Question ID: 2317
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)
Topic: Solvency Capital Requirement (SCR)
Article: 179(1); 189(2)(f)
Status: Final
Date of submission: 26 Jul 2021
Question
Article 179 of Delegated Regulation (EU) 2015/35 refers to “credit derivative” in the context of the spread risk sub-module of the standard formula. Article 189 of that Regulation sets out the capital requirements for counterparty default risk and states that derivatives other than credit derivatives covered in the spread risk sub-module are in the scope of that module. Of the following types of derivatives, which should be treated as credit derivatives pursuant to Article 179 of Delegated Regulation (EU) 2015/35?
1) Credit Default Swap
2) Total Return swap
3) Forward contract referencing a bond or loan
4) Call or Put Option referencing a bond or loan
EIOPA answer
The answer to this question is provided by the European Commission.
According to Article 179(3) of Commission Delegated Regulation (EU) 2015/35, credit derivatives which are part of the undertaking's risk mitigation policy shall not be subject to a capital requirement for spread risk, as long as the undertaking holds either the instruments underlying the credit derivative or another exposure with respect to which the basis risk between that exposure and the instruments underlying the credit derivative is not material in any circumstances. Therefore, if any of the examples of derivatives mentioned in the question are part of the undertaking's risk mitigation policy pursuant to that paragraph, the derivative should be treated in the counterparty default risk module and not in the spread risk module.
The term credit derivative is not further specified in Commission Delegated Regulation (EU) 2015/35. However, as the explanatory memorandum to the act adopted by the Commission explains, the “Delegated Regulation [was] based on […] technical advice provided by EIOPA in 2009 and 2010“. EIOPA’s advice on the market risk module proposed that credit derivatives, “such as credit default swaps, total return swaps and credit linked notes”, should be dealt with in the spread risk module (see paragraph 4.116).
Accordingly, credit default swaps and total return swaps that are not part of the undertaking's risk mitigation policy pursuant to Article 179(3) should be treated in the spread risk module.
Disclaimer provided by the European Commission:
The answers clarify provisions already contained in the applicable legislation. They do not extend in any way the rights and obligations deriving from such legislation nor do they introduce any additional requirements for the concerned operators and competent authorities. The answers are merely intended to assist natural or legal persons, including competent authorities and Union institutions and bodies, in clarifying the application or implementation of the relevant legal provisions. Only the Court of Justice of the European Union is competent to authoritatively interpret Union law. The views expressed in the internal Commission Decision cannot prejudge the position that the European Commission might take before the Union and national courts.