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Time horizon
Institutions shall calculate the net interest income of their non-trading book activities over a minimum time horizon of 1 year (‘net interest income time horizon’). The remaining time up to the end of a net interest income time horizon shall be the net interest rate horizon minus the repricing midpoint of the repricing time buckets concerned referred to in point 1 of the Annex (‘remaining time’).
Calculation of the contribution of the projected risk-free interest rate on the reinvestment or refinancing of notional repricing cash flows
1. To calculate the contribution of the projected risk-free yield on the reinvestment or refinancing of notional repricing cash flows to the net interest income as referred to in paragraph 4, institutions shall, for each currency and each scenario, calculate forward rates that reflect the risk-free component of interest rates that is expected to be applied to risk-free loans starting at the repricing midpoints of the repricing time buckets referred to in point 4 of the Annex and with maturities that correspond to the reference term time bucket midpoints referred to in point 3 of the Annex. 2. Institutions shall calculate the forward rates referred to in paragraph 1 in accordance with the following formula: where: t k is the midpoint of repricing time bucket k ; REF j is the midpoint of reference term time bucket j ; is the forward rate for the respective scenario i and for currency c for a risk-free loan starting at the midpoint of repricing time bucket k and maturing at the midpoint of reference term time bucket j ; is the discounting factor for the respective scenario i and for currency c and time t k as referred to Article 17(3). 3. Institutions shall calculate the applicable risk-free interest rate, for each combination of a repricing time bucket midpoint with a reference term time bucket midpoint, by multiplying the forward rates referred to in paragraph 1 with the remaining time horizon referred to in Article 18, second subparagraph. 4. Institutions shall calculate the contribution of the projected risk-free interest rate on the reinvestment or refinancing of notional repricing cash flows to the net interest income as the product of the following points (a) and (b): (a) the notional repricing cash flows referred to in Articles 6, 7 and 8, Article 9(5), Article 10(7), Article 11(2), second subparagraph, and Article 12, allocated in accordance with Article 14(4) and (5); (b) the contribution of the corresponding applicable risk-free interest rate calculated in accordance with paragraph 3 of this Article.
Calculation of the contribution of the projected commercial margin on the reinvestment or refinancing of notional repricing cash flows
1. Institutions shall calculate the contribution of the projected commercial margin on the reinvestment or refinancing of notional repricing cash flows to the net interest income by multiplying the notional repricing cash flows calculated in accordance with paragraph 2 by the applicable commercial margin yield referred to in paragraph 4. 2. For the purposes of the calculation referred to in paragraph 1, institutions shall: (a) allocate, at the reset of commercial margins, the notional repricing cash flows of the instruments referred to in Articles 6 to 12 to the repricing time buckets referred to in point 4 of the Annex; (b) estimate: (i) the applicable commercial margin rate, in accordance with paragraph 3 of this Article; (ii) the remaining time referred to in Article 18, second subparagraph. For the purposes of point (a), Articles 6 to 12 shall apply mutatis mutandis . However, in the case of floating rate instruments, institutions shall allocate the part of notional repricing cash flows that constitutes a principal amount in accordance with the final contractual maturity date of those floating rate instruments. 3. For the purposes of paragraph 1, institutions shall allocate the non-trading book positions to the product types of financial assets and financial liabilities, divided by geographical location and currency denomination. The product types of financial assets referred to in the first subparagraph shall be the following: (a) debt securities; (b) loans and advances – non-financial corporates; (c) loans and advances – households – mortgages; (d) loans and advances – households – credit (non-mortgage); (e) loans and advances – other counterparties; (f) other products in the non-trading book. The product types of financial liabilities referred to in the first subparagraph shall be the following: (a) deposits – non-financial corporates; (b) deposits – households; (c) deposits – other counterparties; (d) debt securities; (e) other liabilities in the non-trading book. 4. In the case of instruments traded in deep and active liquid markets where the value of those instruments can be determined on the basis of widely disseminated and easily available market prices, institutions shall estimate the applicable commercial margin rate referred to in paragraph 2, point (b), on the basis of the market price, the interest payments of those instruments and the deduction of the risk-free interest rate. In the case of other instruments than those referred to in the first subparagraph, institutions shall estimate the applicable commercial margin rate referred to in paragraph 2, point (b), on the basis of the weighted average of commercial margins received or paid in transactions during the preceding 360 days, having regard to the product type, the geographical location, and the currency denomination, referred to in paragraph 2. In the absence of such transactions, institutions shall estimate the applicable commercial margin rate on the basis of assumptions relying on margins received or paid in comparable portfolios. 5. The applicable commercial margin rate in the baseline scenario, estimated in accordance with paragraph 3, shall also apply in the applicable scenario. 6. To take into account the remaining time referred to in Article 18, second subparagraph, institutions shall calculate the percentage of commercial margin yield by multiplying the applicable commercial margin rate estimated in accordance with paragraph 3 of this Article by that remaining time.
Calculation of interest payments or part of interest payments that occur up to and including their reset date
1. Institutions shall calculate the contribution of interest payments occurring up to the repricing date, including that date, to the net interest income, by allocating to the repricing time buckets referred to in point 4 of the Annex, in addition to the allocation referred to in Articles 19 and 20, the interest payments of the instruments referred to in Articles 6 to 12, provided that those interest payments meet the following conditions: (a) the size of the interest payment is known and fixed, with no possibility for the payment to change due to a movement in interest rates; (b) the interest payment is expected to be paid within the net interest income time horizon referred to in Article 18, first subparagraph. 2. For floating rate instruments, where the interest payment occurs after the repricing date, institutions shall apply paragraph 1 of this Article only to the part of the interest payment that represents the commercial margin.
Market value changes for instruments held at fair value maturing beyond the net interest income time horizon
1. Institutions shall calculate the market value changes beyond the net interest income time horizon for instruments held at fair value by applying Article 17(3), (4) and (5) mutatis mutandis to the allocation performed in accordance with paragraph 2. 2. For the allocation referred to in paragraph 1, institutions shall apply Article 17(2) mutatis mutandis , and shall include the commercial margins and other spread components in interest payments in the notional repricing cash flows, and with the following derogations: (a) institutions shall exclude notional repricing cash flows related to instruments not held at fair value; (b) institutions shall exclude the notional cash flows repricing in the net interest income time horizon by setting those cash flows to zero in the repricing time buckets referred to in point 4 of the Annex.
Net interest income add-on for basis risk
1. In addition to the allocation referred to in Article 7, institutions shall allocate the notional repricing cash flows of floating rate instruments, for each currency, by their repricing date, to the repricing time buckets referred to in point 4 of the Annex, where the sum of those floating rate instruments, other than those in the reference term ‘overnight’ referred to in paragraph 2, point (a), of this Article exceeds 5 % of the non-trading book positions that are accounted for as an asset in accordance with the applicable accounting framework. For the purposes of the first subparagraph, institutions shall exclude embedded interest rate options and shall treat those options in accordance with paragraph 8. 2. When allocating the notional repricing cash flows referred to in paragraph 1, institutions shall assign those cash flows to the following reference terms, to which the floating rate instrument refers: (a) overnight; (b) 1 month; (c) 3 months; (d) 6 months; (e) 12 months. 3. In the absence of a corresponding reference term, institutions shall assign the notional repricing cash flows to either of the following categories: (a) ‘policy rate’, where the floating rate instrument refers to a central bank policy rate; (b) ‘other’, where the floating rate instrument refers to any other benchmark. Institutions shall assign incoming notional repricing cash flows with a positive sign, and outgoing notional repricing cash flows with a negative sign. 4. Institutions shall, for a given currency, on the basis of historic observations of movements in the interest rates of the instruments and for each reference term referred to in paragraph 2 and category referred to in paragraph 3, estimate tightening shocks and widening shocks in a way that is consistently applied over time. 5. Institutions shall estimate the tightening and widening shocks referred to in paragraph 4 by comparing interest rates in the reference term ‘overnight’ referred to in paragraph 2, point (a), with the other reference terms referred to in paragraph 2, points (b) to (e), and categories referred to in paragraph 3. 6. Institutions shall, for each currency, apply the tightening and widening shocks referred to in paragraph 4, multiplied by the remaining time referred to in Article 18, second subparagraph, to the notional repricing cash flows. 7. Institutions shall aggregate, but separately for the tightening and widening shocks referred to in paragraph 4, the results from the calculations referred to in paragraph 6. 8. Institutions shall calculate, both for the tightening and the widening shocks referred to in paragraph 4, the pay-outs from automatic interest rate options in floating rate instruments, and shall compare those pay-outs with the pay-outs calculated under the baseline scenario. Institutions shall add the difference in the pay-outs that results from the comparison referred to in the first subparagraph to the aggregated result referred to in paragraph 7, but separately for the tightening and the widening shock. They shall assign a positive sign to incoming pay-outs and a negative sign to outgoing pay-outs. Institutions shall not discount pay-outs and shall not make any assumptions regarding changes in volatility. 9. The net interest income add-on for basis risk shall be the lower result calculated in accordance with paragraphs 1 to 8 for tightening and the widening shocks.
Calculation of the net interest income and changes in the net interest income
1. Institutions shall calculate the net interest income by adding all of the following, with the exclusion of automatic interest rate options, up to the net interest income time horizon: (a) the projected risk-free yields on the reinvestment or refinancing of notional repricing cash flows, calculated in accordance with Article 19; (b) the projected commercial margin on the reinvestment or refinancing of notional repricing cash flows of the instruments referred to in Articles 6 to 12, calculated in accordance with Article 20; (c) the sum of interest payments occurring up to the repricing date, including that date, calculated in accordance with Article 21, reduced by any material interest accrued at t = 0. 2. For the purposes of the calculation referred to in paragraph 1, institutions shall assign a positive sign to incoming cash flows and a negative sign to outgoing cash flows. 3. Institutions shall calculate the impact of a scenario on net interest income by adding all of the following: (a) the difference between: (i) the calculation referred to in paragraph 1 relating to the applicable scenario; (ii) the calculation referred to in paragraph 1 relating to the baseline scenario; (b) the net interest income add-on for automatic options within the net interest income time horizon, calculated in accordance with Article 15; (c) the net interest income add-on for basis risk referred to in Article 23. For the purposes of the first subparagraph, points (a) and (b), institutions shall use the same scenarios. For the purposes of the first subparagraph, point (c), institutions shall calculate the net interest income add-on for basis risk for the tightening or widening shocks, as referred to in Article 23(9), that has the largest negative impact on the net interest income. 4. When calculating the aggregate change for each scenario, institutions shall add together any negative and positive changes occurring in each currency. In that calculation, institutions shall convert currencies, other than the reporting currency, to the reporting currency at the ECB spot FX rate on the reference date. Positive changes shall be weighted by a factor of 50 % or by a factor of 80 % in the case of ERMII currencies with a formally agreed fluctuation band narrower than the standard band of +/-15 %. Institutions shall recognise weighted gains up to the greater of either of the following values: (a) the absolute value of negative changes in EUR or ERM II currencies; (b) the result of applying a factor of 50 % to the positive changes of ERM II currencies or EUR.
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Source: EUR-Lex (Publications Office of the EU), © European Union, reuse permitted under Commission Decision 2011/833/EU.