the deposit.
3. Institutions shall treat fixed rate term deposits that are wholesale deposits in accordance with Article 6.
Where the wholesale depositor holds the option to redeem any outstanding amount of the deposit before its contractual maturity date and the conditions set out in paragraph 2 are not met, institutions shall treat that option as an embedded automatic option in accordance with Article 13.
4. Institutions shall estimate the baseline cumulative term deposit redemption rate for the fixed rate term deposits referred to in paragraph 1 in a way that is consistent over time and which is suitable for an average early redemption rate. Institutions shall estimate that baseline cumulative term deposit redemption rate separately for each portfolio of homogeneous products denominated in a currency and under the prevailing term structure of interest rates, based on all available internal observations.
For the purposes of the first subparagraph, institutions may set the baseline cumulative term deposit redemption rate at 0 where the total of the fixed rate term deposits referred to in paragraph 1 is smaller than 5 % of the non-trading book positions that are accounted for as liabilities in accordance with the applicable accounting framework.
5. Institutions shall adjust the baseline cumulative term deposit redemption rate for the fixed rate term deposits estimated in accordance with paragraph 4 to the applicable scenarios as follows:
(a)
in scenarios that prescribe a decrease of the short-term interest rates as referred to in Article 4, points (a)(ii), (b)(ii), and (c)(ii), institutions shall multiply the redemption rate by 0,8;
(b)
in scenarios that prescribe an increase of the short-term interest rates as referred to in Article 4, points (a)(i), (b)(i), and (c)(i), institutions shall multiply the redemption rate by 1,2.
6. For each repricing time bucket as referred to in point 1 of the Annex, institutions shall obtain the expected amount of early redeemed fixed rate term deposits by multiplying the fixed rate term deposits referred to in paragraph 1 of a certain homogeneous product type denominated in a certain currency by the applicable baseline cumulative term deposit redemption rate for the fixed rate term deposits adjusted in accordance with paragraph 5.
7. Institutions shall, for all repricing time buckets and sets of homogeneous product types, obtain the total amount of the early redeemed fixed rate term deposits by aggregating the early redemption amounts referred to in paragraph 6. Institutions shall allocate the aggregated early redeemed amounts in the repricing time bucket referred to in point 1(a) of the Annex. Institutions shall allocate the parts of the notional repricing cash flows of the fixed rate term deposits referred to in paragraph 1 that they do not expect to be redeemed early to the relevant repricing time buckets referred to in point 1 of the Annex according to their contractual maturity.
Derivative instruments without optionality
1. Institutions shall separate derivative instruments without optionality into a paying and a receiving leg.
2. Institutions shall treat the receiving leg of a derivative instrument without optionality as an incoming cash flow and the paying leg as an outgoing cash flow.
Institutions shall allocate the notional repricing cash flows to the relevant repricing time buckets referred to in point 1 of the Annex.
3. Institutions shall treat cross-currency interest rate swaps involving swapping principal or interest in different currencies separately for each leg in each currency.
4. Institutions shall treat the interest income and expenses of derivative instruments used for hedging separately from the income and expenses deriving from the hedged position.
Non-performing exposures and fixed rate loan commitments to retail counterparties
1. Institutions with a non-performing exposure ratio of 2 % or more shall allocate the notional repricing cash flows of their non-performing exposures to the relevant repricing time buckets referred to in point 1 of the Annex. They shall allocate those expected cash flows net of provisions, taking into account their timing and in a way that it is consistently applied over time.
For the purposes of the first subparagraph, institutions shall calculate the non-performing exposures ratio by dividing the amount of non-performing debt securities, loans and advances, as referred to in Article 47a(3) of Regulation (EU) No 575/2013, by the total amount of gross debt securities, loans and advances.
2. Where the sum of notional amounts of fixed rate loan commitments to retail counterparties exceeds 2 % of the non-trading book positions that are accounted for as an asset in accordance with the applicable accounting framework, institutions shall estimate the drawn amount, in both the baseline scenario and the applicable scenarios referred to in Article 4, based on:
(a)
historical internal observations of drawings on fixed rate loan commitments by the type of the counterparty under similar conditions;
(b)
the value of the contract for the counterparty in the baseline scenario;
(c)
the value of the contract for the counterparty in the shock scenario.
Institutions shall allocate the estimated drawn amounts to the relevant repricing time buckets referred to in point 1 of the Annex in accordance with the estimated time of the drawing.
Economic value of equity add-on for automatic interest rate options
1. Institutions shall calculate the economic value of equity add-ons for automatic interest rate options of their non-trading book positions referred to in Article 5(3), point (a).
2. In the case of a bought automatic interest rate option, institutions shall calculate the change in the value of that option between its value in the applicable scenario, taking into account a relative increase in the implicit interest rate volatility of 25 %, and its value in the baseline scenario.
3. In the case of a sold automatic interest rate option, institutions shall calculate the change in the value of that option between its value in the applicable scenario and its value in the baseline scenario.
For the purposes of the first subparagraph, the change in the value shall be the difference between the following points (a) and (b):
(a)
an estimate of the value of the option for the option holder, given:
(i)
a risk-free yield curve in the applicable currency under the applicable scenario;
(ii)
a relative increase in the implicit interest rate volatility of 25 %;
(b)
the value of the interest rate option for the option holder, calculated using the non-shock yield curve and the implicit interest rate volatility in the applicable currency at the valuation date.
4. Institutions shall calculate the economic value of equity add-on for automatic interest rate option risk as the difference between the values of all bought options calculated in accordance with paragraphs 2 and the values of all sold options calculated in accordance with paragraph 3, after having applied the scenario in a currency.
5. For the calculation referred to in paragraphs 2 and 3, institutions shall use their applicable internal valuation methods.
Source: EUR-Lex (Publications Office of the EU), © European Union, reuse permitted under Commission Decision 2011/833/EU.
