EBA/RTS/2025/09 12/12/2025 Final Report On Draft Regulatory Technical Standards on the treatment of structural FX positions under Article 104c of Regulation (EU) No 575/2013 (Capital Requirements Regulation)

FINAL DRAFT RTS ON STRUCTURAL FX 2 Contents

1. Executive Summary 3
2. Background and rationale 4 2.1 Overview of the provision and clarifications on the application of the structural FX treatment 4 2.2 Introduction to the RTS and overarching requirements 8 2.3 Calculation of the maximum net open position 23 2.4 Exclusion of the risk position from the calculation of the FX-own funds requirements 26 2.5 Specific provisions on non-monetary items at historical cost and items leading to gains or losses not affecting the CET1 27 2.6 Combining the maximum open position and the specific treatment for items whose changes to not affect the CET1 28 2.7 Reporting on structural foreign exchange positions 28
3. Draft Regulatory Technical Standards 30
4. Accompanying documents 45 4.1 Draft cost-benefit analysis / impact assessment 45 4.2 Feedback on the public consultation 48 4.3 Annex I: Derivation of the maximum open position 62 Annex II: Stylised examples of the application of the structural FX provision 69 Annex III: Reporting on Structural FX positions: Templates 87 Annex IV: Reporting on Structural FX positions: Instructions 88

FINAL DRAFT RTS ON STRUCTURAL FX 3

1. Executive Summary The concept and specific application of the structural foreign exchange (FX) provision pursuant to Article 352(2) of Regulation (EU) No 575/2013 (the Capital Requirements Regulation, CRR) has been subject to several interpretations, across both supervisory authorities and institutions. The implementation of this provision has proved to be quite uneven across jurisdictions. In order to ensure a harmonised EU interpretation and implementation of the treatment of structural FX positions, the EBA published in 2020 guidelines (GLs) on how to implement the structural FX provision contemplated in Article 352(2) of the CRR. In light of the importance of the structural FX provision, also in terms of impact on the own funds’ requirements, the co-legislators, as part of the CRR3 legislative process, introduced a mandate for the EBA to develop RTS in this regard. The RTS overall keep the provisions included in the GLs. There have been only few changes compared to the GLs text, namely: • The removal of a threshold for a currency to be considered eligible for the structural FX treatment; • The possibility for banks to consider only credit risk own funds requirements when determining the position neutralising the sensitivity to the capital ratios, as long as the credit risk own funds requirements are the ones driving the variability of the ratio against FX changes; • Clarifications around how institutions are to remove the risk position from the own funds requirements for foreign exchange risk; • Provisions relating the institution’s policies as regards currencies that are particularly illiquid in the market, for example, because of Union restrictive measures. Based on the information provided by supervisors to the EBA, the changes introduced are not expected to lead to a material capital impact. On the contrary, the possibility for institutions to consider only credit risk own funds requirements when computing the maximum open position is expected to at least reduce the operational burden to which they are subject.

FINAL DRAFT RTS ON STRUCTURAL FX 4 2. Background and rationale

1. The structural FX provision in Article 352 of Regulation (EU) No 575/2013 (CRR) has been subject to various interpretations that have led to differences in its application both between EU Member States and across institutions. To promote a harmonised approach within the EU, the EBA published in 2020 own-initiative guidelines (EBA/GL/2020/09) on the practical implementation of the ‘structural FX’ provision. Those GLs are now transposed into these RTS, following a mandate provided to EBA in the context of the CRR3 legislative process (see Article 104c of CRR as amended by CRR3).
2. It is important to note that, even if the guidelines related to the provision included in Article 352(2) of CRR, which refers to the pre-FRTB market risk framework (Basel II), they were developed also considering changes to the market risk framework introduced in the revised Capital Requirements Regulation (CRR2), which builds on the new FRTB standards published by the Basel Committee on Banking Supervision (BCBS) in January 2019, and taking into account the structural FX treatment envisaged in those standards. Accordingly, the RTS overall keeps the content of the GLs unchanged.
3. Accordingly, most of the provisions included in the RTS were already part of the GLs on structural FX. For approvals that were already granted under the provisions set out in the GLs, it is expected that competent authorities ensure the continuity of the institution’s compliance with the new structural FX provision, in particular in relation to those aspects that were subject to amendments introduced by the RTS. 2.1 Overview of the provision and clarifications on the application of the structural FX treatment
4. This section provides an overview of the regulatory treatment of the structural FX provision in the CRR and clarifies some aspects around its applicability.
5. Article 104c of the CRR states that:
6. An institution which has deliberately taken a risk position in order to hedge, at least partially, against adverse movements in foreign exchange rates on any of its capital ratios as referred to in Article 92(1), points (a), (b) and (c), may, subject to permission of the competent authorities, exclude that risk position from the own funds requirements for foreign exchange risk set out in Article 325(1), provided that all of the following conditions are met: (a) the maximum amount of the risk position that is excluded from the own funds requirements for market risk is limited to the amount of the risk position that neutralises the sensitivity of any of the capital ratios to the adverse movements in foreign exchange rates;

FINAL DRAFT RTS ON STRUCTURAL FX 5 (b) the risk position is excluded from the own funds requirements for market risk for at least 6 months; (c) the institution has established an appropriate risk management framework for hedging the adverse movements in foreign exchange rates on any of its capital ratios, including a clear hedging strategy and governance structure; (d) the institution has provided to the competent authorities a justification for excluding a risk position from the own funds requirements for market risk, the details of that risk position and the amount to be excluded from the own funds requirements for market risk. 2. Any exclusion of risk positions from the own funds requirements for market risk in accordance with paragraph 1 shall be applied consistently. 3. The competent authorities shall approve any changes by the institution to the risk management framework referred to in paragraph 1, point (c), and to the details of the risk positions referred to in paragraph 1, point (d). 4. EBA shall develop draft regulatory technical standards to specify: (a) the risk positions that an institution can deliberately take in order to hedge, at least partially, against the adverse movements of foreign exchange rates on any of an institution’s capital ratios referred to paragraph 1, first subparagraph; (b) how to determine the maximum amount referred to in paragraph 1, point (a), and the manner in which an institution shall exclude this amount for each of the approaches set out in Article 325(1); (c) the criteria that shall be met by an institution’s risk management framework referred to in paragraph 1, point (c), in order to be considered appropriate for the purpose of this Article. 6. The provision allows competent authorities to authorise, on an ad hoc basis, the exclusion of FX risk positions deliberately taken by firms to hedge against the adverse effect of exchange rates on capital ratios from the calculation of the own funds requirements for foreign exchange risk. 7. It is worth mentioning that, in the context of these RTS, a position that has been taken to hedge the ratios against the adverse effect of changes in the FX rate on its ratios is a position that reduces the volatility of the ratios with respect to changes in the relevant exchange rate. Accordingly, such positions should limit the changes in the value of the ratios considering both appreciations and depreciations of the foreign currency with respect to the reporting currency. Therefore, such positions should limit the changes in the value of the ratios compared with a closed position. 8. It is worth clarifying that the FX position or the FX risk position means the FX risk stemming from any item/asset/liability held by the institution. Accordingly, what is subject to the exemption is the FX risk position stemming from an item/asset/liability, not the item/asset/liability itself.

FINAL DRAFT RTS ON STRUCTURAL FX 6 Maximum open position that can be exempted under the structural FX provision 9. The CRR3 text clarifies that the open position that can be exempted under the structural FX provision is capped by the open position neutralising the sensitivity of the capital ratio to changes in the exchange rate. 10.The methodology that institutions should use for calculating the open position neutralising the sensitivity of the capital ratio to movements in the exchange rate is discussed later in this background section. 11.There might be cases where the size of the open position generated by positions that are suitable for the exemption (and therefore potentially exemptible from the net open position) exceeds the maximum open position that can be exempted. Accordingly, these RTS set a clear distinction between FX positions that cannot be exempted because they are not suitable for the exemption (e.g. because they are not structural or because they are not taken for hedging the ratio) and FX positions that are not exempted only because of the cap imposed by the maximum open position. 12.These RTS refer to over-hedges when the position suitable for the exemption is greater in size than the maximum open position (i.e. the position perfectly hedging the ratio). Similarly, in under-hedges, the position suitable for the exemption is lower in size than the maximum open position. Ratio to which the structural FX provision applies 13.Article 104c of the CRR refers to the ratios of the institutions, as defined in Article 92 CRR. Accordingly, the RTS were developed considering that institutions may apply for the waiver when hedging any of the three capital ratios with structural FX positions. Because the CET1 ratio is the ratio that typically attracts the most attention from external stakeholders, the expectation of the EBA would be that the CET1 ratio is the ratio that institutions will aim to hedge. 14.A position that is suitable for the exemption in the context of the structural FX provision applied to one ratio of the institution is also deemed suitable for the exemption in the context of the structural FX provision of another ratio of the institution. Where the institution perfectly hedges the total capital ratio, the T1 ratio and the CET1 ratio are over-hedged. Along the same lines, where the institution perfectly hedges the CET1 ratio, the T1 ratio and the total capital ratio are in general under-hedged. It is clear that the FX open position required to neutralise the sensitivity of the ratio to the FX rate depends on the ratio that the institution hedges. Accordingly, the number of FX positions that could be exempted from the net open position varies from ratio to ratio (as the maximum open position that can be exempted varies). 15.As a result of the previous paragraph, if the institution were calculating the maximum open position for each of the ratios, it would also obtain different own funds requirements for each of the ratios (as the positions that can be exempted would differ in size). To prevent such a situation from occurring, the RTS specify that the institution should choose the ratio it intends

FINAL DRAFT RTS ON STRUCTURAL FX 7 to hedge and, accordingly, develop a strategy with the purpose of hedging such a ratio (as also required by the CRR3 text). 16.Once the exemption has been granted by the competent authority in the context of one ratio, it will have an impact on all three reported ratios due to the reduction in risk weights for FX risk. 17.The RTS also clarify that the ratio to be considered when computing the position neutralising the sensitivity is the current ratio, i.e. the ratio that the institution currently has (or the one calculated with the latest available figures), and not any form of ratio the institution plans to have or foresees having in the future. Accordingly, competent authorities should assess whether the FX risk positions hedge the current capital ratio and potentially grant the permission to exclude them from the net open position. To be noted that, since the institution is required to consider the actual ratio, it should also consider the ratio as resulting from the application of output floor if this happens to be hit. Level to which the structural FX provision applies 18.Article 6 of the CRR determines that institutions shall comply with their market risk requirements on an individual basis, and Article 11 of the CRR establishes the obligation to comply with these requirements on a consolidated basis. Accordingly, institutions have to generally comply with the CRR requirements for market risk, including FX risk requirements, both on an individual and on a consolidated basis. Consequently, the waiver in Article 104c CRR could apply both on an individual and on a consolidated basis. 19.These RTS therefore consider specificities in applying the structural FX provision on an individual and on a consolidated basis. It is expected that a specific request is sent to the competent authority for each level at which the institution seeks permission to apply the structural FX treatment. 20.The need for a specific permission is because positions that have been taken for hedging the capital ratio at a consolidated level might not have a hedging effect on the capital ratio at a solo level (and vice versa). Accordingly, positions that might be exempted in one context might not receive the same prudential treatment (i.e. the exemption) in another context. Risk position and net open position 21.An additional element of the current regulation related to FX positions that may be worth clarifying stems from the differences between simplified standardised, the standardised and the internal model regulatory frameworks. The treatment of structural FX is now established in Article 104c CRR. This article also refers directly to all three approaches that institutions may use to compute the own funds requirements for foreign exchange risk. Hence, the provision in Article 104c CRR applies to banks under any of the three approaches. 22.Considering that there could be cases where the institution (at consolidated level) uses all three approaches, it is appropriate to introduce a semantic that is applicable to all. In particular:

FINAL DRAFT RTS ON STRUCTURAL FX 8 (i) By risk position, the RTS refer to the overall FX position that is taken/maintained for hedging the ratio. This risk position consists of FX positions corresponding to specific items/assets/liability. (ii) By net open position, the RTS refer to the FX position resulting by netting FX positions. Institutions are free to consider the net open position as either: o The net open position referred to in Article 352(1) CRR; or o The net delta sensitivity towards the relevant exchange rate. Items that are deducted from the institution’s own funds 23.According to Article 325(1) of the CRR, positions that are deducted from the institution's own funds are not subject to own funds requirements for foreign exchange risk. This is in line with the FRTB standards. Accordingly, given that these positions are excluded ex-ante, they cannot be subject to the S-FX permission. Accordingly, compared to the GLs, the RTS remove all provisions relating to items deducted from CET1. Base currency treatment 24.Under CRR3, an institution must compute the own funds requirements using one reporting currency only (see last subparagraph of Article 325b(4) CRR). However, the institution may use the base-currency treatment referred to in Article 325q CRR (if does so, it has to do it for all banking and trading book positions and must still capture translation risk). The RTS specify that if the bank computes the foreign-exchange risk using a base currency (instead of the reporting currency), then the RTS themselves must be applied treating the base currency as the reporting currency (i.e. the institution cannot ask to waive positions denominated in the base currency, as FX risk is not computed in the first place for those positions), and the reporting currency as a foreign currency (i.e. the institution can ask for waiving position denominated in the reporting currency, given that the institution pays FX risk for those positions). 2.2 Introduction to the RTS and overarching requirements 25.As previously mentioned, the structural FX provision allows competent authorities to authorise, on an ad hoc basis, the exclusion of the risk position deliberately taken by firms to hedge against the adverse effect of the exchange rate on capital ratios from the calculation of the net open positions. 26.The EBA is of the view that the provision has a rather limited scope of application, as the hedging activity must be ‘deliberately taken in order to hedge (at least partially) against the adverse movements of the exchange rate on its ratios’. Specifically, this is fundamentally different from hedging specific exposures and would indicate that only positions taken to hedge the overall FX risk of the capital ratios, i.e. at the level of the overall balance sheet of the institution, can be taken into consideration.

FINAL DRAFT RTS ON STRUCTURAL FX 9 27.As mentioned, the CRR requires the FX positions to be deliberately taken in order to hedge the ratio. These RTS reflect the interpretation that, when considering whether or not a position is ‘deliberately taken’, this could be seen as analogous to ‘deliberately not closed’ or ‘maintained’. Accordingly, the RTS have been developed with the overarching concept that structural FX positions are positions that have been taken or maintained (i.e. not closed) with the purpose of hedging the ratios of the institution. 28.The RTS, similarly to the GLs, consider that a position to be considered as deliberately taken to hedge the ratio must meet the following conditions:

1. The risk position hedges the ratio;
2. The risk position is structural;
3. The risk position is managed in accordance with the risk management framework whose criteria are laid down in these RTS. 29.It should be stressed that all conditions are to be met. In particular, the fact that a position is structural does not necessarily mean that it is suitable for the exemption. The institution should always prove that a structural position has been taken for the purpose of hedging the ratio. Accordingly, there can be structural positions that are not suitable for the exemption (i.e. that do not meet all three conditions). 30.Requirements relating to risk-management framework are essential – indeed, whether a position is suitable for the exemption is strictly related to the way that the position is managed over time and accordingly it would be counterintuitive to, for example, define a specific set of conditions that structural positions should meet to be automatically identified as such without taking into account the risk management strategy of such positions (which is typical of the institution). 31.Here below, each of these three conditions is outlined in more concrete terms. 2.2.1 Risk position hedging the capital ratio 32.This section sets out minimum requirements that the risk position for which exemption is sought should fulfil to be recognised as hedging the ratio. It is important to stress that the fulfilment of such requirements does not entail that a position is actually suitable for being exempted. Indeed, whether the risk position has been taken (or is maintained) for hedging the ratio will be assessed by the competent authority, considering also all other requirements included in the RTS. Long nature of the open FX position 33.If the purpose of a risk position is the hedging of the capital ratio, it is clear that only a net long FX position could potentially qualify for the exemption. Indeed, if an institution maintains a net

FINAL DRAFT RTS ON STRUCTURAL FX 10 short position, the effect on the numerator of the ratio of the fluctuations in the exchange rate will actually go in the reverse direction from the effect of the FX movement on the denominator of the ratio, exacerbating the effect of FX movements on the ratio compared with a closed position, which is the opposite of what would justify the application of the rule (i.e. hedge the capital ratio). Example: Considering now a 10% appreciation in the foreign currency, the balance sheet of the institution would be: Accordingly, CET1 (i.e. the numerator of the ratio) diminishes, while the risk-weighted asset (RWA) for credit risk augments (and the FX- own funds requirements, as well as the open position, increases). As a result, the numerator and denominator of the ratio move in opposite directions, obtaining the opposite effect from a hedge. It is worth mentioning that the numerator and denominator will also move in the opposite direction if the foreign currency depreciates.

FINAL DRAFT RTS ON STRUCTURAL FX 11 34.It is worth highlighting that, for the purpose of the waiver, it is the net open position that must be a long one. In turn, any net long position will normally be composed of gross long and gross short positions. 35.In accordance with the two paragraphs above, the RTS set out that the position for which the institution seeks the exclusion from the net open position should constitute a net long FX position. 36.Below, the requirement to have a long position is detailed under three different cases: (A) where the permission is sought at a solo level, (B) where the permission is sought at a consolidated level, with Article 325b CRR granted for all entities in the group, and (C) where the permission is sought at a consolidated level, with Article 325b CRR not granted for some entities in the group. Case A: permission sought on an individual basis 37.When the institution applies for the structural FX provision on an individual basis, then the exemption is meaningful when: (i) the net open position in the currency without exemption is long; (ii) the net open position generated by the exempted structural FX positions is long. 38.The net open position generated by the exempted structural FX positions should be long. Accordingly, the net open position in the currency before the exemption should also be long; if such a position were (net) short, then the exclusion of a long open structural position stemming from that net short position would actually increase the magnitude of the net open short position that the institution would have to capitalise. 39.However, considering that there is a natural incentive for institutions to fulfil the requirement in point (i) above1 , these RTS do not include other minimum requirements reflecting this aspect. As a result, when the provision is applied on an individual basis, the only requirement set out in this section is the one in point (ii) above (i.e. the risk position is net long). 40.It should be noted that, to ensure that the structural FX provision is applied in a meaningful way (i.e. that the numerator and the denominator move in the same direction), a provision requiring the numerator of the ratio to increase when the foreign currency appreciates has also been included in the legal text. Case B: permission sought on a consolidated basis, with the permission in Article 325b CRR granted for all entities 41.When the permission is sought on a consolidated basis and the permission to offset the positions among all entities within the group has been granted, all rationales presented under Case A hold. 1 If the institution excluded a long position from a short position, the institution would get an even shorter position to consider for capitalisation (i.e. the capital requirements would increase following the exclusion).

FINAL DRAFT RTS ON STRUCTURAL FX 12 Accordingly, also in this case, the only requirements set out in this section are that the risk position for which exemption is sought is long and the numerator increases when the foreign currency appreciates. Case C: permission sought on a consolidated basis, with the permission in Article 325b CRR not granted for some entities 42.First, in this context, it is important to observe that the permission in Article 325b CRR does not affect the calculation of CET1/T1/own funds of the institution at a consolidated level, as it deals only with the calculation of the own funds requirements (i.e. the denominator of the ratio). Accordingly, the CET1/T1/own funds of an institution are calculated regardless of the permission. As a result, the numerator of the capital ratio is sensitive to the exchange rate regardless of whether the permission in Article 325b CRR has been granted or not. 43.Whether the permission in Article 325b CRR has been granted or not does change, however, the own funds requirement for market risk (and accordingly also the FX charge) included in the denominator. 44.The hedging effect that a position has on the ratio does not depend on whether the permission to offset the positions within the group has been granted or not. For example, the parent bank of a group may enter into a short position to reduce the size of a long position stemming from a subsidiary and in this way reduce the sensitivity of the consolidated ratio with respect to changes in the exchange rate. Such a hedging effect is present regardless of whether the permission in Article 325b CRR has been granted or not. This situation is represented in the following example. Example: Parent institution at solo level reporting in EUR: Value in EUR Value in EUR Assets in EUR 700 Liabilities in EUR 595 Assets in GBP – participation 10 Liabilities in GBP 30 CET1 in EUR 85 Subsidiary at the solo level reporting in GBP: Value in EUR Value in EUR Assets in GBP 300 Liabilities in GBP 225 CET1 in GBP 75 Institution at a consolidated level reporting in EUR: Value in EUR Value in EUR Assets in EUR 700 Liabilities in EUR 595 Assets in GBP 300 Liabilities in GBP 255 CET1 in EUR 150

FINAL DRAFT RTS ON STRUCTURAL FX 13 Suppose that the bank entered into a short position at the parent level (EUR 30 in GBP) to reduce the over-hedge2 that the bank would have without such a position. Then, a short position has been actually taken for hedging the ratio and the hedging effect is present regardless of whether the permission in Article 325b CRR has been granted or not3 . 45.As a result, the structural FX position also has to be long on a net basis under case C. When assessing whether the structural position is net long, institutions should net all positions that are structural regardless of the fact that the permission in Article 325b CRR has been granted. 46.As mentioned later in this background section, the EBA believes that positions that are of a structural nature are mostly positions related to the cross-border nature of the group. This is in line with the feedback received by the EBA on the consultation paper relating to the guidelines. The EBA expects the structural position stemming from a subsidiary to be net long (as in the example included above); thus, structural positions that are net short are expected to be present only at the parent bank level for the purpose of reducing the size of the long position stemming from the subsidiary – furthermore, the EBA expects this to happen only where the currency of the short position at the parent level is the same as the reporting currency of the subsidiary at the solo level. In other words, the EBA expects that a short position at the parent level is recognised as structural and taken for hedging the ratio if it is booked for the purpose of covering the translation risk that emerges when translating the positions stemming from the subsidiary. 47.In general, when the permission in Article 325b CRR has not been granted (or only partially granted), the guidelines specify that a short position at the solo level (i.e. at subsidiary level or parent bank level) can be considered for the exemption at consolidated level only if it has been taken with the sole purpose of hedging the ratio at the consolidated level4. In addition, when the permission in Article 325b CRR has not been granted, these RTS require institutions to specifically describe how they manage positions that at the solo level are short for the purpose of hedging the ratio at a consolidated level. 48.Two other examples are provided below to show how the requirements described under case C work in practice. Example: An institution is composed of three entities, P, S1 and S2, where P is the parent bank and S1 and S2 are two subsidiaries. Suppose that after applying for the permission in Article 325b CRR the institution (i.e. P + S1 + S2) is allowed to offset positions in P and S1, but not S2. Then these guidelines set out that: 2 Over-hedge meaning that the net open position is greater than the position perfectly hedging the ratio. 3 This is specified in the legal text by clarifying that the net open position has to be net long at the level at which the institution applies the CRR, i.e. at the level of the group (i.e. netting all positions in the foreign currency within the group). 4 As explained, such short position must be in any case part of a long structural position at consolidated level.

FINAL DRAFT RTS ON STRUCTURAL FX 14 (i) the institution is allowed at a consolidated level to request the structural FX permission if the structural position for which the exemption is sought is net long at a consolidated level (i.e. netting all structural positions in P, S1 and S2); (ii) supervisors should check whether the structural position is net long or net short at these levels:

1. at the level of P + S1 – the positions among them can be netted;
2. at the level of S2. If at either of the two levels the structural FX position is short, then competent authorities are required to thoroughly check the reason why this is the case. As mentioned, the EBA expects that positions recognised as structural and taken for hedging the ratio should not be short at the level of S2. In addition, at the level of P + S1 a short position is expected to be recognised as structural only if it has been taken to reduce a long position that stems from the subsidiary S2 and if it is in the reporting currency of S2 (i.e. the risk at the consolidated level stems from the translation of positions held in S2 in the reporting currency used at the consolidated level). Example: Parent bank at solo level reporting in EUR: Value in EUR Value in EUR Assets in EUR 700 Liabilities in EUR 595 Assets in GBP – participation 40 Liabilities in USD 30 CET1 in EUR 115 Subsidiary at the solo level reporting in GBP: Value in EUR Value in EUR Assets in GBP 300 Liabilities in GBP 260 Assets in USD 60 Liabilities in USD 10 CET1 in GBP 90 Institution at the consolidated level reporting in EUR: Value in EUR Value in EUR Assets in EUR 700 Liabilities in EUR 595 Assets in GBP 300 Liabilities in GBP 260 Assets in USD 60 Liabilities in USD 40 CET1 in EUR 165 Suppose that the institution is requesting the structural FX permission for all positions that are in USD, and that the institution does not have the permission under Article 325b CRR to offset the

FINAL DRAFT RTS ON STRUCTURAL FX 15 positions held in the two entities. The position for which the exemption is sought in this case meets the minimum requirement to be net long (EUR 20 in USD). However, at the level of P, the position for which the exemption is sought is short. In addition, this position was not taken to cover the risk stemming from positions that are not attracting FX risk at the individual level (i.e. the positions in GBP). As a result, the competent authority should check, for example, why the institution does not directly reduce its long position in USD at the level of the subsidiary, instead of taking a short position at the parent bank level, i.e. the competent authority should deeply investigate whether that short position has been taken for hedging the ratio and whether the institution could reach the same objective in a sounder way from a prudential point of view. Delta risk and internal trades 49.The RTS prescribe that the risk position must be a delta risk position. There, banks cannot remove from the own funds requirements for market risk any non-delta risk e.g. vega position, on the basis that this has been taken for the purpose of hedging the ratio. 50.Furthermore, the RTS set out that internal trades between banking book and trading book cannot be considered part of the waiver. Internal trades do not impact the size of the net open position of the institution in the foreign currency – hence, it cannot be argued that the bank performs internal trades to achieve the objective of stabilizing the ratio. On the contrary, there may be cases where an institution transfers its trading book FX risk to the non-trading book for the purpose of meeting the condition set out in the next section (i.e. the fact that only non￾trading book position can be subject to the waiver). Accordingly, in order to avoid regulatory arbitrage, the RTS make explicit that internal trades cannot be part of the waiver. 51.An exception to the general principle set out in the previous paragraph is however introduced to permit those cases where the risk transfer from the banking book to the trading book, is further transferred to an external party, similarly to what is required to institutions to qualify transactions as internal hedges under Article 106 CRR. In those cases, the banking book position of this chain of transaction (i.e. the one facing the trading book) may be part of structural waiver (if all three conditions to qualify a position as suitable for the exemption are met). 2.2.2 Risk position is structural Limitation to banking book positions 52.These RTS exclude the possibility of institutions including in the scope of positions suitable for the exemption FX positions that stem from instruments in the trading book. In other words, only banking book positions qualify as possibly being recognised as structural. 53.In particular, it is deemed that an FX risk position is of a non-trading nature only if the instrument from which it stems is of a non-trading nature as well. In addition, Article 102 of the CRR requires positions in the trading book to be free of restrictions (or able to be hedged). It is clear that, if a

FINAL DRAFT RTS ON STRUCTURAL FX 16 position stemming from the trading book could be among the scope of those for which the institution seeks the permission, then the position would automatically become subject to restrictions with respect to its tradability (as the institution would be required, for example, to keep that position until the item bearing the position expires). 54.Accordingly, it is deemed that only FX positions stemming from instruments for which the institution does not have trading intent (i.e. instruments held in the banking book) can possibly qualify for the exemption5 . Positions of type A and B 55.The RTS include other conditions for a risk position to be considered structural. In particular, for the positions for which the exemption is sought, institutions should indicate whether they are positions of type A or positions of type B in accordance with the specifications in the paragraphs below. Positions of type A are positions for which the RTS recognise their structural nature, while positions of type B are positions for which the RTS require a deeper analysis to assess the structural nature. 56.The categorisation into positions of type A or positions of type B is meant to support the competent authority in analysing the application of the institution; in particular, such categorisation is meant to support supervisors in assessing whether the conditions that positions should meet for being suitable for the exemption are actually met, and represents a minimum level of granularity into which such positions need to be subdivided by the institution. 57.The categorisation into positions of type A or positions of type B is based both on the finalised FRTB standards and on the EBA’s view that positions that are of a structural nature are mainly positions related to the cross-border nature of the group. In addition, this interpretation is in line with the feedback received on the consultation paper when the EBA guidelines were developed. Case A: permission sought on an individual basis 58.Where the provision is applied on an individual basis, except for investments in subsidiaries (i.e. investments in subsidiaries that are subject to prudential consolidation according to Title II, Chapter 2 of the CRR at the consolidated level), these guidelines do not identify any other kind of position that is clearly correlated with the cross-border nature of the group. 59.Accordingly:

1. positions of type A: investment in a subsidiary;
2. positions of type B: the remaining FX positions (i.e. FX positions that are not of type A). 5 It should be noted that the FRTB standards clarify that positions should be of a ‘structural (i.e. non-dealing) nature’, meaning that ‘structural’ and ‘non-dealing’ should be treated as synonymous.

FINAL DRAFT RTS ON STRUCTURAL FX 17 60.It is worth mentioning that investments in the subsidiary are in general held at historical cost and accordingly they are subject to an ad hoc treatment in relation to the maximum open position, as presented in the following sections. Case B: permission sought on a consolidated basis 61.Where the provision is applied at the consolidated level:

1. positions of type A: are FX positions satisfying both conditions (a) and (b) below: (a) the FX position stems from an investment in the subsidiary; (b) the subsidiary holding the item from which the FX position stems has a reporting cur￾rency that coincides with the currency of the FX position itself;
2. positions of type B: the remaining FX positions (i.e. FX positions that are not of type A). 62.For meeting the accounting requirements, where consolidating or combining the financial statements prepared in different currencies, an institution must have financial statements of its foreign subsidiaries translated into its reporting currency in order to produce single-currency consolidated financial statements. The translation of assets and liabilities of the subsidiary may give rise, in the consolidated financial statements, to translation reserves. Movements of the exchange rate will affect the translation reserve through other comprehensive income (OCI), resulting in the volatility of the capital with no impact on the volatility of the profit and loss (P&L). 63.From a prudential perspective, all positions in the banking book and in the trading book (regardless of whether the corresponding gains or losses due to change in the exchange rate go through OCI or P&L in the financial statements) are subject to own funds requirements for FX risk. 64.However, in the context of the structural FX provision, it should be noted that, although there are exceptions, positions for which the institution seeks the exemption contributing to the translation reserve are expected to be positions of type A, as in general they fulfil the conditions for being classified as such. The classification as positions of type A or type B is relevant only for positions that meet the minimum requirements set out in the previous sections; accordingly, without any exception, i.e. even if contributing to the translation reserves, trading book positions should not be considered structural. 65.FX positions of type A are positions not bearing FX risk when the own funds requirements are computed at the level of the subsidiary holding the items from which the FX positions stem. Example 1: The institution consists of the parent bank P reporting in EUR and the subsidiary S reporting in GBP at individual level.

FINAL DRAFT RTS ON STRUCTURAL FX 18 The parent bank P (at the solo level) has positions only in EUR, except for the long-term participation in the subsidiary, which is held at historical cost. The subsidiary S has positions only in GBP. At the solo level, neither of the two banks is subject to FX risk (except for the item held at historical cost by the parent bank); however, at the consolidated level the positions stemming from the subsidiary are subject to FX risk. At the consolidated level, the FX positions in GBP stemming from the subsidiary are positions of type A. Example 2: Bank C is a subsidiary of bank B, and bank B is a subsidiary of parent bank A, and the reporting currencies of the three banks are different (e.g. EUR for bank C, GBP for bank B, USD for bank A). At a consolidated level, the positions in the foreign currency of C (i.e. EUR) are due to positions stemming from investments of A in B, which invested in C; accordingly, at the consolidated level the open position in the foreign currency of C (i.e. EUR) is generated by positions of type A. 2.2.3 Requirements applicable to the risk-management framework 66.This section sets out the governance requirements and the requirements related to the risk management strategy of the institution for its structural FX positions. As previously mentioned, the risk management strategy for structural FX positions and the governance requirements are expected to constitute the basis for the assessment performed by the competent authority. 67.The requirements included in this section represent the fourth condition to be met by the risk position for it to be exempted from the own funds requirements for foreign exchange risk. To be noted that, these requirements also fulfil the mandate for the EBA in Article 104c(4)(c) CRR. 68.The notion ‘deliberately taken to hedge’ specifies that the credit institution must have entered into (or maintains) a position with the purpose and objective of hedging its ratio against the effects of exchange rate movements. Any requirement that is based on the intention is, however, challenging for the competent authorities to assess. For that purpose, a number of qualitative and quantitative elements have been put in place to assess whether a position is taken (or maintained) for the purpose of hedging the ratio. 69.For the purpose of assessing such requirements, institutions must provide supervisors with the business strategy used for the management of structural FX positions. In particular, the waiver application should refer to those documents in which the institution describes the intention and the strategy to hedge the capital ratio. This will be first and foremost the institution’s risk appetite framework (RAF), although other relevant documents approved by the board or senior management of the institution could also be considered. In particular, the institution should

FINAL DRAFT RTS ON STRUCTURAL FX 19 include in the waiver application only elements that are reflected in (or are consistent with) the institution’s general risk management strategy. 70.In general, the risk management framework of the structural FX positions must be approved by the management board. In the approval process the members of the management board must be explicitly made aware that the open position that is taken/maintained for hedging the ratio will lead to losses (i.e. reduction in the own funds) when the foreign currency depreciates. In other words, the management board must be aware that a strategy that fully hedges the ratio entails higher volatility of own funds/CET1 amounts due to changes in the exchange rate than a closed position. In addition, a maximum limit on the loss that is deemed acceptable should be part of the approval from the management board. 71.In particular, the documentation describing the risk management framework should state: (i) the definition of the objective of the institution leading to the reduction of the sensi￾tivity of the capital ratio to movements in the relevant exchange rate; (ii) the strategy to achieve that objective6 , which should be outlined in a detailed, credible and reliable way, and the time horizon of this strategy, which should be at least 6 months. 72.It is worth highlighting that, for the purpose of receiving the structural FX waiver, the institution is not requested to fully offset the sensitivity of the ratio to changes in the exchange rate (as not explicitly stated also in the CRR3 text). It is fully acknowledged that institutions may have strategies that are, for example, based on a trade-off between having the ratio fully hedged (i.e. the sensitivity of the ratio to exchange rate changes is equal to zero) and zero volatility in CET1 due to the FX changes (i.e. according to the CRR this is equivalent to a net open position equal to zero). 73.The RTS allow institutions to set its objective with respect to the risk management of the structural positions. That objective must be based on quantitative criteria that are specific and detailed. 74.When defining the objective, institutions are required at least to set a level of tolerance for the sensitivity of the ratio with respect to changes in the exchange rate and specify in detail the criteria and methodology for setting such a level of tolerance. Considering that the value taken by that sensitivity is driven by many factors (e.g. the level of the ratio, the shock applied to the current value of the exchange rate, the relation between own funds in the foreign currency and own funds requirements in that currency), the RTS also specify that the criteria for setting the level of tolerance must encompass all components that may lead to changes in the value taken by the sensitivity and any specificity of the currency. 6 For example, the institution may decide to buy or sell FX forwards that are held in the banking book as they are taken with the purpose of hedging the ratio. The FX position stemming from the FX forwards would be part of the structural position that is eligible to be exempted.

FINAL DRAFT RTS ON STRUCTURAL FX 20 75.Several specific requirements have been included in the RTS with respect to the information that the documentation describing the risk management framework should include. Again, this information should be as detailed as possible. 76.First, the risk management strategy must outline the definition of the boundaries between positions that the institution categorises as structural and taken with the purpose of hedging the ratio and those that are not structural. Those are also the boundaries that must be followed by the institution when categorising FX positions when entering into a new transaction bearing FX risk. 77.In addition, for the purpose of assessing whether the open structural position has been taken to hedge the ratio or not, the risk management strategy must outline how the institution plans to meet in a continuous manner the objective that the institution has set. In particular, it must cover at least the following aspects: (a) It must clearly state which are the positions the institution intends to open/close in order to meet in a continuous manner the objective at the basis of the risk management framework, e.g. when seeking the permission at the consolidated level the institution is expected to at least indicate at which level (i.e. at the parent institution level or at the level of which subsidiary) it intends to open/close the positions to meet that objective. (b) It must provide evidence that there are not impediments (of any nature) in opening/closing the positions identified in point (a). In particular: (i) The intention to close/open the positions identified in point (a) should not lead to any inconsistency with the overall risk management strategy of the institution. In addition, it should not lead to any inconsistency with risk management that the legal entities within the group may have in place, e.g. at the solo level. (ii) The intention to close/open the positions identified in point (a) should be consistent with the risk management strategies of the structural FX positions that legal entities (i.e. the parent bank/subsidiary) within the same group may have when applying the structural FX provision at a different level (i.e. on a solo/consolidated basis). In other words, closing/opening such positions, e.g. for the purpose of hedging the ratio at a consolidated level, must be compatible with the risk management strategy that the institution has for hedging the solo ratio. 78.The institution must also document and have available for supervisory review the type of positions (e.g. positions stemming from a specific subsidiary) and amounts (i.e. the net open position that is actually excluded) that are excluded from the FX charge in the market risk capital requirements. 79.As mentioned, when the permission to offset positions within institutions in the group has not been granted (or it has been granted only for some of the institutions in the group) as per Article 325b CRR, the risk management framework must specifically describe how the institution

FINAL DRAFT RTS ON STRUCTURAL FX 21 manages positions that at the solo level are short for the purpose of hedging the ratio at the consolidated level. Competent authorities must indeed be able to assess whether the short position at the solo level has been taken with the sole purpose of hedging the ratio at the consolidated level. 80.The RTS also include requirements to ensure that the institutions can meet this objective under stressed circumstances, e.g. when a currency becomes particularly illiquidity as a result of restrictive measures (commonly known as sanctions) of the Union targeting a country. Exclusionary treatment of the hedge 81.The assessment made by the competent authority must lead to the identification of the positions that are suitable for the exemption. It is important to stress that this does not necessarily imply that such positions are actually exempted (i.e. excluded from the net open position); indeed, a portion of the open position generated might not be exempted due to the cap provided by the maximum open position that institutions can exempt – such a situation happens when the institution is actually over-hedging the ratio. 82.Once the exemption has been granted, institutions cannot change the boundaries distinguishing the positions that are suitable for the exemption from the positions that are not. In particular, if the institution did not seek the exemption for some positions, then, as previously mentioned, they must be treated (for all effects) as positions not suitable for the exemption. Accordingly, institutions cannot change the scope of the positions for which they seek the exemption. 83.This specification is deemed essential to avoid any regulatory arbitrage, in particular considering the broad interpretation in these RTS of the meaning of ‘deliberately taken’. Figure 1 provides a graphical representation of this aspect. The RTS include this specification by requiring the institution to outline the above-mentioned boundaries and by saying that they must be used when entering into a new FX position. Figure 1

FINAL DRAFT RTS ON STRUCTURAL FX 22 Monitoring and reporting requirements 84.As usual, the approval of the competent authorities encompasses all specifications that the institution implements for meeting the requirements included in the previous sections (including those related to data that are used for computing the maximum open positions). Accordingly, the approval of the competent authority holds only under the condition that such specifications remain unchanged. 85.As part of the requirements relating to the risk-management framework, the RTS include several measures that institutions are to monitor. 86.As soon as the institution plans to undertake any change to the specifications that are at the basis of an approval, it should inform the competent authority of the change (see Article 104c(3) CRR). Accordingly, the competent authority should assess the change and, in proportion to the relevance/importance of the change, should/may take any supervisory measure it deems appropriate (e.g. withdrawal of the previously granted permission). 87.It is important to stress that, even where the institution does not perform any change to the specifications at the basis of the approval, the competent authority has the power to take any supervisory measure it deems appropriate; for example, if the competent authority assesses that the institution is not actually implementing the strategy that was at the basis of the approval, it may decide to withdraw the permission that was previously granted, as the institution is not following the specifications that were made for receiving the waiver. 88.As mentioned, institutions are required to define an objective that is specific, detailed and supported by quantitative criteria. Where the institution does not meet this objective the competent authority should be informed in a timely manner and should be provided with the reason why this is the case. The competent authority should take any supervisory measure that is deemed appropriate. For example:

• The competent authority could withdraw the permission that was previously granted if the institution is not able to put in practice the strategy described in the application waiver (i.e. the strategy that was at the basis of the permission). Alternatively, the institution may pro￾pose a change to the strategy included in the application waiver that it is actually able to implement. Such a change should be treated as outlined in paragraph 88.
• The competent authority may require the institution to review the boundaries between the positions that are structural and those that are not, in order to reduce the amount of net open position suitable for the exemption. This could be the case, for example, where the competent authority assesses that there is a strong instability in some positions that were included in the scope of those that were suitable for the exemption and, accordingly, they may not be considered structural. 89.As set out in Article 104c(1)(c) CRR3, the time horizon of the institution’s strategy should be at least 6 months, meaning that the institution should not change e.g. the objective within a 6-

FINAL DRAFT RTS ON STRUCTURAL FX 23 month period from when the permission was granted. If after this period the institution wants to change the objective included in the strategy, for example due to a change in the business model, then it should be treated as a change to which the provisions in paragraph 88 apply. 90.After having received the permission in line with these RTS, the more frequently the institution requires to apply changes to the terms at the basis of the permission, the more it could be argued that some positions for which the institution seeks the exemption are actually not stable (and, accordingly, of a structural nature). Accordingly, competent authorities are expected to consider also the terms at the basis of permissions that were granted in the past when assessing the terms of a change or a new permission. 2.3 Calculation of the maximum net open position 91.One of the key features of these RTS is the definition of the maximum net open position that can be recognised as being taken for hedging the ratio to an institution by the competent authority. 92.The definition of the maximum open position is not trivial given the complex nature of the structural FX provision. In particular, the maximum net open position that can be exempted is defined as the amount of FX risk position that neutralises the sensitivity of the capital ratio to movements in the exchange rate. Indeed, above the maximum net position the institution loses the hedging effect when increasing the open position; accordingly, the position exceeding the maximum open position cannot be considered to be kept for hedging the ratio. 93.This section aims to define the methodology that the institution should apply to calculate the maximum risk position that can be recognised as suitable for the exemption. 94.As mentioned, in the content of these RTS hedging the capital ratio to FX changes is interpreted as reducing the capital ratio sensitivity to a change in the FX rate. 95.As the intention of hedging the ratio from FX changes by entering into any FX risk position precedes the fact of actually having such a position, the ratio that the institution wants to hedge is the one that the institution has without considering the own funds requirements (OFR) for that FX risk position. A similar reasoning can be followed for an open position that is maintained open for the purpose of hedging the ratio. Indeed, it could be argued that the institution keeps the position open for hedging the ratio, aware that such a position would be exempted from the open position. 96.Accordingly, when the sensitivity of the capital ratio to the FX rate is assessed for the purpose of calculating the maximum open position that can be recognised as structural, the capital ratio should be that without considering any own funds requirements for FX risk (𝐹𝑋 − 𝑂𝐹𝑅). 97.The decision to exclude the 𝐹𝑋 − 𝑂𝐹𝑅 from the ratio for the purpose of calculating the maximum open position that can be recognised as structural:

FINAL DRAFT RTS ON STRUCTURAL FX 24 • applies only to the currency for which the institution is calculating the maximum open po￾sition; i.e. the 𝐹𝑋 − 𝑂𝐹𝑅 for all other currencies should be included in the ratio used for the calculation of the maximum open position; • avoids the circular effect of calculating the open position neutralising the ratio, including also the 𝐹𝑋 − 𝑂𝐹𝑅 of positions that will be excluded as part of the waiver. 98.Excluding the 𝐹𝑋 − 𝑂𝐹𝑅 (just for the currency for which the exemption is sought) should not be burdensome for institutions. In particular: • for institutions using the (either simplified or alternative) standardised approach for FX risk, this would simply require the institution to remove all positions in the currency for which the exemption is sought from the calculation of the net open position; • for institutions using the internal model approach for FX risk, this would require institu￾tions to run the value-at-risk model without considering changes in the relevant ex￾change rate. 99.In line with the reasoning above, the RTS set out that the maximum net open position (𝑀𝑎𝑥𝑂𝑃𝐹𝐶 ) that the institution may exclude (upon permission of the competent authority) when hedging the CET1 ratio is that calculated in accordance with the following formula: 𝑀𝑎𝑥𝑂𝑃𝐹𝐶 = 𝐶𝐸𝑇1 ∙ 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 (1.01 ∙ 𝐹𝑋𝐹𝐶0 ) − 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(𝐹𝑋𝐹𝐶0 ) 0.01 ∙ 𝐹𝑋𝐹𝐶0 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(𝐹𝑋𝐹𝐶0 ) (∗) where 𝑀𝑎𝑥𝑂𝑃𝐹𝐶 is expressed in the foreign currency 𝐹𝐶 and:

• 𝐹𝑋𝐹𝐶 is the spot exchange rate between the reporting currency and the foreign currency for which the institution is calculating the maximum open position that can be exempted (i.e. one unit of foreign currency corresponds to 𝐹𝑋𝐹𝐶 units of the reporting currency);
• 𝐹𝑋𝐹𝐶0 is the value of 𝐹𝑋𝐹𝐶 at the moment of the calculation of 𝑀𝑎𝑥𝑂𝑃;
• 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 is the total risk exposure amount, as defined in Article 92 of the CRR (expressed in the reporting currency); it therefore includes both risk-weighted exposure amounts and own funds requirements arising from various types of risks, excluding the 𝐹𝑋 − 𝑂𝐹𝑅 for the currency for which the institution is calculating the maximum open position that can be exempted;
• 𝐶𝐸𝑇1 is the Common equity Tier 1 of the institution (expressed in the reporting currency).

FINAL DRAFT RTS ON STRUCTURAL FX 25 100. For the purpose of calculating the maximum open position for which the institution is hedging the T1 ratio (or the total capital ratio), the institution should: (i) calculate the amount using formula (∗), substituting the Common equity tier 1 in for￾mula (∗) with the Tier 1 capital (resp. the Total capital). (ii) deduct from the amount obtained in (i) the delta equivalent of additional Tier 1 instru￾ments (or the sum of the Additional Tier 1 (AT1) and Tier 2 (T2) instruments) issued in the structural currency. 101. It is important to highlight that any tax effect must not be considered when computing the maximum open position. 102. Annex I presents the derivation of formula (*). 103. The transposition of the formula above in the legal text of the RTS slightly differ compared to what has been presented here. The reason for this deviation is presented in section 2.6 below. Potential simplifications to the formula 104. As part of the feedback received from the consultation process on the EBA GLs, some respondents highlighted that it may be beneficial to introduce a derogation from the prescribed formula, allowing institutions to perform simplifications to that formula, as some of its components may not be material for the purpose of computing the value of the maximum open position. On the basis of such comments, the EBA decided to include in the final guidelines the possibility for institutions to perform simplifications to the formula provided in the guidelines as long as: (i) institutions are able to show the effect of such simplifications on the value taken by the maximum open position; (ii) the simplifications do not lead to an overestimation of the maximum open position. In addition, when the institution makes such simplifications it has to also include a gap analysis in the documentation describing the risk management framework to show the effect of the simplifications on the value taken by the maximum open position. 105. The RTS complement that option by giving the possibility to institutions to simplify the formula provided by considering only credit risk RWA, upon the condition that these RWA are the most material in the foreign currency. Such simplification, being prescribed, would not require institutions to do any gap analysis. As part of the consultation to these RTS, the EBA seeks feedback on the potential removal of one of the two simplifications (i.e. either remove the possibility referred to in the previous paragraph, or that referred to in this paragraph).

FINAL DRAFT RTS ON STRUCTURAL FX 26 2.4 Exclusion of the risk position from the calculation of the FX￾own funds requirements 106. For the purpose of determining the own funds requirements associated with the FX risk once the permission has been granted, two different cases are distinguished: (i) where the size of the open position suitable for the exemption (i.e. the open position gen￾erated by the FX positions suitable for the exemption) is lower than the maximum open position; (ii) where the size of the open position suitable for the exemption (i.e. the open position gen￾erated by the FX positions eligible to be structural) is greater than the maximum open posi￾tion. 107. Where the size of the open position suitable for the exemption is lower than the maximum open position (i.e. under-hedges), then the positions suitable for the exemption are excluded from the net open position. This means that all positions that are suitable for the exemption must not be taken into account when performing the calculation of the net open position in accordance with Article 352(1) CRR following the structural FX permission. 108. Where the size of the open position eligible to be structural is greater than the maximum open position (i.e. over-hedges), then only the amount given by the maximum open position is exempted. This means that positions that are suitable for the exemption are to be removed from the calculation of the net open position to the extent that the structural net open position is equal to the maximum open position. Example: Consider the following ‘simplified balance sheet’ of an institution: Value in EUR Value in EUR Assets in EUR (BB7 ) 500 Liabilities in EUR (BB) 400 Assets in USD (BB) 300 Liabilities in USD (BB) 250 CET1 in EUR 150 Suppose that all positions in the banking book are suitable for the exemption following the assessment of the competent authority and that the maximum net open position is 40. Then the new net open position should be computed as if USD 290 of assets and 250 USD of liabilities were removed (i.e. 40 = 290 – 250). 109. It should be noted that, where the permission referred to in Article 325b to offset positions in the calculation of the market risk own funds requirements has been granted partially/not 7 Banking book

FINAL DRAFT RTS ON STRUCTURAL FX 27 granted at all, banks may have a capital benefit that is greater than the maximum net open position8 . 110. Institutions should inform the competent authority of the positions that are actually excluded from the net open position. In particular, in the case of over-hedges, since only a part of the positions can be actually waived, the institution should provide the competent authority with the criteria the institution uses for selecting the positions that are actually excluded. 111. Institutions using the simplified standardised approach are to exclude the positions from the calculation of the net open position in the foreign currency referred to in Article 352(1) CRR. Institutions using the standardised approach are to exclude the positions from the calculation of the unweighted delta sensitivity. Institutions using the internal model approach are to remove positions from the relevant tests (i.e. P&L attribution test and back-testing), as well as from the calculation of the expected shortfall measure and the stress scenario risk measure. 2.5 Specific provisions on non-monetary items at historical cost and items leading to gains or losses not affecting the CET1 112. The RTS on FX and Commodity risk in the banking book, clarifies that non-monetary items at historical costs are to captured as part of the FX charge. 113. In accordance with accounting standard IAS 21, monetary items refer to assets/liabilities with a right to receive or an obligation to deliver a fixed or determinable amount of money. For all these items, regardless of whether they are reflected at historical cost or at fair value, the FX rate applied must be that of the reporting date 9 . Non-monetary items (i.e. items with the absence of a right to receive or an obligation to deliver a fixed or determinable amount of money) should be translated using the exchange rate at the date of the transaction, unless they are designated at fair value, either applying the fair-value option or if they are held with trading intent. For a typical institution, participations in subsidiaries10 in the individual balance sheet as well as real estate items would be such non-monetary items. 114. In general, non-monetary items that are booked at historical cost therefore do not change their balance sheet value with movements in the exchange rates. However, in the event of an indication of an impairment (due to a sharp move of the FX rate and/or due to other circumstances) the carrying amount of an asset is the lower of its carrying amount before 8 For example, consider the case a group made by parent bank and subsidiary, and assume that there is no 325b permission. Assume that the parent bank has a long position in USD of 100 EUR, and the subsidiary a short position in USD of 80 EUR. Without permission, the long and short position cannot be netted. Assume that the two positions meet all requirements in the RTS, and that the maximum net open position that can be removed is 15. The group, as a result of the permission, could remove 95 EUR from the parent bank, and 80 EUR from the subsidiary. De-facto what remains to be capitalised is a 5 EUR long position at parent bank level. Hence, the capital benefits (95 + 80 that could not be netted were removed) are higher than the maximum net open position (15). 9 Here and in what follows, it is assumed that the functional currency (in accordance with IAS 21, i.e. the currency of the primary economic environment in which the entity operates, is identical to the (regulatory) reporting currency. 10 To be noted that if the investment in the subsidiary is deducted from CET1, then automatically the item is not subject to the FX risk charge (as per FRTB standards and CRR requirements)

FINAL DRAFT RTS ON STRUCTURAL FX 28 considering possible impairment losses (with the FX rate at the date of the transaction) and its recoverable amount (with the FX rate at the reporting date). Thus, in certain instances a movement of the FX rate may also lead to FX-related losses with respect to non-monetary items that are booked at historical cost. Hence, the inclusion of those items in the RTS on FX and Commodity risk in the banking book. 115. The RTS therefore set out that non-monetary items held at historical cost can be waived, as long as they are structural in nature, in excess to the maximum position that is calculated in accordance with section 3.3. In other words, the cap calculated in accordance with that section does not apply to non-monetary items at historical cost. 116. As part of the consultation on the EBA GLs, some respondents identified another case of positions that do not impact the CET1, although included in the net open position in the foreign currency. The example was provided of some positions arising from minority interests that do not impact the CET1. The EBA agreed with the analysis provided by those respondents; hence, the guidelines have been amended, specifying that all positions leading to gains or losses that do not impact the CET1 are to be excluded from the net open position as long as they are structural (i.e. they are not subject to the cap imposed by the maximum open position). 2.6 Combining the maximum open position and the specific treatment for items whose changes do not affect the CET1 117. As mentioned in [paragraph], the CRR specifies that the waiver should be capped by the position neutralising the sensitivity. Strictly speaking, the position neutralising the sensitivity would be the one determined by computing the 𝑀𝑎𝑥𝑂𝑃𝐹𝐶 as presented above. However, encoding this in the legal text of the RTS would not allow the exclusion of positions that do not lead to changes in the CET1, as presented in the previous section – indeed, the limit imposed by the CRR wouldn’t be fulfilled. 118. Accordingly, the legal text (as proposed in Article 5) sets that the amount neutralising the sensitivity is the sum of the 𝑀𝑎𝑥𝑂𝑃𝐹𝐶 as presented in section 2.3, and the position stemming from items not leading to changes as presented in the previous section. In this way, the specific treatment envisaged for items identified in section 2.5 can be included in the RTS, while respecting the limit imposed by Article 104c CRR. Setting the position neutralising the sensitivity as the sum of the two components is seen in line with the CRR requirement as the second component is made of items that de-facto, as explained, do not affect the sensitivity itself. 2.7 Reporting on structural foreign exchange positions 119. In addition to the RTS, setting out the policy framework for the treatment of S-FX position, this final report also presents the template for the reporting on S-FX permissions granted by competent authorities.

FINAL DRAFT RTS ON STRUCTURAL FX 29 120. The reporting template and instructions (see Annexes III and IV to this final report) have been developed based on current reporting requirements put in place by some competent authorities in accordance with the Guidelines on structural FX. The reporting requirement has been adapted to the content of the RTS. 121. The vast majority of the information included in the template refers to items that the RTS request institutions to monitor, once a permission has been granted (see Article 8 of the RTS) or that the institution has to specify in its application for the S-FX permission (e.g. capital ratio hedged). For the sake of a comprehensive overview over the currency in question, this information is complemented by information on positions that cannot be considered structural (e.g. trading book positions). Information has to be provided for every currency, for which an S￾FX permission was granted. 122. The information included in the template should be provided by any institution that has obtained an S-FX permission, irrespective of the approach for calculating own funds requirements for foreign exchange risk applied, and covers all currencies for which an S-FX permission was granted. It would be reported with a quarterly frequency, alongside the remainder of the reporting on own funds and own funds requirements through COREP. 123. In response to the feedback to the public consultation, minor clarifications have been made in the instructions, and one column in the template was dropped. 124. The reporting requirement will be included in the ITS on Supervisory Reporting (Regulation (EU) 2024/3117). The proposal to include the S-FX reporting into the ITS will be formalised in an upcoming consultation paper on reporting, and will target an application date in 2027. Given the close link to the policy framework, the (substance of) the reporting on S-FX is already presented here.

FINAL DRAFT RTS ON STRUCTURAL FX 30 3. Draft Regulatory Technical Standards

FINAL DRAFT RTS ON STRUCTURAL FX 31 COMMISSION DELEGATED REGULATION (EU) …/… of XXX supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards specifying requirements on foreign exchange risk hedges of capital ratios in accordance with Article 104c (Text with EEA relevance) THE EUROPEAN COMMISSION, Having regard to the Treaty on the Functioning of the European Union, Having regard to Regulation (EU) No 575/2013 of the European Parliament and of the Coun￾cil of 26 June 2013 on prudential requirements for credit institutions and amending Regula￾tion (EU) No 648/201211, and in particular Article 104c(4), third subparagraph thereof, Whereas: (1) A risk position that the institution has taken or maintains for the purpose of hedging a capital ratio from adverse movements of an exchange rate should fulfil its hedging goals. Accordingly, requirements aiming at assessing whether the risk position ef￾fectively hedges the capital ratios should be envisaged. (2) Considering that only net long risk position can act as a hedge of the capital ratio, net short risk position should not be recognised as a hedge for this purpose. Further￾more, considering that the hedging effects of a position are not affected by whether the institution has received the permission referred to in Article 325b of Regulation (EU) No 575/2013, all positions constituting the risk position should be offset for the purpose of assessing the effects of the hedge even when that permission has not been granted. (3) Internal trades between trading book and non-trading book cannot cover alone the requirement to protect the capital ratio from movements in the foreign exchange rate. For that reason, they should not be excluded from the own funds requirements for foreign-exchange as part of the permission referred to in Article 104c of Regulation (EU) No 575/2013. Whereas, the hedging of the capital ratio can be attained by com￾bining internal trades with corresponding external trades. Hence, internal trades com￾bined with equivalent external transactions should be enabled where they respect the requirements of Article 106(1) of Regulation (EU) No 575/2013. (4) Capital ratio management, including managing the capital ratio’s sensitivity towards exchange rates is not a trading related business. Accordingly, risk positions that are taken or maintained to hedge the ratio should be non-trading book positions of a structural nature. To ensure alignment with international standards, non-trading book 11 OJ L 176, 27.6.2013, p. 1.

FINAL DRAFT RTS ON STRUCTURAL FX 32 positions that are of a structural nature should include, but should not be a priori limited to, those that attract foreign exchange risk in the form of translation risk. (5) To ensure level playing field across institutions in the Union, the foreign exchange risk hedge neutralising the sensitivity of the capital ratios to adverse movements in foreign exchange rates should be determined based on a standardised formula. How￾ever, to reduce operational burden, this Regulation should allow simplifications in the formula provided while ensuring a prudent outcome. (6) Requirements on the exclusion of the risk position from the own funds requirements for foreign exchange risk should ensure that the portion of risk position in excess of that neutralising the sensitivity of the capital ratio to movements in the foreign ex￾change rate is not excluded from the own funds requirements for foreign exchange risk. For internal models, the exclusion of positions should be done consistently in the context of the back-testing requirements, the profit and loss attribution require￾ments, and the calculation of the expected shortfall and stress scenario risk measures. (7) Given the particular features of items for which the institution does not update the value to reflect changes in the exchange rate as referred to in Article 1(5) and Article 3(6) of Commission Delegated Regulation (EU) 2023/1577, this Regulation should prescribe how those items should be treated. For completeness, this should be done for both the determination of the position neutralising the sensitivity of the capital ratio to movements in the foreign exchange rate and the exclusion of that position from the own funds requirements for foreign exchange risk. Similarly, this Regula￾tion should prescribe the treatment applicable to items that may lead to gains or losses due to movements in the exchange rate that do not impact the CET1 capital. (8) Given the primary role that the risk management framework has in the context of the permission referred to in Article 104c of Regulation (EU) No 575/2013, its require￾ments should be designed to ensure that the institution’s strategy is detailed enough to be assessed against both quantitative and qualitative criteria. Furthermore, they should ensure that the institution’s strategy can be objectively implemented. (9) This Regulation is based on the draft regulatory technical standards submitted to the Commission by the European Banking Authority. (10) The European Banking Authority has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, ana￾lysed the potential related costs and benefits and requested the advice of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council12 . HAS ADOPTED THIS REGULATION: Article 1 Definition of overall risk position 12 Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (OJ L 331, 15.12.2010, p. 12–47. ELI: http://data.europa.eu/eli/reg/2010/1093/oj).

FINAL DRAFT RTS ON STRUCTURAL FX 33 For the purpose of this Regulation, the overall risk position resulting from a set of posi￾tions in a foreign currency shall either be: (a) the net unweighted delta sensitivity corresponding to those position towards the risk factor made of the exchange rate between the reporting currency and the foreign currency; or, (b) the net open position in the foreign currency as resulting from the application of Article 352 of (EU) Regulation No 575/2013. SECTION 1 RISK POSITIONS THAT AN INSTITUTION CAN DELIBERATELY TAKE TO HEDGE, AT LEAST PARTIALLY, AGAINST THE ADVERSE MOVEMENTS OF FOREIGN EXCHANGE RATES ON ANY OF ITS CAPITAL RATIOS REFERRED TO IN ARTICLE 92(1), POINTS (a), (b), AND (c) OF REGULATION (EU) NO 575/2013 Article 2 Conditions for a risk position to be considered a position that an institution deliberately takes in order to hedge its capital ratio

1. An overall risk position resulting from a set of risk positions in a foreign currency, in relation to which an institution applies for the permission referred to in Article 104c of Regulation (EU) No 575/2013, shall be considered a risk position deliber￾ately taken in order to hedge, at least partially, against the adverse movements of foreign exchange rates on any of its capital ratios referred to in Article 92(1), points (a), (b) and (c) of that Regulation where all the following conditions are met: (a) it hedges the ratio in accordance with Article 3; (b) it is structural in accordance with Article 4; (c) it is managed in accordance with the risk management framework meeting the requirements referred to in Article 7.
2. For the purposes of this Regulation, institutions that use a base currency to compute the own funds requirements for foreign exchange risk in accordance with Article 325q(7) of Regulation (EU) No 575/2013 shall treat that base currency as the report￾ing currency, and the reporting currency as a foreign currency. Article 3 Requirements relating to the hedging effects
3. An overall risk position in a foreign currency shall be considered to be hedging the capital ratio where all the following conditions are met: (a) The overall risk position reduces the adverse effect on that ratio caused by changes in the exchange rate, irrespective of whether that adverse effect de-

FINAL DRAFT RTS ON STRUCTURAL FX 34 rives from an appreciation or a depreciation of that foreign currency with re￾spect to the reporting currency and irrespective of whether the position is maintained for hedging the ratio or taken for hedging the ratio; (b) When the foreign currency of the overall risk position appreciates against the reporting currency, the numerator of the ratio increases; (c) The overall risk position is net long; (d) The overall risk position is a delta risk position; (e) The overall risk position does not include positions resulting from internal trades between the trading book and non-trading book business of the insti￾tution unless the conditions referred in paragraph 3 are met; (f) Where the institution computes the own funds requirements of Regulation (EU) No 575/2013 for market risk on a consolidated basis without having the permission referred to in Article 325b(2) of Regulation (EU) No 575/2013, and the overall risk position is made by risk positions that are net short at the level of one or more of the institutions within the group, those risk positions in those institutions are managed exclusively with the objective of hedging the consolidated level ratio; (g) Where the institution computes the own funds requirements of Regulation (EU) No 575/2013 for market risk on a consolidated basis having the permis￾sion referred to in Article 325b of Regulation (EU) No 575/2013, and the overall risk position is made of risk positions that are net short at the level of either any subsets of institutions in the group within which the positions are offset as specified in that permission, or at the level of any other of the insti￾tutions within the group which are not included in that permission, those risk positions in those subsets of institutions or in the other institutions outside the permission are managed exclusively with the objective of hedging the con￾solidated level ratio. 2. On a consolidated basis, where the overall risk position is made of risk positions booked in more than one institution of the group, the requirement referred to in par￾agraph 1, point (c), shall be assessed by netting all those positions regardless of whether the institution has the permission referred to in Article 325b of Regulation (EU) No 575/2013. 3. An internal trade between banking book and trading book may be part of the overall risk position when all of the additional following conditions are met: (a) the internal trade is initiated by the non-trading book; (b) the internal trade is not primarily intended to avoid or reduce own funds re￾quirements (c) it shall be properly documented and subject to particular internal approval and audit procedure (d) it is dealt with at market conditions; and (e) the institution enter into another transaction with a third party that perfectly offsets the foreign-exchange risk of the internal trade.

FINAL DRAFT RTS ON STRUCTURAL FX 35 For the purposes of the first subparagraph, the transaction entered into by an in￾stitution to offset the foreign exchange risk may be composed of multiple trans￾actions with multiple third-parties, provided that the resulting aggregate of trans￾actions meets all of the conditions set out in that subparagraph. Article 4 Structural nature of the risk position

1. A risk position shall be considered structural when it is made exclusively of one or more of the following categories of risk positions: (a) on an individual basis, non-trading book risk positions that correspond to in￾vestments in institutions that are included in the same scope of consolidation; (b) on a consolidated basis, non-trading book risk positions that stem from in￾vestments in an institution that is included in the scope of consolidation and are in the reporting currency of the institution holding those positions;
2. Risk positions not meeting the conditions referred to in paragraph 1 could be con￾sidered of a structural nature where an adequate justification is built considering any of the following: (a) the positions are related to the cross-border nature of the institution; (b) the positions are related to a business of the institution which is established and stable over time; (c) the risk management of those positions over time. SECTION 2 DETERMING THE AMOUNT NEUTRALISING THE SENSITIVITY OF THE CAPITAL RATIOS TO MOVEMENTS IN FOREIGN EXCHANGE RATES AND EXCLUSION OF THE RISK POSITION FROM THE OWN FUNDS REQUIRE￾MENTS FOR FOREIGN EXCHANGE RISK Article 5 Determination of the position neutralising the sensitivity to the capital ratio
3. The amount neutralising the sensitivity of the capital ratios to the adverse movements in foreign exchange rates shall be determined by summing: (a) The complementary open position 𝐶𝑂𝑃𝐹𝐶 calculated in accordance with par￾agraph 2; (b) The maximum core open position 𝑀𝑎𝑥𝐶𝑜𝑟𝑒𝑂𝑃𝐹𝐶 calculated in accordance with paragraph 3.
4. The complementary open position 𝐶𝑂𝑃𝐹𝐶 shall be the overall risk position relating to items that are structural in accordance with Article 4 and that meet either of the following conditions:

FINAL DRAFT RTS ON STRUCTURAL FX 36 (a) The item is subject to the treatment referred to in Articles 1(5) or 3(6) of Commission Delegated Regulation (EU) 2023/1577; (b) The item leads to gains or losses due to changes in the exchange rate that do not impact the CET1 capital. 3. The maximum core open position 𝑀𝑎𝑥𝐶𝑜𝑟𝑒𝑂𝑃𝐹𝐶 shall be calculated as follows: (a) where the institution aims at hedging the CET1 ratio, in accordance with the following formula: 𝑀𝑎𝑥𝐶𝑜𝑟𝑒𝑂𝑃𝐹𝐶 = 𝐶𝐸𝑇1 ∙ 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(1.01 ∙ 𝐹𝑋𝐹𝐶)− 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(𝐹𝑋𝐹𝐶) 0.01 ∙ 𝐹𝑋𝐹𝐶 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(𝐹𝑋𝐹𝐶) Where:

• 𝐹𝐶 = the currency of the structural position;
• 𝑀𝑎𝑥𝐶𝑜𝑟𝑒𝑂𝑃𝐹𝐶 = the maximum core open position expressed in the foreign currency 𝐹𝐶;
• 𝐶𝐸𝑇1 = the Common Equity Tier 1 of the institution;
• 𝐹𝑋𝐹𝐶 = the spot exchange-rate between the reporting currency and the foreign currency 𝐹𝐶 of the structural position;
• 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(. ) = the total risk exposure amount expressed in the re￾porting currency calculated in accordance with Article 92(3) of Reg￾ulation (EU) No 575/2013, excluding the own funds requirements for foreign-exchange risk for all positions that are in the foreign currency 𝐹𝐶; (b) where the institution aims at hedging the T1 ratio, in accordance with the following formula: 𝑀𝑎𝑥𝐶𝑜𝑟𝑒𝑂𝑃𝐹𝐶 = 𝑇1 ∙ 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(1.01 ∙ 𝐹𝑋𝐹𝐶)− 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(𝐹𝑋𝐹𝐶) 0.01 ∙ 𝐹𝑋𝐹𝐶 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(𝐹𝑋𝐹𝐶) −𝐴𝑇1𝐹𝐶 Where:
• 𝐹𝐶 = the currency of the structural position;
• 𝑀𝑎𝑥𝐶𝑜𝑟𝑒𝑂𝑃𝐹𝐶 = the maximum core open position expressed in the foreign currency;
• 𝑇1 = the Tier 1 Capital of the institution expressed in the reporting currency;
• 𝐹𝑋𝐹𝐶 = the spot exchange-rate between the reporting currency and the foreign currency 𝐹𝐶;
• 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(. ) = the total risk exposure amount expressed in the re￾porting currency calculated in accordance with Article 92(3) of Reg￾ulation (EU) No 575/2013, excluding the own funds requirements for

FINAL DRAFT RTS ON STRUCTURAL FX 37 foreign-exchange risk for all positions that are in the foreign currency 𝐹𝐶;

• 𝐴𝑇1𝐹𝐶 = the value derived in accordance with the following formula: 𝐴𝑇1𝐹𝐶 = 𝑉(1.01 ∙ 𝐹𝑋𝐹𝐶) − 𝑉(𝐹𝑋𝐹𝐶) 0.01 ∙ 𝐹𝑋𝐹𝐶 where:
• 𝑉 = the value of the portfolio expressed in the reporting cur￾rency constituted by all Additional Tier 1 instruments issued by the institution; (c) where the institution aims at hedging the total capital ratio, in accordance with the following formula: 𝑀𝑎𝑥𝐶𝑜𝑟𝑒𝑂𝑃𝐹𝐶 = 𝑂𝐹 ∙ 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(1.01 ∙ 𝐹𝑋𝐹𝐶) −𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(𝐹𝑋𝐹𝐶) 0.01 ∙ 𝐹𝑋𝐹𝐶 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(𝐹𝑋𝐹𝐶) − 𝐴𝑇1𝐹𝐶 − 𝑇2𝐹𝐶 Where:
• 𝑂𝐹 = the own funds of the institution;
• 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(. ) = the total risk exposure amount expressed in the re￾porting currency calculated in accordance with Article 92(3) of Reg￾ulation (EU) No 575/2013, excluding the own funds requirements for foreign-exchange risk for all positions that are in the foreign currency 𝐹𝐶 of the structural position;
• 𝐹𝑋𝐹𝐶 = the spot exchange-rate between the reporting currency and the foreign currency 𝐹𝐶 of the structural position;
• 𝐴𝑇1𝐹𝐶 = the value derived in accordance with the following formula: 𝐴𝑇1𝐹𝐶 = 𝑉𝐴𝑇1 (1.01 ∙ 𝐹𝑋𝐹𝐶) − 𝑉𝐴𝑇1(𝐹𝑋𝐹𝐶) 0.01 ∙ 𝐹𝑋𝐹𝐶 where:
• 𝑉𝐴𝑇1 = the value of the portfolio expressed in the reporting currency constituted by all Additional Tier 1 instruments issued by the institu￾tion;
• 𝑇2𝐹𝐶 = the value derived in accordance with the following formula: 𝑇2𝐹𝐶 = 𝑉𝑇2 (1.01 ∙ 𝐹𝑋𝐹𝐶) − 𝑉𝑇2(𝐹𝑋𝐹𝐶) 0.01 ∙ 𝐹𝑋𝐹𝐶 where:
• 𝑉𝑇2 = the value of the portfolio expressed in the reporting currency constituted by all tier 2 instruments issued by the institution.

FINAL DRAFT RTS ON STRUCTURAL FX 38 4. By way of derogation from paragraph 2, and where the average over the previous four quarters of the metric 𝑀 is at least 75%, the institution may replace 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(. ), with 𝑅𝑊𝐴𝐶𝑅(. ), where: 𝑀 = |𝐴|/(|𝐴| + |𝐵|) 𝐴 = overall risk position in the foreign currency stemming from non-trading book items in that currency without considering any permission referred to in Article 104c of Regulation (EU) No 575/2013; 𝐵 = overall risk position in the foreign currency stemming from trading book items; 𝑅𝑊𝐴𝐶𝑅(. ) = the un-floored exposure amount expressed in the reporting currency referred to in Article 92(4), point (a) of Regulation (EU) No 575/2013, where the institution TREA is equal to U-TREA as referred to in Article 92(3); 𝑅𝑊𝐴𝐶𝑅(. ) = 1.25 ∙ un-floored exposure amount expressed in the reporting currency referred to in Article 92(4), point (a) of Regulation (EU) No 575/2013, where the institution TREA is equal to 125% ∙ U-TREA as referred to in Article 92(3); 𝑅𝑊𝐴𝐶𝑅(. ) = 𝑥 ∙ the standardised exposure amount expressed in the reporting cur￾rency referred to in Article 92(5), point (a) of Regulation (EU) No 575/2013, where the institution TREA is equal to 𝑥 ∙ S − TREA as referred to in Article 92(3). 5. Institutions not using the treatment referred to in paragraph 4, may apply simplifica￾tions when calculating the maximum core open position referred to in paragraph 3 where they meet both of the following conditions: (a) they are able to show the effect of such simplifications on the value of the maximum core open position; (b) the effect of the simplifications referred to in point (a) does not represent an overestimation of the maximum core open position. Article 6 Exclusion of the risk position from the own funds requirements for foreign-exchange risk

1. Institutions intending to exclude part of or the entire risk position from the own funds requirements for foreign exchange risk shall apply the following steps in sequence: (a) they shall exclude from the own funds requirements for foreign exchange risk all the risk positions corresponding to items referred to in Article 5(1), point (a); (b) Assess whether the remaining risk positions of which the overall risk position is made, following the application of point (a), lead to an overall risk position that is greater, equal or lower than the maximum core open position 𝑀𝑎𝑥𝐶𝑜𝑟𝑒𝑂𝑃𝐹𝐶 referred to in Article 5(1)(b) and classify the hedging technique as follows: Remaining position Vs 𝑴𝒂𝒙𝑪𝒐𝒓𝒆𝑶𝑷𝑭𝑪 Hedging technique

FINAL DRAFT RTS ON STRUCTURAL FX 39 remaining position < 𝑀𝑎𝑥𝐶𝑜𝑟𝑒𝑂𝑃𝐹𝐶 Under hedge remaining position = 𝑀𝑎𝑥𝐶𝑜𝑟𝑒𝑂𝑃𝐹𝐶 Perfect hedge remaining position > 𝑀𝑎𝑥𝐶𝑜𝑟𝑒𝑂𝑃𝐹𝐶 Over hedge (c) Where the institution is under-hedging or perfectly hedging its capital ratio, the institution shall exclude all remaining positions of which the overall risk position is made; (d) Where the institution is over-hedging its capital ratio, the institution shall ex￾clude some of the remaining positions in a way that net position excluded equals the maximum core open position (𝑀𝑎𝑥𝐶𝑜𝑟𝑒𝑂𝑃𝐹𝐶) referred to in Arti￾cle 5. On a consolidated basis, when excluding positions in accordance with point (d), and with the purpose of verifying that the excluded net position equals the maximum core open position 𝑀𝑎𝑥𝐶𝑜𝑟𝑒𝑂𝑃𝐹𝐶, an institution shall net posi￾tions between institutions of the group whose positions cannot be offset for the purpose of computing the own funds requirements for market risk in ac￾cordance with Article 325b of Regulation (EU) No 575/2013. 2. An institution applying the simplified standardised approach referred to in Article 325(1), point (c) of Regulation (EU) No 575/2013 for positions to be excluded in accordance with paragraph 1, shall exclude those positions from the calculation of the net open position in the foreign currency referred to in Article 352(1) of Regula￾tion (EU) No 575/2013. 3. An institution applying the alternative standardised approach referred to in Article 325(1), point (a) of Regulation (EU) No 575/2013 for positions to be excluded in accordance with paragraph 1, shall exclude those positions from the calculation of the unweighted delta sensitivity referred to in Article 325f(3) of Regulation (EU) No 575/2013 towards the exchange rate between the reporting and the foreign currency. 4. An institution applying the alternative internal model approach referred to in Article 325(1), point (b) of Regulation (EU) No 575/2013 for positions to be excluded in accordance with paragraph 1, shall: (a) Exclude those positions from the actual, hypothetical and theoretical changes in the portfolio value referred to in Article 325bf and Article 325bg of Regu￾lation (EU) No 575/2013; (b) Exclude those positions from the computation of the Value-at-Risk numbers referred to in Article 325bf of Regulation (EU) No 575/2013; (c) Exclude those positions from the calculation of the expected shortfall measures referred to in Article 325bb Regulation (EU) No 575/2013 and the stress scenario risk measure referred to in Article 325bk of that Regulation. 5. An institution using more than one of the approaches referred to in Article 325(1) of Regulation (EU) No 575/2013, shall apply paragraphs 2, 3 and 4 consistently with

FINAL DRAFT RTS ON STRUCTURAL FX 40 the approach used to calculate the own funds requirements for foreign exchange risk for the positions to be excluded. SECTION 3 RISK-MANAGEMENT FRAMEWORK Article 7 Criteria for an appropriate risk-management framework

1. A risk management framework shall be considered appropriate where all the follow￾ing conditions are met: (a) it is documented adequately in accordance with paragraph 2 and it foresees that the capital ratio hedged is the same across all currencies for which the institution seeks the permission referred to in Article 104c of Regulation (EU) No 575/2013; (b) it sets out the objective to hedge the ratio from movements in the exchange rate over time and provides for its assessment by means of both quantitative measures and qualitative criteria; (c) it specifies a maximum acceptable level of tolerance for the sensitivity of the ratio with respect to changes in the exchanges rate and specifies in detail the criteria and methodology for setting such a level of tolerance. Criteria for setting the level of tolerance should encompass all components that may lead to a change in the value taken by the sensitivity and any specificity of the currency; (d) it includes a limit of the maximum loss that is deemed acceptable for the in￾stitution to incur due to the choice of maintaining the positions for which the permission referred to in Article 104c of Regulation (EU) No 575/2013 is sought; (e) it is approved by the management board of the institution, along with the documentation referred to in point (a); (f) it is linked to the risk-appetite framework of the institution and the overall risk management of the institution and any relevant documents that have been approved by the senior management or the board of the institution; (g) it includes an explicit warning that the open position that is maintained for hedging the ratio will lead to losses as soon as the relevant currency depreci￾ates, and that hedging the ratio leads to an increase in the volatility of the own funds due to changes in the relevant exchange rate; (h) it specifies a strategy that has a time horizon of at least six months to achieve the objective referred to in point (b) which includes at least the following: (i) it outlines the definition of the boundaries between positions that the institution categorises as taken with the purpose of hedging the

FINAL DRAFT RTS ON STRUCTURAL FX 41 ratio and those that are not, and requires that such boundaries are used by the institution when taking a new position in the relevant currency; (ii) it states the positions the institution intends to open or close for the purpose of meeting the objective referred to in point (b); (iii) it requires the documentation of evidence for both of the following: i. that opening or closing those positions does not lead to any inconsistency with the overall risk management of the insti￾tution or with the risk management that any entity within the scope of the consolidation may apply on an individual basis; ii. that opening or closing those positions is consistent with the risk management frameworks that any entity within the scope of consolidation may have where applying the provi￾sion in Article 104c of Regulation (EU) No 575/2013 for the purpose of hedging ratios at another level of consolidation; (i) it ensures that the institution can identify, at any time, the items correspond￾ing to positions taken with the purpose of hedging the ratio (j) it specifically outlines how internal hedges are used for the purpose of achiev￾ing the objective of hedging ratio and how it is ensures that the conditions referred to in Article 3(3) are met; (k) it provides evidence, where applicable based on past experience, that the strategy referred to in point (h) is implementable and the objective achieva￾ble, including where there are significant divergencies in the offshore and onshore markets of the foreign currency; (l) where applicable, it describes how positions that have been taken with the only purpose of hedging the ratio in accordance with Article 3(1), point (f) and point (g) are managed in order to meet the objective referred to in point (b); (m)It ensures that the exclusion of the risk position fulfils the requirements set out in Article 6, and that such an exclusion does not reduce vega risk and curvature risk; (n) where the institution does not have the permission referred to in Article 325b of Regulation (EU) No 575/2013 for some of its positions, it shall specify criteria that the institution uses to select the positions to be excluded when it over-hedges the ratio in the sense of Article 6(1)(d). (o) It envisages the monitoring of the following measures, at least on a monthly basis; (i) the overall risk position in the currency previous to any permission; (ii) the overall risk position meeting the requirements referred to in Ar￾ticle 2(1); (iii) the complementary open position referred to in Article 5(1), point (a), and Article 5(2);

FINAL DRAFT RTS ON STRUCTURAL FX 42 (iv) the overall risk position meeting the requirements referred to in Ar￾ticle 2(1) excluding items constituting the complementary open po￾sition referred to in Article 5(1), point (a), (hereinafter referred to as “S_OP”); (v) the maximum core open position 𝑀𝑎𝑥𝐶𝑜𝑟𝑒𝑂𝑃𝐹𝐶 referred to in Article 5(1), point (b); (vi) both of the following sensitivities: i. 𝑠𝑒𝑛𝑠𝑖𝑡𝑖𝑣𝑖𝑡𝑦1 = 𝑆_𝑂𝑃− 𝑀𝑎𝑥𝐶𝑜𝑟𝑒𝑂𝑃𝐹𝐶 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 Where:

• 𝑆_𝑂𝑃 as defined in point (iv)
• 𝑀𝑎𝑥𝐶𝑜𝑟𝑒𝑂𝑃𝐹𝐶 = the maximum core open position referred to in Article 5(1)(b);
• 𝐹𝐶 the currency of the risk position;
• 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 = the total risk exposure amount calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013, excluding the own funds requirements for for￾eign-exchange risk for all positions that are in the foreign currency 𝐹𝐶 ii. the sensitivity of the capital ratio with respect to changes in the exchange rate as calculated by the institution; (vii) The difference in own funds requirements for market risk fol￾lowing the exclusion of the risk position in accordance with Article 6; (viii) a qualitative assessment stating the reasons for any changes in the amount of the positions referred to in point (iii) and point (iv) and the values taken by the two sensitivities referred to in point (vi); (ix) the spot exchange rate between the reporting currency and the for￾eign currency 𝐹𝐶 on the reference date; (x) any planned changes relating to the request to the competent author￾ity; (xi) the percentage of total credit risk-weighted amounts in the foreign currency to the total risk-weighted amounts of the institution; (xii) the percentage of total credit risk-weighted amounts in the for￾eign currency to the total credit risk weighted amounts in all curren￾cies other than the reporting currency; On a consolidated basis, for the purposes of determining the overall risk position referred to in points (i) to (iv), institutions shall offset positions within the group regardless of whether the institution has the permission referred to in Article 325b of Regulation (EU) No 575/2013.

FINAL DRAFT RTS ON STRUCTURAL FX 43 2. The risk management framework shall be considered adequately documented in ac￾cordance with paragraph 1, point (a), where all the following conditions are met: (a) The documentation describes which positions are excluded pursuant to Arti￾cle 6 of this Regulation; (b) All the conditions laid down in paragraph 1, points (b) to (o) are documented; (c) The documentation outlines the data and capital figures that are used for com￾puting the quantitative measures referred to in paragraph 1, point (o); (d) Where the institution took some positions with the sole purpose of hedging the ratio in accordance with Article 3(1), point (f) and point (g), the docu￾mentation includes evidence that those positions were taken with that purpose only; (e) Where applicable, the documentation describes the simplifications that are made for the purpose of computing the maximum net open position and the analysis of the effect of such simplifications on the value taken by that max￾imum core open position in accordance with Article 5(5), by providing at least a gap analysis showing that the simplifications made do not lead to an overestimation of the maximum net open position. 3. For the purposes of paragraph 1, point (k), the institution shall duly take into account: (a) The liquidity of the currency. In doing so, the institution shall substantiate, for illiquid currencies, that the illiquidity does not impair the actual imple￾mentation of the strategy; (b) Significant volatility in the exchange rate. In doing so, the institution shall substantiate that fast changes in the relevant exchange rate do not impair the actual implementation of the strategy; (c) The presence of restrictive measures targeting a country that may impact a currency tradability. In doing so, the institution shall substantiate that those restrictive measures do not impair the actual implementation of the strategy. SECTION 4 FINAL PROVISIONS Article 8 Entry into force and application This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union. This Regulation shall be binding in its entirety and directly applicable in all Member States. Done at Brussels,

FINAL DRAFT RTS ON STRUCTURAL FX 44 For the Commission The President

FINAL DRAFT RTS ON STRUCTURAL FX 45 4. Accompanying documents 4.1 Draft cost-benefit analysis / impact assessment Article 104c of the CRR3 requires the EBA to develop draft RTS to specify: i) the risk positions that an institution can deliberately take in order to hedge, at least partially, against the adverse movements of foreign exchange rates on any of an institution’s capital ratios; ii) how to determine the maximum amount of the risk position that is excluded from the own funds requirements for market risk and the manner in which an institution shall exclude this amount for each of the approaches set out in Article 325(1) CRR; and iii) the criteria that shall be met by an institution’s risk management framework for hedging the adverse movements in foreign exchange rates on any of its capital ratios, in order to be considered appropriate for the purpose of this Article. As per Article 10(1) of Regulation (EU) No 1093/2010 (EBA Regulation), any regulatory technical standards developed by the EBA shall be accompanied by an Impact Assessment (IA), which analyses ‘the potential related costs and benefits’. This section presents the cost-benefit analysis of the provisions included in the RTS. The analysis provides an overview of identified problems, the proposed options to address those problems and the costs and benefits of those options. Given the nature and the scope of the RTS, the IA is high￾level and qualitative in nature. A. Problem identification Article 352(2) of the CRR2 allows competent authorities to permit, on an ad hoc basis, the exclusion of FX risk positions from the calculation of net open currency positions where an institution has deliberately taken these positions to hedge against adverse effects of the exchange rates on its capital ratios. However, this provision has been subject to several interpretations, leading to differences in its application across the EU. In order to ensure a harmonised approach, the EBA has produced in 2020 own-initiative guidelines on the practical implementation of the ‘structural FX’ provision. CRR3 replaces Article 352(2) of the CRR2 with Article 104c, providing the EBA with a legal mandate on how to treat foreign exchange risk hedges of capital ratios. This requires the EBA to review and replace the GL on ‘structural FX’ with an RTS in order to be aligned with CRR3. B. Policy objectives The objective of these draft guidelines is to provide for a harmonised approach to the practical implementation of the provision contemplated in Article 104c of the CRR3. In this way, the

FINAL DRAFT RTS ON STRUCTURAL FX 46 guidelines aim to ensure a level playing field and promote convergence of supervisory practices across the EU regarding the treatment of foreign exchange risk hedges of capital ratios. C. Baseline scenario The baseline scenario aims to describe the regulatory environment and regulatory developments, as well the institutions’ practices. In terms of regulatory environment, the baseline assumes the entry into force of the CRR3. It is also expected that institutions are compliant with the existing GL on structural FX. D. Options considered, Cost-Benefit Analysis and Preferred Options This section presents the main policy options discussed during the development of the RTS, the costs and benefits of these options, as well as the preferred options included in the RTS. Alignment with existing GL on structural FX Option 1a: Align the RTS and the ITS on reporting with the existing GL on structural FX Option 1b: Do not align the RTS with the existing GL on structural FX Option 1a takes into account that several institutions have already implemented the GL on structural FX and ensures regulatory stability in the framework. Under this option, banks would not need to make significant changes in their existing implementation but rather very limited ones to align with the few changes made in these RTS. The same holds true for the reporting part of the package (i.e. the ITS) given that the GLs already foresaw monitoring requirements involving the calculation of monthly figures which were expected to be reported, outside COREP, to the competent authority. In addition, this option reduces the burden on supervisors as they will need to focus only on those aspects that were amended in the RTS to ensure compliance with the new structural FX provision for banks already granted the permission under Article 352(2) of CRR2. In contrast, Option 1b will require banks to implement new regulatory requirements and possibly undo changes already implemented, causing additional compliance costs. Supervisors would also need to re-assess compliance with the new structural FX provision for approvals that were already granted under the provisions set out in the GLs. Given that the existing GL have already been developed after an extensive consultation with the industry, it would be counterproductive and disproportionate to repeat the same process. Moreover, it should be noted that, the GL were developed with the FRTB standards published by the BCBS in January 2019 in mind, and hence are aligned with the market risk framework under the CRR3.

FINAL DRAFT RTS ON STRUCTURAL FX 47 Hence, option 1a is preferred.

FINAL DRAFT RTS ON STRUCTURAL FX 48 4.2 Feedback on the public consultation The EBA undertook a public consultation on the guidelines contained in this paper. The consultation period lasted for 3 months and ended on 7 February 2025. Six responses were received, of which four were non-confidential and were published on the EBA website. This section presents a summary of the key points and other comments arising from the consultation, the analysis and discussion triggered by these comments and the actions taken to address them if deemed necessary. In a number of cases, some industry bodies made similar comments or the same body repeated its comments in response to different questions. These comments and the EBA’s analysis of them are included in the section of the feedback table that the EBA considers most appropriate’. Changes to the draft RTS have been incorporated as a result of the responses received during the public consultation.

FINAL DRAFT RTS ON STRUCTURAL FX 49 Comments Summary of responses received EBA analysis Amendments to the proposals General comments Continuity of previous approv￾als Some members note that the RTS is aligned with the existing Guidelines and that its implementation should not trigger another wave of application re￾quests. They seek for the EBA to communicate clearly on this aspect. The RTS is overall aligned with the guidelines, except for three aspects: (1) The threshold applicable to currencies for which the institution seeks the S-FX permis￾sion: a requirement has been removed com￾pared to the GLs. Hence, clearly this will not trigger any new approval request/permis￾sion. (2) The requirements linked to the enhance￾ment of the policy for illiquid currencies: It is not expected that this enhancement would trigger an approval, as long as those en￾hancements are consistent with what has been pre-approved. (3) Specifications on internal hedges: require￾ments on internal hedges may trigger a change in the approval where the existing policy did not lead to the externalisation of the risk with an external counterparty and internal hedges were recognised as part of the exemption despite them not having any hedging effect. In this context, the EBA notes that without this externalisation, the internal hedge could not qualify for the exemption even under the current GLs, as the internal hedge without externalisation cannot be considered to hedge ratio. For more details, please check the EBA analysis under Q3. None

FINAL DRAFT RTS ON STRUCTURAL FX 50 Comments Summary of responses received EBA analysis Amendments to the proposals (4) Simplifications linked to the calculation of the maximum core open position: the RTS in￾troduce additional possibilities for institu￾tions to simplify the calculation of the maxi￾mum open position. Hence, this per se’ will not trigger a new approval request. The EBA expects that institutions inform the compe￾tent authorities when they switch to a new way of computing the maximum core open position. Identifying the position in ex￾cess of the maximum open po￾sition It is noted that determining which entity within a consolidated group should bear the remaining FX position (exceeding the maximum open position) is a relevant aspect when the permission referred to in Article 325b CRR is not provided. The draft RTS do not impose any requirement on the selection of the positions exceeding the maximum po￾sition that are not excluded from the capital require￾ments for FX risk. The only applicable constraint is that the net position removed must be equal to the maximum open position (the net position removed is obtained by netting all positions removed regardless of 325b permission). To make this more explicit, the RTS now specify that, as part of the policy, institutions should describe how the positions removed are se￾lected. Choice of the institu￾tion is made explicit by introducing provi￾sion in Article 7 Items deducted from CET1 Some respondents request an additional specifica￾tion regarding items that are deducted from the CET1. Those respondents asks the EBA to clarify in the RTS that items that deducted from the CET1 are part of the exemption noting that Article 36 in￾cludes a provision in that regard. The RTS do not deal with treatment of items deducted from CET1, as those items are now directly excluded from the FX-own funds requirements in the first place as per level 1 provision. Hence, the requirements set out in this Regulation are not applicable to those items. None

FINAL DRAFT RTS ON STRUCTURAL FX 51 Comments Summary of responses received EBA analysis Amendments to the proposals Items not leading to changes in CET1 capital Some respondents request further clarity on the types of items that may be considered as not bear￾ing changes in CET1 capital. In particular, the exam￾ple of prudential filters is raised. Items not leading to changes in CET1 capital are those for which a change in FX do not lead to gains or losses that are reflected in the CET1 capital. No further pro￾visions have been added in this regard, as the princi￾ple appears to be sufficiently broad to accommodate various cases. Institutions are expected to prove that changes in the FX relating to these items do not lead to any change in the CET1 of the institution. None Responses to questions in Consultation Paper EBA/CP/2024/21 Question 1. Do you agree with the clarification provided in Ar￾ticle 1 of these proposed RTS? Some respondents request a clarification around the treatment applicable to internal models, noting that the definitions provided in Article 1 are now based on the standardised approach and the alter￾native standardised approach. Article 1 provides two alternative definitions for the purpose of the Regulation. Those definitions are purely meant to ensure a common understanding of the provisions included in the RTS. In particular, as re￾gards the concept of overall risk position. Those definitions do not hamper in any way the appli￾cation of the S-FX provision in the context of the in￾ternal model approach. Simply, also for banks applying internal models, the definitions provided in Article 1 are used. Accordingly, assuming the definition in Article 1, point (a) is preferred, when reading ‘overall risk position’ in other Articles of the RTS, the institution should read “the net unweighted delta sensitivity corresponding to those position towards the risk factor made of the exchange rate between the reporting currency and the foreign currency” None

FINAL DRAFT RTS ON STRUCTURAL FX 52 Comments Summary of responses received EBA analysis Amendments to the proposals Question 2. Do you agree with the criteria to identify the signif￾icant currencies for an institu￾tion? Do you agree with a threshold set at 1% or do you deem that a higher threshold (e.g. 2%) would create more level playing field across institu￾tions? If not, what would be al￾ternative criteria? Please elabo￾rate. Most of the respondents are against the proposal. They disagree with limiting the number of curren￾cies eligible for a waiver, arguing that it unfairly pe￾nalizes internationally active banks. Frequent changes in top 10 credit risk RWAs would disrupt hedging strategies. Some respondents argue that proposed restriction lacks regulatory justification and contradicts Level 1 text. Moreover, it would lead to unnecessary capital requirements and increased complexity due to cur￾rency fluctuations. Some respondents even request the deletion of Ar￾ticle 3, Article 2(1)(9a), and recital (1). According to them, these would impose administrative burdens on banks and supervisors, conflicting with EU sim￾plification efforts. This would contradict the re￾quirement to maintain a six-month stability horizon for risk management. One respondent believes that either 1% or 2% threshold would not be restrictive, causing no con￾straint to the relevant currencies. Some respondents prefer 1% threshold, arguing that raising the threshold to 2% could result in the exclusion of currencies that, while slightly below this level, represent a substantial portion of an insti￾tution's activities. The CP introduced a threshold, in order to simplify the framework, and ensure that institutions applied for the S-FX permission only in the context of material currencies. Having a threshold would also significantly reduce su￾pervisory burden. The EBA however acknowledges that most of the re￾spondents favour a more risk-sensitive approach that does not preclude institutions requesting the S-FX permissions for even immaterial currencies and therefore amends the CP by removing any threshold. In this context, it is important that institutions (re￾spectively CAs), request (respectively grant or reject) approvals for specific currencies, as implied by the re￾quirements in the RTS. In other words, a supervisory decision that provides a general ‘omnibus’ approval for all currencies the bank has (or even, that will have in the future) is not considered to be in line with these RTS. In other words, supervisory decisions should name specifically which are the currencies for which the in￾stitution is given the approval. Threshold has been removed (Removal of “old” Article 3).

FINAL DRAFT RTS ON STRUCTURAL FX 53 Comments Summary of responses received EBA analysis Amendments to the proposals Question 3. Do you agree that internal trades cannot be con￾sidered as taken for hedging the ratio? Please elaborate. Some respondents are against the proposal to ex￾clude internal trades from the exemption. It is ar￾gued that they should be part of the waiver when (i) the transactions are consistent within the risk framework set out in the RTS and (ii) the trading book capitalizes any discrepancy between the trans￾ferred risk from the internal transactions and the offsetting trading book transactions (to the extent that those transactions are with the trading book and as such the risk being transferred to the TB is capitalized). In that sense, some suggested a re-wording of the relevant Article allowing under certain conditions internal hedges to be part of the waiver: “The over￾all risk position does not include positions resulting from internal trades between the trading book and non-trading book business of the same legal entity; unless arrangements are implemented to evidence that such internal trades are initiated by the banking book to mitigate structural foreign exchange risk as per Article 8, and that external trading book trans￾actions are offsetting risks from internal trades” It is also argued that the proposal lacks an analysis of entities having a branch structure instead of a structure with a subsidiary. One respondent requested that it should be clari￾fied if a loan from the subsidiary to the parent com￾pany with an external debt instruments (issuance made by the subsidiary) is not considered to be a short position Internal trades between banking book (BB) and trad￾ing book (TB) might affect the respective FX positions of the BB/TB. However, those transactions do not af￾fect the overall institution FX position as they are per￾fectly neutral from an accounting perspective (no im￾pact on FINREP). Indeed “Internal trades” in Q3 refer only to transac￾tions which are made between BB/TB of the same in￾stitution (incl. branches). Therefore, they cannot be considered as being taken/maintained for hedging the ratio as they do not reduce the adverse effect on the ratio caused by changes in the exchange rate. Only market facing (external) positions can be consid￾ered as “open”. Otherwise, those transactions might raise supervisory concerns related to “fictional” trans￾actions (leading to manipulation and misrepresenta￾tion between BB/TB) for which an institution might (unduly) seek an exemption. That being said, EBA acknowledges that for opera￾tional efficiency purposes institutions might manage FX risk by transferring the risk from the banking book to the trading book via internal hedges (also a com￾mon pattern in other risk areas) which ultimately rep￾licate those transactions with external counterpar￾ties. As a result, as long as that chain of transactions is im￾plemented (BB -> TB -> external party), those transac￾tions should be allowed to be included in the waiver. Amendments to “new” Article 3

FINAL DRAFT RTS ON STRUCTURAL FX 54 Comments Summary of responses received EBA analysis Amendments to the proposals One other respondent requested that to have clari￾fied if internal trades are pointing to both funding positions (by nature of loans and deposits) and FX trades Others either support or do not see any issue with the proposal. Question 4. What do you think should be cases of positions po￾tentially exempted under the provisions included in Article 5(c)? Please elaborate. Some respondents propose to amend Article 5 to augment the scope of categories out of which a risk position is to be considered structural by default. Particularly, with respect to Article 5(c) some re￾spondents propose the inclusion of positions linked to foreign branches, business lines within the bal￾ance sheet which products are denominated in a foreign currency in a stable way over time, certain short positions associated with investments in sub￾sidiaries denominated in FX, certain strategic and long-term investment in equity, FX derivatives posi￾tions taken to hedge the ratio. One respondent argues that too much focus is made on subsidiaries. The bank suggests that the focus on “cross-border” should be deleted and proposes to amend Article 5(c) to cover lending in currencies other than the functional currency of the reporting entity. One respondent proposes that exemptions should include positions immaterial to the institution’s The categorisation into positions of type A or type B is based both on the finalised Basel standards (Mini￾mum capital requirements for market risk, FRTB) standards and on the EBA’s view that positions that are of a structural nature are mainly positions related to the cross-border nature of the group. In view of ensuring continuity with the structural FX Guidelines, the RTS have been amended to further align the provisions included in new Article (old Arti￾cle 5), with those of the guidelines. Amendments to new Article 4 to align GLs and RTS provisions o this matter.

FINAL DRAFT RTS ON STRUCTURAL FX 55 Comments Summary of responses received EBA analysis Amendments to the proposals overall risk profile and exemplifies with small hedges taken to manage residual risks and foreign reserve requirements mandated by regulatory au￾thorities. One respondent sees nothing obvious as relevant by significance. Question 5. Do you agree with the simplification allowing insti￾tutions to use only credit risk RWA in the determination of the MAX_OP? Please elaborate. All respondents agreed to the simplification of ap￾plying the credit risk RWA as a simplification. Some respondents proposed not to limit the RWA applied in the simplification solely to Credit Risk RWA. While two respondents named CVA RWA as an example, one bank proposed to explicitly allow RWA from the operational risk. Two respondents do not agree to the 80% threshold introduced in the RTS and claimed to allow for the simplification without a threshold. Two respondents propose to clarify, that in the cal￾culation of the 80%-threshold long structural posi￾tions before applying hedges and waivers are con￾sidered, while for the non-structural FX positions the absolute book value is relevant. In addition, they propose that where the Bank received an ap￾proval according to Art. 325b CRR, all positions may be offset across the entities in the scope of Art. 325b. One respondent asked for clarification on the calcu￾lation of the maximum open position, i.e. in which scope of consolidation the position shall be calcu￾lated. More specifically, the respondent asks for The simplification proposed in the draft RTS shall ease the calculation where the capital ratios are mainly lin￾ear-dependent. EBA considers the credit risk RWA be￾ing the most appropriate proxy for a linear portfolio. Furthermore, EBA notes that other simplifications may be performed, as long as the conditions in the RTS are met. EBA acknowledges the feedback provided with re￾gards to the threshold. However, it does not consider appropriate to remove the threshold condition, since the simplified approach is meant to ease the calcula￾tion where the FX-related positions are mostly linear, which can be ensured with an appropriate threshold in place. EBA understands that an 80% ratio is potentially too restrictive for cases, where a currency fluctuates around the targeted threshold and therefore agrees to reduce it to 75%, so to account for potential fluctu￾ations around 80%. EBA acknowledges the need for clarification in the calculation of the proposed threshold. The text of the RTS is amended, to clarify some technical aspects. Reduction of the threshold to 75%. Clarifications of the calculation included in the formula to cal￾culate the 75% threshold in the RTS text.

FINAL DRAFT RTS ON STRUCTURAL FX 56 Comments Summary of responses received EBA analysis Amendments to the proposals clarification, that all positions within an entity shall be considered. Further, it is confirmed that all positions within an en￾tity shall be included in the calculation of the maxi￾mum open position. Question 6. Do you expect that institutions currently using the derogation referred to in Article 6(4) would qualify for the treat￾ment referred to in paragraph 3 of that Article? Please elabo￾rate. Some respondents note that it is not necessarily the case, that applicants of Art. 6(4) would qualify for the treatment under Art. 6(3), due to the absence of further needed operational simplifications in both approaches, i.e. the disregard the monthly re￾valuation of credit risk RWA. The proposed amend￾ment would be to explicitly include linearity of RWA in foreign currency as an explicit permission in Art. 6(4). Other note that some banks would qualify for the simplification under Art. 6(3). The EBA understands that a current application of Art. 6(4) does not necessarily mean, that the simplifica￾tion of Art. 6(3) is applicable. However, the EBA deems the simplified calculation approach in Art. 6(3) as appropriate and does not see the necessity to amend it. Especially, in the view of EBA, an explicit permission of linearity of FX in Art. 6(4) would contradict the threshold implemented in Art. 6(3), as the credit risk RWA is an indicator for lin￾earity. With the 80% (new: 75%) threshold EBA deem this as being an appropriate indicator for linearity. EBA recognizes the operational burden of a monthly revaluation of credit risk RWA and would like to em￾phasize that the Bank may leverage on the latest and already existing credit risk RWA figures. A monthly re￾calculation for the threshold estimation is not neces￾sary in the view of the EBA. No amendments Question 7. Do you agree with the requirements set out in Ar￾ticle 8(1)(j), and in Article 8(3)? Do you see the need to intro￾duce additional safeguards to address, for example, currency crisis? Please elaborate. All respondents except one are against the provi￾sions in Article 8(1)(j) and 8(3) and suggest deleting them. Some respondents deem that the liquidity of the currency is not relevant for the implementation of the hedging strategy. Although EBA recognizes that crisis events are not un￾der the control of the institutions, they may hamper the implementation of the hedging strategy. There￾fore, provisions in Article 8(1)(j) and 8(3) are needed as minimum safeguards aimed at reducing the poten￾tial negative impact on the institution’s hedging strat￾egy stemming from liquidity contraction, significant volatility and restrictive measures. Furthermore, it No amendments

FINAL DRAFT RTS ON STRUCTURAL FX 57 Comments Summary of responses received EBA analysis Amendments to the proposals In particular, some respondents make the following case: in Argentina there is no liquid market that al￾lows to hedge the exposition with derivatives, how￾ever there can be active investment management through the consumption of RWAs, the payment of dividends, and debt issuances, and there is also a strict control of limits and compliance with target capital. Some respondents propose that the RTS shall con￾sider adverse scenarios and casuistic of active man￾agement of a structural currency and allow institu￾tions to have time and additional tools to adapt to such changes, without assuming that the FX man￾agement strategy of the policy does not comply with Article 8(1)(j) and 8(3). One respondent also deems that the institution should be allowed to delegate the Managing Board’s approval of the risk-management frame￾work to a sufficiently senior committee (e.g., Asset Liability Committee), with due consideration of overall risk appetite approval processes and pro￾vided that the Managing Board itself is aware of and accept that keeping open positions (with an aim to fully or partially hedge a capital ratio) could lead to losses. Differently from the respondents above, one re￾spondent supports the provisions in Article 8(1)(j) and 8(3) and suggest additional safeguards, such as shall be noted that according to the RTS, the illiquidity of a currency, the high volatility of exchange rate and the presence of restrictive measures do not automat￾ically exclude the possibility for the relevant position to be considered of structural nature. If the institution proves that such circumstances do not impair the ac￾tual implementation of the hedging strategy, the cri￾teria for an appropriate risk-management framework as set in Article 8 can still be met.

FINAL DRAFT RTS ON STRUCTURAL FX 58 Comments Summary of responses received EBA analysis Amendments to the proposals comprehensive stress testing for currency crises. That respondent deems that institutions operating in volatile markets may benefit from scenario anal￾yses that simulate extreme fluctuations in key cur￾rencies, enabling institutions to develop targeted mitigation strategies and enhance overall prepared￾ness. Question 8. Did you identify any issues re￾garding the representation of the RTS policy framework for S￾FX in the ITS reporting require￾ment? No respondent identified any misalignment between the policy framework and the intended reporting requirements. Some respondents raised questions on how se￾lected elements of the policy framework map to the reporting template. Please refer to the assessment under Question 9. None None Question 9. Are the scope of application of the reporting requirements, the template itself and instructions clear? Several respondents request clarifying the definition of specific columns. Columns 0050 (S_OP) and 0070 (BB positions not meeting the S-FX requirement) Several respondents ask to explain the difference between the two columns. As regards column 0050, the respondents perceive the definition to be contradictory to the label in the template and seek further clarification. The instructions for column 0050, labelled ‘S_OP’ point to Article 8(1), point (m)(iv), of the RTS (post consultation: Article 7(1), point (o)(iv)). That provision contained an erroneous reference, which was corrected in the final draft RTS. Column 0050 is meant to capture the positions that qualify in principle for the S-FX treatment, but are not the ones referred to in Article 6(1), point (a), of the RTS (after consultation: Article 5(1), point (a)), and are the positions before applying the cap. Correction of reference in Art. 7 (1), point (o) (iv)

FINAL DRAFT RTS ON STRUCTURAL FX 59 Comments Summary of responses received EBA analysis Amendments to the proposals Columns 0030 (Positions that are structural and deliberately taken for hedging the ratio) and 0040 (Items referred to in Article 6(1), point (a) of the RTS) A few respondents seek confirmation of their interpretation of the content of columns 0030 and 0040 of the reporting template. For column 0030, they ask whether this column refers to Article 8(1), point (m)(ii), of the RTS and the exempted S_OP. For column 0040 the question is, if it refers to Article 6(1), point (a), and to the S_OP. One respondent expresses the view that only relevant currencies of the S-FX-hedge strategy, as specified in the application and approved in the permission, should be part of the reporting obligations. With the correction suggested above the difference between column 0070 and 0050 becomes clear. With regard to columns 0030 and 0040, the references quoted by the respondents are correct (note: Article numbering changed after consultation). However, column 0030 refers to the overall risk position that is eligible to be exempted in principle, consisting both of items referred to in Article 6(1), point (a) (Article 5(1), point (a), after consultation,) and S_OP, but not to a structural position already exempted. Column 0040 comprises non-monetary items held at historical costs as well as the specified positions without impact on the CET1, which are not subject to the cap imposed by the maximum net open position; this column does not contain S_OP. See Question and EBA analysis in Question 10. The information in the template is agnostic to the approach used for calculating own funds requirements, i.e. the measurement basis for all None. See Question 10

FINAL DRAFT RTS ON STRUCTURAL FX 60 Comments Summary of responses received EBA analysis Amendments to the proposals One respondent seeks clarifications on the specific information to be reported by institutions that apply the FRTB internal model approach (AIMA). columns is either the overall risk position as defined in Article 1 of the RTS (the net unweighted delta sensitivity for an AIMA institution) or own funds requirements / RWEAs. Question 10. Does the reporting of the net re￾duction in own funds require￾ments (c0130) by currency, or any other element of the re￾porting requirement, trigger a particularly high, or in your view disproportionate, effort or cost of compliance? If yes, please ex￾plain the trigger/source of the cost and offer suggestions on al￾ternative ways to achieve the same/a similar result with lower cost of compliance. One respondent considers it disproportionate to report information for all currencies, regardless of the currencies relevant for the approved hedging strategy (see also Q9). The respondent requests a clarification that only relevant currencies of the S￾FX-hedge strategy, as specified in the application and approved in the permission, should be part of the reporting obligations. One respondent mentions a possibly high burden in recalculation the own funds requirements twice – once with exemptions and once without – especially for banks with international business as it would necessitate the exclusion of a significant number of currencies. The information set out in the template has to be provided for currencies, for which an S-FX permission was granted (cf. point 122 of the background and rationale). This is, and was already, reflected as well in the instructions, in the second paragraph of the general remarks. Given that this instruction appears to have been misinterpreted, the drafting was adapted. The column originally reserved for the net reduction in own funds requirements was removed after consultation. Editorial changes to the second para– graph of the ‘general remarks’ Dropping of the originally proposed c0130 (net reduction in OFRs) General comments on the re￾porting ITS One respondent asks for a transition period to alleviate possible misunderstanding or misconceptions. Subject to the adoption proceedings being completed in time, the EBA expects the reporting requirement to take effect at the same time as the RTS takes effect. Given that this is a reporting requirement with a narrow scope, the implementation efforts for the reporting (in addition to those for the policy part) are expected to be limited. The timely application of the reporting requirement would enable competent authorities to monitor the compliance with the None

FINAL DRAFT RTS ON STRUCTURAL FX 61 Comments Summary of responses received EBA analysis Amendments to the proposals One respondent requests continuity, in the sense that the reporting in accordance with the ITS should be aligned with reporting requirements that competent authorities currently impose as part of their transposition of the Guidelines on S-FX. The respondent contests that the ITS mandate in Level 1 covers reporting on S-FX. provisions of the RTS based on the reported data. The reporting requirement has been developed based on reporting requirements currently in place, taking into account supervisors’ experience with this reporting requirements, and reflecting, where applicable, differences between the Guidelines and the RTS. The EBA expects that the reporting in accordance with the ITS would replace the data collections currently in place. This reporting is part of the reporting on own funds and own funds requirements, and therefore covered by Article 430 CRR.

FINAL DRAFT RTS ON STRUCTURAL FX 62 4.3 Annex I: Derivation of the maximum open position Derivation of the formulas for an institution hedging the CET1 ratio The reasoning below is presented in the context of an institution applying for the structural FX treatment to recognise the hedging effect of FX positions on the CET1 ratio. For the purpose of calculating the maximum open position (𝑀𝑎𝑥𝑂𝑃) , as described in the background section, institutions should exclude the own funds requirements for FX risk (𝐹𝑋 − 𝑂𝐹𝑅) for all positions in the currency of the positions for which they seek the waiver from the total risk exposure amount. Accordingly, the ratio to consider for calculating the maximum open position (𝐶𝑅𝑀𝑎𝑥𝑂𝑃) is defined as: 𝐶𝑅𝑀𝑎𝑥𝑂𝑃 ≡ 𝐶𝐸𝑇1 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 (1) where: 𝐶𝐸𝑇1 is the Common Equity Tier 1, as defined under Part Two –Title I of the Capital Requirement regulation (CRR); 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 is the total risk exposure amount, as defined in Article 92 of the CRR, excluding the 𝐹𝑋 − 𝑂𝐹𝑅 for the currency of the positions for which the institution seeks the waiver. Making explicit the dependence of the 𝐶ET1 on the exchange rate 𝐹𝑋𝐹𝐶 and assuming 𝐶ET1 to be regular around 𝐹𝑋𝐹𝐶0 : 𝐶ET1(𝐹𝑋𝐹𝐶) = ∑𝐶𝑗 ∙ (𝐹𝑋𝐹𝐶 − 𝐹𝑋𝐹𝐶0 ) 𝑗 ∞ 𝑗=0 = 𝐶0 + 𝐶1 ∙ (𝐹𝑋𝐹𝐶 − 𝐹𝑋𝐹𝐶0 ) +∑𝐶𝑗 ∙ (𝐹𝑋𝐹𝐶 − 𝐹𝑋𝐹𝐶0 ) 𝑗 ∞ 𝑗=2 (2) where: (i) 𝐹𝑋𝐹𝐶 is the exchange rate between the reporting currency and the foreign currency for which the institution is calculating the maximum open position that can be exempted (i.e. one unit of foreign currency corresponds to 𝐹𝑋𝐹𝐶 units of the reporting currency); (ii) 𝐹𝑋𝐹𝐶0 is the value of 𝐹𝑋𝐹𝐶 at the moment of the calculation of 𝑀𝑎𝑥𝑂𝑃; (iii) the coefficients 𝐶𝑗 are not dependent on 𝐹𝑋𝐹𝐶. Accordingly, around 𝐹𝑋𝐹𝐶0 , 𝐶𝐸𝑇1 can be approximated as:

FINAL DRAFT RTS ON STRUCTURAL FX 63 𝐶ET1(𝐹𝑋𝐹𝐶) ~ 𝐶0 + 𝐶1 ∙ (𝐹𝑋𝐹𝐶 − 𝐹𝑋𝐹𝐶0 ) (3) The first derivative of 𝐶𝑅𝑀𝑎𝑥𝑂𝑃 defined in (1) is: 𝜕𝐶𝑅𝑀𝑎𝑥𝑂𝑝 𝜕𝐹𝑋𝐹𝐶

( 𝜕𝐶𝐸𝑇1 𝜕𝐹𝑋𝐹𝐶 ∙ (𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶) − 𝜕𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 𝜕𝐹𝑋𝐹𝐶 ∙ 𝐶𝐸𝑇1) 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 2 (4) Considering the approximation in (3), it holds that 𝜕𝐶𝐸𝑇1 𝜕𝐹𝑋𝐹𝐶 = 𝐶1, and accordingly the sensitivity in (4) is: 𝜕𝐶𝑅𝑀𝑎𝑥𝑂𝑝 𝜕𝐹𝑋𝐹𝐶

𝐶1 ∙ 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 − 𝜕𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 𝜕𝐹𝑋𝐹𝐶 ∙ 𝐶𝐸𝑇1 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 2 (5) Setting the derivative to zero, a condition neutralising the sensitivity of 𝐶𝑅𝑀𝑎𝑥𝑂𝑝 with respect to 𝐹𝑋𝐹𝐶 is obtained: 𝐶1 𝑂𝑝𝑡𝑖𝑚𝑎𝑙 = 𝐶𝐸𝑇1 ∙ 𝜕𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 𝜕𝐹𝑋 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 (6) where 𝐶1 𝑂𝑝𝑡𝑖𝑚𝑎𝑙 is the value of 𝐶1 neutralising the sensitivity of 𝐶𝑅𝑀𝑎𝑥𝑂𝑝 with respect to 𝐹𝑋𝐹𝐶. The net open position (𝑁𝑂𝑃) , calculated in accordance with Article 352(2) (or the net delta sensitivity towards the relevant exchange rate), can be written as the sum of the long and short FX positions stemming from items whose gains and losses can be reflected in the 𝐶𝐸𝑇1 and the sum of the long and short FX positions stemming from items whose gains and losses cannot be reflected in the 𝐶𝐸𝑇1 (which, in any case, have been included in the calculation of the net open position). Accordingly: 𝑁𝑂𝑃 = 𝑂𝑃𝐶𝐸𝑇1 + 𝑂𝑃𝐸𝑥𝐶𝐸𝑇1 (7) where: • 𝑂𝑃𝐶𝐸𝑇1 is the resulting net open position stemming from items that lead to gains or losses that can be reflected in the 𝐶𝐸𝑇1; • 𝑂𝑃𝐸𝑥𝐶𝐸𝑇1 is the resulting net open position stemming from items that lead to gains or losses that cannot be reflected in the 𝐶𝐸𝑇113. 13 There may be cases of items that are included in the net open position but whose gains or losses cannot be reflected in CET1, as noted by some respondents during the consultation on the EBA guidelines that have been used as a basis to produce these RTS.

FINAL DRAFT RTS ON STRUCTURAL FX 64 It should be noted now that 𝑂𝑃𝐶𝐸𝑇1 is a good approximation of 𝐶1. Indeed, the open position stemming from items whose gains or losses can be reflected in the 𝐶𝐸𝑇1 represents a good approximation of the coefficient measuring the impact on the 𝐶𝐸𝑇1 of small changes in the exchange rate. In other words, the open position 𝑂𝑃𝐶𝐸𝑇1 is the delta sensitivity to the FX rate, and 𝐶1 represents such delta as it is the coefficient that, multiplied by a change in the exchange rate, provides (to the first order) the gains/losses that the institution’s portfolio faces following such a change. For example, if 𝑂𝑃𝐶𝐸𝑇1 increases by USD 10 million under a shock of 1 basis point in the euro to US dollar exchange rate, then 𝐶𝐸𝑇1 increases by USD 10 million as well. Combining that: a. 𝐶1 𝑂𝑝𝑡𝑖𝑚𝑎𝑙 is the value of 𝐶1 for which the sensitivity of the ratio with respect to changes in the relevant exchange rate is equal to zero; b. 𝐶1 ≅ 𝑂𝑃𝐶𝐸𝑇1 following the reasoning in the previous paragraph; It follows that, if the institution has an open position stemming from items whose gains or losses can be reflected in the 𝐶𝐸𝑇1 that is equal to 𝐶1 𝑂𝑝𝑡𝑖𝑚𝑎𝑙 , then 𝐶𝑅𝑀𝑎𝑥𝑂𝑃 is not sensitive (to the first order) to changes in the exchange rate. This can be expressed as follows: 𝐼𝑓 𝑂𝑃𝐶𝐸𝑇1 = 𝐶1 𝑂𝑝𝑡𝑖𝑚𝑎𝑙 𝑡ℎ𝑒𝑛 𝜕𝐶𝑅𝑀𝑎𝑥𝑂𝑝(𝐹𝑋𝐹𝐶) 𝜕𝐹𝑋𝐹𝐶 = 0 𝑖𝑛 𝐹𝑋𝐹𝐶 = 𝐹𝑋𝐹𝐶0 Accordingly, 𝐶1 𝑂𝑝𝑡𝑖𝑚𝑎𝑙is the size of the open position capping the size of the long structural open position that can be excluded from the net open position as it represents the amount neutralising the sensitivity of 𝐶𝑅𝑀𝑎𝑥𝑂𝑝 to changes in the exchange rate. As a result, these guidelines require institutions to calculate the maximum open position (𝑀𝑎𝑥𝑂𝑃) that can be recognised as structural, as defined by the following formula: 𝑀𝑎𝑥𝑂𝑃 = 𝐶𝐸𝑇1 ∙ 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(1.01 ∙ 𝐹𝑋𝐹𝐶𝑜 ) − 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(𝐹𝑋𝐹𝐶𝑜 ) 0.01 ∙ 𝐹𝑋𝐹𝐶𝑜 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(𝐹𝑋𝐹𝐶𝑜 ) (∗) where 𝑀𝑎𝑥𝑂𝑃 is expressed in the foreign currency 𝐹𝐶. In addition, considering that FX positions stemming from items whose gains or losses cannot be reflected in the CET1 capital, which, in any case, have been included in the calculation of the net open position (i.e. those included in the calculation of 𝑂𝑃𝐸𝑥𝐶𝐸𝑇1), do not affect the way the 𝐶𝐸𝑇1 moves with respect to FX changes, they can be excluded from the net open position regardless of the cap imposed in (∗). Combining (5) with the definition of 𝐶1 𝑂𝑝𝑡𝑖𝑚𝑎𝑙 in (6), it follows that:

FINAL DRAFT RTS ON STRUCTURAL FX 65 𝜕𝐶𝑅𝑀𝑎𝑥𝑂𝑝 𝜕𝐹𝑋𝐹𝐶

𝐶1 ∙ 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 − 𝐶1 𝑂𝑝𝑡𝑖𝑚𝑎𝑙 ∙ 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 2 (8) And since 𝐶1 ≅ 𝑂𝑃𝐶𝐸𝑇1 and 𝐶1 𝑂𝑝𝑡𝑖𝑚𝑎𝑙 ≅ 𝑀𝑎𝑥𝑂𝑃 it holds that: 𝜕𝐶𝑅𝑀𝑎𝑥𝑂𝑝 𝜕𝐹𝑋𝐹𝐶

𝑂𝑃𝐶𝐸𝑇1 − 𝑀𝑎𝑥𝑂𝑃 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 (9) The sensitivity in (9) can be written as: 𝜕𝐶𝑅𝑀𝑎𝑥𝑂𝑝 𝜕𝐹𝑋𝐹𝐶

𝑆_𝑂𝑃𝐶𝐸𝑇1 + 𝑁𝑆_𝑂𝑃𝐶𝐸𝑇1 − 𝑀𝑎𝑥𝑂𝑃 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 (10) where: a) 𝑆_𝑂𝑃𝐶𝐸𝑇1 is the resulting open position stemming from items whose gains and losses can be reflected in the 𝐶𝐸𝑇1 and corresponding to positions that are suitable to be exempted. b) 𝑁𝑆_𝑂𝑃𝐶𝐸𝑇1 is the resulting open position stemming from items whose gains and losses cannot be reflected in the 𝐶𝐸𝑇1 and corresponding to positions that are not suitable to be exempted. Removing the effect of positions that cannot be exempted from the open position in the numerator of the sensitivity, the measure that institutions are required to report for the purpose of the ongoing monitoring is obtained: 𝑆𝑒𝑛𝑠𝑖𝑡𝑖𝑣𝑖𝑡𝑦 = 𝑆_𝑂𝑃𝐶𝐸𝑇1 − 𝑀𝑎𝑥𝑂𝑃 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 (∗∗) Derivation of the formulas for an institution hedging the T1 ratio The reasoning below is presented in the context of an institution applying for the structural FX treatment to recognise the hedging effect of FX positions on the T1 ratio14 . For the purpose of calculating the maximum open position (𝑀𝑎𝑥𝑂𝑃) , as described in the background section, institutions should exclude the own funds requirements for FX risk (𝐹𝑋 − 𝑂𝐹𝑅) for the currency of the positions for which they seek the waiver from the total risk exposure amount, as defined in Article 92 of the CRR. Accordingly, the ratio to consider for calculating the maximum open position (𝐶𝑅𝑀𝑎𝑥𝑂𝑃) is defined as: 𝐶𝑅𝑀𝑎𝑥𝑂𝑃 ≡ 𝑇𝑖𝑒𝑟 1 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 (1𝑎) where: 14 It should be noted that the same reasoning can be applied in the context of the total capital ratio.

FINAL DRAFT RTS ON STRUCTURAL FX 66 𝑇𝑖𝑒𝑟 1 is the Tier 1 as defined under Part Two –Title I of the CRR; 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 is the total risk exposure amount, as defined in Article 92 of the CRR, excluding the 𝐹𝑋 − 𝑂𝐹𝑅 for the currency of the positions for which the institution seeks the waiver. Making explicit the dependence of the T1 on the exchange rate 𝐹𝑋𝐹𝐶 and assuming T1 to be regular around 𝐹𝑋𝐹𝐶0 : Tier 1(𝐹𝑋𝐹𝐶) = ∑𝑇𝑗 ∙ (𝐹𝑋𝐹𝐶 − 𝐹𝑋𝐹𝐶0 ) 𝑗 ∞ 𝑗=0 = 𝑇0 + 𝑇1 ∙ (𝐹𝑋𝐹𝐶 − 𝐹𝑋𝐹𝐶0 ) +∑𝑇𝑗 ∙ (𝐹𝑋𝐹𝐶 − 𝐹𝑋𝐹𝐶0 ) 𝑗 ∞ 𝑗=2 (2𝑎) where: (i) 𝐹𝑋𝐹𝐶 is the exchange rate between the reporting currency and the foreign currency for which the institution is calculating the maximum open position that can be exempted (i.e. one unit of foreign currency corresponds to 𝐹𝑋𝐹𝐶 units of the reporting currency); (ii) 𝐹𝑋𝐹𝐶0 is the value of 𝐹𝑋𝐹𝐶 at the moment of the calculation of 𝑀𝑎𝑥𝑂𝑃; (iii) the coefficients 𝑇𝑗 are not dependent on 𝐹𝑋𝐹𝐶. The T1 is the sum of CET1 and AT1. Accordingly, the series in (2a) can be written as: 𝑇𝑖𝑒𝑟 1 (𝐹𝑋𝐹𝐶) = 𝐶𝐸𝑇1 (𝐹𝑋𝐹𝐶) + 𝐴𝑇1(𝐹𝑋𝐹𝐶) = ∑(𝐶𝑗 + 𝐴𝑇𝑗) ∙ (𝐹𝑋𝐹𝐶 − 𝐹𝑋𝐹𝐶0 ) 𝑗 ∞ 𝑗=0 = (𝐶0 + 𝐴𝑇0 ) + (C1 + 𝐴𝑇1) ∙ (𝐹𝑋𝐹𝐶 − 𝐹𝑋𝐹𝐶0 ) +∑(𝐶𝑗 + 𝐴𝑇𝑗) ∙ (𝐹𝑋𝐹𝐶 − 𝐹𝑋𝐹𝐶0 ) 𝑗 ∞ 𝑗=2 (3𝑎) where 𝐶𝑗 and 𝐴𝑇𝑗 are the coefficients of the Taylor expansion for 𝐶𝐸𝑇1 and 𝐴𝑇1 respectively. Accordingly, around 𝐹𝑋𝐹𝐶0 , 𝑇𝑖𝑒𝑟 1 can be approximated as: 𝑇𝑖𝑒𝑟 1 ~ (𝐶0 + 𝐴𝑇0) + (𝐶1 + 𝐴𝑇1) ∙ (𝐹𝑋𝐹𝐶 − 𝐹𝑋𝐹𝐶0 ) (4𝑎) The first derivative of 𝐶𝑅𝑀𝑎𝑥𝑂𝑃 defined in (1𝑎) is: 𝜕𝑇𝑖𝑒𝑟1 𝜕𝐹𝑋𝐹𝐶

( 𝜕𝑇𝑖𝑒𝑟1 𝜕𝐹𝑋𝐹𝐶 ∙ (𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶) − 𝜕𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 𝜕𝐹𝑋𝐹𝐶 ∙ 𝑇𝑖𝑒𝑟1) 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 2 (5𝑎)

FINAL DRAFT RTS ON STRUCTURAL FX 67 Considering the approximation in (4𝑎), it holds that 𝜕𝑇𝑖𝑒𝑟1 𝜕𝐹𝑋𝐹𝐶 = 𝐶1 + 𝐴𝑇1 , and accordingly the sensitivity in (5𝑎) is: 𝜕𝑇𝑖𝑒𝑟1 𝜕𝐹𝑋𝐹𝐶

(𝐶1 + 𝐴𝑇1) ∙ 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 − 𝜕𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 𝜕𝐹𝑋𝐹𝐶 ∙ 𝐶𝐸𝑇1 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 2 (5𝑎) Setting the derivative to zero, a condition neutralising the sensitivity of 𝐶𝑅𝑀𝑎𝑥𝑂𝑝 with respect to 𝐹𝑋𝐹𝐶 is obtained: 𝐶1 𝑂𝑝𝑡𝑖𝑚𝑎𝑙 = 𝐶𝐸𝑇1 ∙ 𝜕𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 𝜕𝐹𝑋 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶 − 𝐴𝑇1 (6𝑎) where 𝐶1 𝑂𝑝𝑡𝑖𝑚𝑎𝑙 is the value of 𝐶1 neutralising the sensitivity of 𝐶𝑅𝑀𝑎𝑥𝑂𝑝 with respect to 𝐹𝑋𝐹𝐶. The net open position (𝑁𝑂𝑃) can be written as the sum of the long and short FX positions stemming from items whose gains and losses can be reflected in 𝐶𝐸𝑇1 and the sum of the long and short FX positions stemming from items whose gains and losses cannot be reflected in 𝐶𝐸𝑇1 (which, in any case, have been included in the calculation of the net open position). Accordingly: 𝑁𝑂𝑃 = 𝑂𝑃𝐶𝐸𝑇1 + 𝑂𝑃𝐸𝑥𝐶𝐸𝑇1 (7a) where: • 𝑂𝑃𝐶𝐸𝑇1 is the resulting net open position stemming from items that lead to gains or losses that can be reflected in the 𝐶𝐸𝑇1. • 𝑂𝑃𝐸𝑥𝐶𝐸𝑇1 is the resulting net open position stemming from items that lead to gains or losses that cannot be reflected in the 𝐶𝐸𝑇1 It should be noted now that 𝑂𝑃𝐶𝐸𝑇1 is a good approximation of 𝐶1. Indeed, the open position stemming from items whose gains or losses can be reflected in the 𝐶𝐸𝑇1 represents a good approximation of the coefficient measuring the impact on the 𝐶𝐸𝑇1 of small changes in the exchange rate. In other words, the open position 𝑂𝑃𝐶𝐸𝑇1 is the delta sensitivity to the FX rate, and 𝐶1 represents such delta as it is the coefficient that, multiplied by a change in the exchange rate, provides (to the first order) the gains/losses that the institution’s portfolio faces following such a change. For example, if 𝑂𝑃𝐶𝐸𝑇1 increases by USD 10 million under a shock of 1 basis point in the euro to US dollar exchange rate, then 𝐶𝐸𝑇1 increases by USD 10 million as well. Similarly, 𝐴𝑇1 represents the delta sensitivity to the FX rate of AT1 instruments; in other words, 𝐴𝑇1 represents the coefficient that, multiplied by the value of a change in the exchange rate, provides (to the first order) the appreciation/depreciation of the AT1 instruments following such a change.

FINAL DRAFT RTS ON STRUCTURAL FX 68 Combining that: a. 𝐶1 𝑂𝑝𝑡𝑖𝑚𝑎𝑙 is the value of 𝐶1 for which the sensitivity of the ratio with respect to changes in the relevant exchange rate is equal to zero; b. 𝐶1 ≅ 𝑂𝑃𝐶𝐸𝑇1 following the reasoning in the previous paragraph; It follows that if the institution has an open position stemming from items whose gains or losses can be reflected in the 𝐶𝐸𝑇1 that is equal to 𝐶1 𝑂𝑝𝑡𝑖𝑚𝑎𝑙, then 𝐶𝑅𝑀𝑎𝑥𝑂𝑃 is not sensitive (to the first order) to changes in the exchange rate. This can be expressed as follows: 𝐼𝑓 𝑂𝑃𝐶𝐸𝑇1 = 𝐶1 𝑂𝑝𝑡𝑖𝑚𝑎𝑙 𝑡ℎ𝑒𝑛 𝜕𝐶𝑅𝑀𝑎𝑥𝑂𝑝(𝐹𝑋𝐹𝐶) 𝜕𝐹𝑋𝐹𝐶 = 0 𝑖𝑛 𝐹𝑋𝐹𝐶 = 𝐹𝑋𝐹𝐶0 Accordingly, 𝐶1 𝑂𝑝𝑡𝑖𝑚𝑎𝑙is the size of the open position capping the size of the long structural open position that can be excluded from the net open position as it represents the amount neutralising the sensitivity of 𝐶𝑅𝑀𝑎𝑥𝑂𝑝 to changes in the exchange rate. As a result, these guidelines require institutions to calculate the maximum open position (𝑀𝑎𝑥𝑂𝑃) that can be recognised as structural, as defined by the following formula: 𝑀𝑎𝑥𝑂𝑃 = 𝑇𝑖𝑒𝑟1 ∙ 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(1.01 ∙ 𝐹𝑋𝐹𝐶𝑜 ) − 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(𝐹𝑋𝐹𝐶𝑜 ) 0.01 ∙ 𝐹𝑋𝐹𝐶𝑜 𝑅𝑊𝐴𝑁𝑜𝐹𝑋𝐹𝐶(𝐹𝑋𝐹𝐶𝑜 ) − 𝐴𝑇1 (∗ 𝑎) where 𝑀𝑎𝑥𝑂𝑃 is expressed in the foreign currency 𝐹𝐶.

FINAL DRAFT RTS ON STRUCTURAL FX 69 Annex II: Stylised examples of the application of the structural FX provision In the examples below, the values of the items have already been translated into EUR. Accordingly, even if an item is denominated in, for example, US dollars (and is therefore subject to the EUR/USD risk), its value has already been converted to euro. 𝑴𝒂𝒙𝑶𝑷 and 𝑺_𝑶𝑷 have also already been translated into the reporting currency (i.e. EUR). Example 10 shows in a simplified manner how the guidelines are expected to be applied by institutions and competent authorities. Example 1: identification of positions of types A and B at solo level for an institution with EUR as the reporting currency and assuming all positions to be banking book positions Value in EUR Value in EUR Assets 1 in EUR 400 Liabilities in EUR 450 Assets 2 in EUR 100 Liabilities in GBP 20 Assets 3 in GBP – participation 20 Assets 4 in GBP 30 CET1 in EUR 80 Assets and liabilities in blue do not bear FX risk for an institution reporting in EUR. The FX position corresponding to an asset in green is of type A, since the item bearing FX risk is an investment in the subsidiary15. Assets in yellow are positions of type B, as they are not investments in a subsidiary. Example 2: identification of positions of types A and B at the consolidated level Parent bank at the solo level reporting in EUR: Value in EUR Value in EUR Assets in EUR 400 Liabilities in EUR 450 Assets in EUR 100 Assets in GBP – participation 20 Assets in GBP 30 CET1 in EUR 100 15 It may be the case that the investment is deducted from the institution’ own funds – in that case, the position would not be subject to the FX own funds requirements in the first place.

FINAL DRAFT RTS ON STRUCTURAL FX 70 Subsidiary at solo level reporting in GBP: Value in EUR Value in EUR Assets in GBP 300 Liabilities in GBP 200 Assets in USD 100 Liabilities in USD 20 CET1 in GBP 180 Institution at consolidated level reporting in EUR: Value in EUR Value in EUR Assets in EUR 400 Liabilities in EUR 450 Assets in EUR 100 Assets in GBP 300 Liabilities in GBP 200 Assets in GBP 30 Assets in USD 100 Liabilities in USD 20 CET1 in EUR 260 Assets and liabilities in blue do not bear FX risk for an institution reporting in EUR. Assets and liabilities in green are assets stemming from the investment of the parent bank in the subsidiary, and the currency of the corresponding FX positions coincides with the currency of the subsidiary at solo level (i.e. GBP). Accordingly, such FX positions are positions of type A. All other FX positions, corresponding to assets and liabilities in yellow, are of type B. Example 3: identification of positions of types A and B at consolidated level Parent bank P owns subsidiary S1, which owns subsidiary S2. Parent bank P reports in EUR at solo level, subsidiary S1 reports in GBP at solo level and subsidiary S2 reports in DKK at solo level. The group ‘P + S1 + S2’ reports in EUR at consolidated level. The group ‘S1 + S2’ reports in GBP at sub-consolidated level. Assumption: all positions are banking book positions. Parent bank at solo level reporting in EUR: Value in EUR Value in EUR Assets in EUR 400 Liabilities in EUR 300 Assets in GBP – participation in S1 150 CET1 in EUR 250

FINAL DRAFT RTS ON STRUCTURAL FX 71 Subsidiary S1 at solo level reporting in GBP: Value in EUR Value in EUR Assets in GBP 300 Liabilities in GBP 200 Assets in DKK – participation in S2 100 CET1 in GBP 200 Subsidiary S2 at solo level reporting in DKK: Value in EUR Value in EUR Assets in DKK 200 Liabilities in DKK 100 CET1 in DKK 100 Group (P + S1 + S2) at consolidated level reporting in EUR: Value in EUR Value in EUR Assets in EUR 400 Liabilities in EUR 300 Assets in GBP 300 Liabilities in GBP 200 Assets in DKK 200 Liabilities in DKK 100 CET1 in EUR 300 FX positions corresponding to assets and liabilities in green are positions of type A. Assets and liabilities in blue do not bear FX-risk at consolidated level. Group (S1 + S2) at sub-consolidated level reporting in GBP: Value in EUR Value in EUR Assets in GBP 300 Liabilities in GBP 200 Assets in DKK 200 Liabilities in DKK 100 CET1 in GBP 200 FX positions corresponding to assets and liabilities in green are positions of type A. Assets and liabilities in blue do not bear FX risk at sub-consolidated level.

FINAL DRAFT RTS ON STRUCTURAL FX 72 Example 4: Computation of the maximum open position Suppose that the institution is hedging the CET1 ratio and that the competent authority identified all positions as eligible to be exempted. In addition, for the sake of simplicity, it is assumed that no own funds requirements exist for market risk (except FX risk), operational risk, counterparty credit risk and CVA risk. Value in EUR Value in EUR Assets 1 in EUR 400 Liabilities in EUR 450 Assets 2 in EUR 100 Liabilities in GBP 40 Assets 3 in GBP 20 Assets 4 in GBP 40 CET1 in EUR 70 The risk weights for credit risk (and corresponding RWAs) are those reported below: Type of asset Risk weight RWA for credit risk 1 0.75 300 2 0.3 30 3 0.5 10 4 0.4 16 Accordingly: Total RWAs (without FX charge) 356 CET1 70 CET1 ratio (without FX charge) 0.196629213 Applying the formula for the calculation of the maximum open position: 𝑀𝑎𝑥𝑂𝑃 = 𝐸𝑈𝑅 5.1123 As a result16: Net open position structural 20 Max. open position 5.112359551 Capital charge for FX 14.88764045 In the following it is proved that the capital ratio remains constant if the open position in the foreign currency equals the maximum open position. To prove this, the open position in the foreign currency is partially closed, increasing the value of the liabilities in the foreign currency and decreasing by the same amount the liabilities in the domestic currency. 16 Explanation of the figures: Net open position in GBP (value in EUR) = Assets 3 in GBP + Assets 4 in GBP – liabilities in GBP = 20 + 40 – 40 = 20 Capital charge for FX = net open position structural – Max open position = 20 - 5.112359551 = 14.88764045

FINAL DRAFT RTS ON STRUCTURAL FX 73 Value in EUR Value in EUR Assets 1 in EUR 400 Liabilities in EUR 435.1123596 Assets 2 in EUR 100 Liabilities in GBP 54.88764045 Assets 3 in GBP 20 Assets 4 in GBP 40 CET1 in EUR 70 ‘New’ net open position 5.112359551 The CET1 ratio (without FX charge) has not changed. Suppose now a shock of 20% is applied to the exchange rate (e.g. following appreciation of the foreign currency). Accordingly, the ‘new’ balance sheet is as follows: Value in EUR Value in EUR Assets 1 in EUR 400 Liabilities in EUR 435.1123596 Assets 2 in EUR 100 Liabilities in GBP 65.86516854 Assets 3 in GBP 24 Assets 4 in GBP 48 CET1 in EUR 71.02247191 As a result: Total RWAs (without FX charge) 361.2 CET1 ratio (without FX charge) 0.196629213 Accordingly, the CET1 ratio is actually constant if the open position in the foreign currency equals the maximum open position. It is worth mentioning that, where the open position equals the maximum open position, the CET1 ratio without FX charge actually coincides with the ‘real’ CET1 since following the permission of the competent authority the FX charge is equal to zero. In this sense, the ‘real’ CET1 is constant with respect to changes in the exchange rate.

FINAL DRAFT RTS ON STRUCTURAL FX 74 Example 5: Computation of the maximum open position for an institution hedging the T1 ratio Suppose that the institution hedges the T1 ratio and that part of the T1 instruments has been issued in the foreign currency and the remaining parts have been issued in the reporting currency. In addition, for the sake of simplicity, it is assumed that no own funds requirements exist for market risk (except FX risk), operational risk, counterparty credit risk and CVA risk. Value in EUR Value in EUR Assets in EUR 400 Liabilities in EUR 300 Assets in GBP 300 Liabilities in GBP 200 Liabilities in EUR – T1 25 Liabilities in GBP – T1 25 CET1 in EUR 150 The ‘Liabilities in EUR – T1’ and ‘Liabilities in GBP – T1’ are the T1 instruments issued in euro and pounds sterling respectively. Suppose the risk weight for credit risk is 0.8 for assets in EUR and 0.5 for assets in GBP. The total RWAs (without FX charge) are EUR 47017. The T1 ratio is 0.42553. Computing the maximum open position with the formula applicable to institutions hedging the T1 ratio (and translating its value in the reporting currency): 𝑀𝑎𝑥𝑂𝑃 = EUR 38.83 Again, it is checked that the T1 ratio is constant if the open position of the institution equals the maximum open position. As in Example 4, the open position (75 = 300 – 200 – 25) in the foreign currency is partially closed, increasing the value of the liabilities in the foreign currency and decreasing by the same amount the liabilities in the domestic currency. Value in EUR Value in EUR Assets in EUR 400 Liabilities in EUR 263.8297872 Assets in GBP 300 Liabilities in GBP 236.1702128 Liabilities in EUR – T1 25 Liabilities in GBP – T1 25 CET1 in EUR 150 The ‘new’ open position equals the maximum open position, i.e. it is equal to EUR 38.82978723. The T1 ratio is equal to that calculated above, i.e. 0.42553. 17 RWAs with no FX charge = 0.8 * 400 + 0.5 * 300 = 470.

FINAL DRAFT RTS ON STRUCTURAL FX 75 Applying a shock of 25% to the exchange rate, the ‘new’ balance sheet is as follows: Value in EUR Value in EUR Assets in EUR 400 Liabilities in EUR 263.8297872 Assets in GBP 375 Liabilities in GBP 295.212766 Liabilities in EUR – T1 25 Liabilities in GBP – T1 31.25 CET1 in EUR 159.7074468 As a result, the RWAs (without FX charge) are EUR 507.5 and the T1 is 215.9574468. Accordingly, the T1 ratio is 0.42553, i.e. the ratio did not change after the shock was applied to the exchange rate. Example 6: Calculation of the sensitivity as prescribed in the guidelines for monitoring purposes Suppose that the competent authority assesses that all positions in the banking book are eligible to be exempted. Positions in the trading book are not suitable for the exemption because one of the minimum requirements for a position to be exempted is that it belongs to the banking book. Value in EUR Value in EUR Assets in EUR 10 000 Liabilities in EUR 8 000 Assets in GBP (BB) 2000 Liabilities in GBP (BB) 1000 Assets in GBP (TB) 1000 Liabilities in GBP (TB) 0 CET1 in EUR 4 000 Suppose in this case the asset in the trading book to be a UK index, subject to equity risk and FX charge (and no specific risk), and all banking book positions attract only credit risk, with a corresponding RW of 75%. It follows that: RWAs (without FX charge) 0.75 * 10 000 + 0.75 * 2 000 + 1 000 * 0.08 * 12.5 = 10 000 CET1 ratio (without FX charge) 0.4 In addition, it follows (using the formula included in the guidelines) that the maximum open position that can be exempted has a size equal to 1 000. Accordingly: 𝑆𝑒𝑛𝑠𝑖𝑡𝑖𝑣𝑖𝑡𝑦 = 𝑆_𝑂𝑃 − 𝑀𝑎𝑥𝑂𝑃 𝑅𝑊𝐴𝑁𝑜𝐹𝑋_𝐹𝐶 = 0

FINAL DRAFT RTS ON STRUCTURAL FX 76 This because the maximum open position equals the open position that is eligible to be exempted. Now, consider that a shock of 10% is applied to the exchange rate. The ‘new’ balance sheet is as follows: Value in EUR Value in EUR Assets in EUR 10 000 Liabilities in EUR 8 000 Assets in GBP (BB) 2200 Liabilities in GBP (BB) 1100 Assets in GBP (TB) 1100 Liabilities in GBP (TB) 0 CET1 in EUR 4 200 The maximum open position in this new scenario is equal to EUR 1 126.83. Computing the sensitivity above under this new scenario we get: 𝑆𝑒𝑛𝑠𝑖𝑡𝑖𝑣𝑖𝑡𝑦 = −0.262% Institutions are required to report that sensitivity for the purpose of the ongoing monitoring (along with the sensitivity that is calculated using the internal methodologies). Example 7: Items at historical cost Value in EUR Value in EUR Assets in EUR 10 000 Liabilities in EUR 8 000 Assets in GBP at historical cost 1 000 CET1 in EUR 3 000 The CET1 of the institution is not sensitive to changes in the FX rate (unless, for example, a big shock occurs and the item at historical cost is impaired). Accordingly, the maximum open position is: 𝑀𝑎𝑥𝑂𝑃 = 0 Accordingly, as outlined in the background section, these guidelines lay down a special treatment for items that are held at historical cost, i.e., if the item at historical cost is structural, then it can be exempted. Example 8: Calculation of own funds requirements before and after applying the waiver The parent institution, which reports in EUR, owns a subsidiary reporting in GBP. At the consolidated level, the institution reports in EUR. Furthermore, it is assumed that no items are deducted from CET1, that no trading book exists and that no own funds requirements exist for operational risk and CVA risk. The risk weights for credit risk are assumed to be 100% for all assets and the market risk RWAs are calculated using the standardised approach. Finally, it is assumed that the permission to offset the positions in the subsidiary and the parent bank in accordance with Article 325b CRR has been granted.

FINAL DRAFT RTS ON STRUCTURAL FX 77 Parent institution at solo level reporting in EUR: Value in EUR Value in EUR Assets in EUR 700 Liabilities in EUR 625 Assets in GBP – participation 10 CET1 in EUR 85 Subsidiary at solo level reporting in GBP: Value in EUR Value in EUR Assets in GBP 300 Liabilities in GBP 225 CET1 in GBP 75 Institution at consolidated level reporting in EUR: Value in EUR Value in EUR Assets in EUR 700 Liabilities in EUR 625 Assets in GBP 300 Liabilities in GBP 225 CET1 in EUR 150 If waivers are applied neither for the parent institution at solo level nor for the institution at the consolidated level, then the RWA figures and capital ratios are as follows: Parent institution at solo level (without waiver) Institution at consolidated level (without waiver) Credit risk RWAs 710 1 000 FX risk - OFR 10 75 Total RWAs 720 1 075 CET1 85 150 CET1 ratio 85/720 = 11.81% 150/1 075 = 13.95% The maximum open position at consolidated level is equal to 150/1 000 ∙ 300 = 45. If the institution has the structural FX waiver for the solo level and for the consolidated level, then the RWA figures and capital ratios are as follows: Parent institution at solo level (with waiver) Institution at consolidated level (with waiver) Credit risk RWA 710 1 000 FX risk RWA 0 30 Total RWA 710 1 030 CET1 85 150 CET1 ratio 85/710 = 11.97% 150/1 030 = 14.56%

FINAL DRAFT RTS ON STRUCTURAL FX 78 Example 9: Calculation of own funds requirements before and after applying the waiver of a perfectly hedged position at the consolidated level The underlying assumptions, as well as the positions, are the same as in Example 8. However, the institution decides to hedge the capital ratio at the consolidated level by entering into a short position at the parent institution. The institution has the permission to use positions in one institution or undertaking to offset positions in another institution or undertaking in accordance with Article 325b of the CRR. Parent institution at solo level reporting in EUR: Value in EUR Value in EUR Assets in EUR 700 Liabilities in EUR 595 Assets in GBP – participation 10 Liabilities in GBP 30 CET1 in EUR 85 Subsidiary at solo level reporting in GBP: Value in EUR Value in EUR Assets in GBP 300 Liabilities in GBP 225 CET1 in GBP 75 Institution at consolidated level reporting in EUR: Value in EUR Value in EUR Assets in EUR 700 Liabilities in EUR 595 Assets in GBP 300 Liabilities in GBP 255 CET1 in EUR 150 If waivers are applied neither for the parent institution at solo level nor for the institution at the consolidated level, then the RWA figures and capital ratios are as follows: Parent institution at solo level (without waiver) Institution at consolidated level (without waiver) Credit risk RWA 710 1 000 FX risk RWA 20 45 Total RWA 730 1 045 CET1 85 150 CET1 ratio 85/730 = 11.64% 150/1 045 = 14.35% For the parent bank, at individual level the position in the foreign currency is a short position and no waiver can be applied. Thus, hedging the ratio at the consolidated level leads to higher own funds requirements at the solo level (compared with the previous example). The maximum open position at the consolidated level is equal to 150/1 000 ∙ 300 = 45. If the institution has the structural FX permission at the consolidated level, then the RWA figures and capital ratios are as follows:

FINAL DRAFT RTS ON STRUCTURAL FX 79 Institution at consolidated level (with waiver) Credit risk RWA 1 000 FX risk RWA 0 Total RWA 1 000 CET1 150 CET1 ratio 150/1 000 = 15.00% Example 10: step-by-step application of the guidelines The following example is meant to show in a simplified fashion how institutions and competent authorities are to apply the legal text. Consider an institution with the following simplified balance sheet: Parent bank at solo level reporting in EUR: Value in EUR Value in EUR Assets in EUR (BB) 500 Liabilities in EUR (BB) 400 Liabilities in USD (BB) 40 Assets in USD – participation (BB) 20 Liabilities in USD – T1 (BB) 10 Assets in GBP (BB) 30 Liabilities in SEK (BB) 10 Liabilities in DKK (BB) 10 CET1 in EUR 80 All items in the parent bank are banking book items. Items in EUR do not attract any FX risk at solo level. Subsidiary at solo level reporting in USD: Value in EUR Value in EUR Assets in USD (BB) 300 Liabilities in USD (BB) 200 Assets in USD (TB) 100 Assets in GBP (BB) 20 Assets in DKK (BB) 30 Liabilities in DKK (BB) 10 CET1 in USD 240

FINAL DRAFT RTS ON STRUCTURAL FX 80 At subsidiary level, all items are banking book items, except for some items in the trading book in USD which value is EUR 100. Items in USD do not attract FX risk at solo level. Group at consolidated level reporting in EUR: Value in EUR Value in EUR Assets in EUR (BB) – P 500 Liabilities in EUR (BB) – P 400 Assets in USD (BB) – S 300 Liabilities in USD (BB) – P 40 Assets in USD (TB) – S 100 Liabilities in USD – T1 (BB) – P 10 Assets in GBP (BB) – P 30 Liabilities in USD (BB) – S 200 Assets in GBP (BB) – S 20 Liabilities in SEK (BB) – P 10 Assets in DKK (BB) – S 30 Liabilities in DKK (BB) – P 10 Liabilities in DKK (BB) – S 10 CET in EUR 300 Items that are booked at parent bank level are flagged with a P, while those booked at subsidiary level are flagged with an S. The meaning of each colour is specified later in the example. In this example we assume that the institution consists of a parent bank and a subsidiary and that the permission referred to in Article 325b has not been granted, i.e. the positions in the parent bank and in the subsidiary cannot be offset. We assume that the institution applies the standardised approach for calculating its own funds requirements for market risk and that the institution requires the permission only at consolidated level since it aims to hedge only the consolidated ratio. In the simplified balance sheet above, cells in red are representative of the positions for which the structural FX permission cannot be granted. Specifically: (i) the position in US dollars stems from the trading book and as such it does not meet the minimum requirement in Article 5. (ii) the position in SEK is short at group level and as such it does not meet the minimum requirement in Article 5. Suppose now that the institution is requesting the structural FX permission for:

1. all its positions in USD, with the exception of the position that stems from the trading book;
2. all its positions in GBP
3. all its positions in DKK

FINAL DRAFT RTS ON STRUCTURAL FX 81 All the positions for which it seeks the exemption stem from the banking book. In addition, the position for which the exemption is sought is long at consolidated level; indeed:

1. the position in USD for which the exemption is sought is net long: 300 – 40 – 10 – 200 = 50;
2. the position in GBP for which the exemption is sought is net long: 20 + 30 = 50;
3. the position in DKK for which the exemption is sought is net long: 30 – 10 – 10 = 10. As mentioned in the background section, the hedging effect of a position is the same regardless of whether the permission in Article 325b has been granted or not. That is why, for the purpose of Article 4, whether a position is net long or net short has to be assessed considering all positions in the group (i.e. regardless of whether they are booked at parent bank level or at subsidiary level). However, the requirements in Article 4 are more stringent where the permission is sought by an institution without the permission referred to in Article 325b. Specifically, the requirement in Article 4(1)(f)-(g) applies to cases where the permission for which the exemption is sought is short at the level of the institution (or subset of institutions) constituting the group. In the example, we are considering the case of an institution that does not have the permission referred to in Article 325b. Therefore, it has to be checked whether the requirements in Article 4(1)(f)-(g) are relevant or not:
4. For positions in GBP: (i) the position for which the exemption is sought is net long at the level of the parent bank: 30; (ii) the position for which the exemption is sought is net long at the level of the sub￾sidiary: 20. As a result, positions in GBP meet the conditions in Article 4(1)(f)-(g) does not entail any other constraint.
5. For positions in USD: (i) the position for which the exemption is sought is net short at the level of the par￾ent bank: –40 – 10 = –50; (ii) the position for which the exemption is sought is net long at the level of the sub￾sidiary: 300 – 200 = 100. Following Article 4(1)(f)-(g), this means that the positions in the parent bank can be further considered in the assessment of the application if they have been taken or are maintained with the sole purpose of hedging the consolidated ratio. As also mentioned in the background section, the term ‘position’ refers to the position in the foreign currency and not to the items from which it stems. As a result, the competent authority should check that the position at the parent bank level (–50) is maintained with the sole purpose of hedging the ratio. For example, in this specific case, the institution may keep the position at parent bank level for the purpose of reducing the position stemming from the subsidiary, and it adjusts the short position booked by the parent bank depending on the value of the long position stemming from the subsidiary. Hence, the position at parent bank level could be considered to be taken with the sole purpose of hedging the ratio.

FINAL DRAFT RTS ON STRUCTURAL FX 82 In addition, there should not be concerns from a prudential point of view related to the fact that the institution does not have the permission referred to in Article 325b. Indeed, the subsidiary itself cannot incur losses due to changes in the USD/EUR exchange rate, i.e. there will not be any need for the parent bank to intervene to compensate somehow the losses of the subsidiary (a condition that is the basis of the approval of the permission in Article 325b). In other words, the FX risk hedged by the short position stems from the translation of assets/liabilities of the subsidiary in the group’s reporting currency following the consolidation process. In this example we assume that the competent authority determines that the short position at parent bank level in USD has been taken/maintained with the sole purpose of hedging the ratio. 3. For positions in DKK: (i) the position for which the exemption is sought is net short at the level of the par￾ent bank: –10; (ii) the position for which the exemption is sought is net long at the level of the sub￾sidiary: 20. Following Article 4(1)(f)-(g) of the RTS, it means that the positions in the parent bank can be further considered in the assessment of the application if they have been taken or are maintained with the sole purpose of hedging the ratio. In this specific case, the institution could have reduced the position stemming from the subsidiary directly at the level of the subsidiary. For positions in USD (previous point), reducing the long position at the level of the subsidiary may not be trivial since that currency is the currency in which the greater part of the business is performed. For positions in DKK, however, it could be feasible. The competent authority should then deeply investigate whether the position at parent bank level has been taken for hedging the ratio or not. In addition, the competent authority should consider that, in the case of an appreciation of DKK against USD and against EUR, a loss would occur at the level of the parent bank (since at that level the position in DKK is short); the gains at the level of the subsidiary (since at that level the position is long) may not be used to offset that loss since the permission in Article 325b has not been granted. This is different from the case presented for positions in USD, where the position at parent bank level has been taken to cover only the translation risk arising from the consolidation process. In this example, we assume that the competent authority determines that the position at parent bank level in DKK cannot be considered to be taken with the sole purpose of hedging the ratio. As a result:

1. All positions in USD for which the exemption is sought meet the requirements in Article 4;

FINAL DRAFT RTS ON STRUCTURAL FX 83 2. All positions in GBP for which the exemption is sought meet the requirements in Article 4 ; 3. With regard to the position in DKK, in principle the institution has a number of possibilities: (i) the institution could request the permission only for the long position stemming from the subsidiary; (ii) the institution does not proceed further with its intention of receiving the permis￾sion for its positions in DKK; (iii) the institution could revise how the positions at parent bank level are managed to prove that they are maintained with the sole purpose of hedging the ratio. In this example, we assume that the institution changes its application and requests the permission only for positions in DKK stemming from the subsidiary; of course, such a move may also trigger a rethinking of the strategy to hedge the ratio. The short position in DKK has been highlighted in violet to highlight that it has been excluded from the scope of the permission as part of this step. The positions in DKK stemming from the subsidiary meets the requirements in Article 4. Hence, the competent authority should proceed in verifying whether the institution meets the other requirements for those positions. With respect to the structural nature, in the simplified balance sheet, items related to positions of type A for which the presumption of the structural nature has been recognised in the RTS are highlighted in green. All other positions (those highlighted in yellow or orange) are positions of type B. For positions of type B an adequate justification of the structural nature is key for considering them to be of a structural nature. Here, we analyse some specific cases, which are to be treated as examples only; in particular, the conclusion of the assessment of the competent authority assumed below is not meant to provide any further guidance beyond what has been included in the RTS. In other words, the conclusion of the competent authority has been included only for the purpose of showing how institutions are to apply the RTS when the competent authority assesses some positions to be structural and others not. In the example that we are analysing:

1. For positions of type B in USD, that justification could be based on the fact that they are managed with the sole purpose of hedging the ratio. For example, given this objective, the institution can prove its intention to roll out those positions as soon as they mature and to eventually adjust them to the extent needed to meet the objective in the risk management strategy. In this example, we assume that the competent authority determines that those positions are structural.
2. For positions of type B in GBP we differentiate between: (i) positions of type B booked in the parent bank;

FINAL DRAFT RTS ON STRUCTURAL FX 84 (ii) positions of type B stemming from the subsidiary. We assume that positions of type B in the parent bank are items that the institution aims to keep in the long term (e.g. real estate not held at historical cost). By contrast, we assume that positions of type B in the subsidiary stem from derivatives in the banking book. We assume that the positions in foreign currency related to those derivatives are unstable over time; in addition, the institution does not plan to roll out that FX position over time. As a result, we assume that the competent authority determines that the positions booked in the parent bank are of a structural nature, while those stemming from the branch are not of a structural nature. 3. For positions of type B in DKK: We assume that positions stemming from the subsidiary are related, for example to branches in Denmark, for which the institution can prove that there is a consolidated business whose size is stable over time. We assume that the competent authority has an overview of the business run by that subsidiary at an appropriate level of detail. As a result, the competent authority determines that the positions stemming from the subsidiary are of a structural nature. Items corresponding to positions of type B that have been recognised as structural following the assessment of the competent authority are highlighted in yellow; those that have not been recognised as such are highlighted in orange. The competent authority should check that all requirements relating to the risk management framework (Article 8) are met. While assessing those requirements, it is important also to cross￾check, for example, that the justification provided for validating the structural nature of a position of type B is consistent with what is stated in the strategy itself. For simplicity, we assume that those requirements are met for all three currencies. It should be now determined the amount that can be actually excluded from the net open position. It is worth noting that the size of the structural net position must be determined regardless of the fact that the permission in Article 325b has been granted, i.e. all positions that are structural are to be net when applying Article 7 (as per Article 7(1)(d)). Suppose that, following the calculation of the maximum open position, the institution obtains the following result: Currency Size of the structural net position Max net open position USD 300 – 40 – 10 – 200 = 50 30 GBP 30 20 DKK 30 – 10 = 20 25

FINAL DRAFT RTS ON STRUCTURAL FX 85 The values taken by the maximum net open position in the table are just assumptions. Several examples have already been included showing how the maximum open position has to be calculated. The values of the maximum net open position have been set to present how the RTS apply both when such value is higher than the size of the structural position and when such value is lower. In the context of USD, the maximum open position is lower than the size of the structural net position. As a result, when calculating the own funds requirements for FX risk, the institution should remove the effect of a net long structural position of size 30. This is achieved by removing all structural positions from the computation of the own funds requirements for FX risk, with the exception of a position of 20 (i.e. structural net position – maximum net open position = 50 – 30). Since the permission in accordance with Article 325b has not been granted it is important also to identify where the position of 20 should be considered to stem from, i.e. from the parent bank or from the subsidiary. In this specific case, the position of 20 is considered to stem from the subsidiary, since there were no long positions at the parent bank level. As a result, the institution should compute the own funds requirements for FX risk considering:

• a long position in the subsidiary of 100 that is held in the trading book;
• a long position in the subsidiary of 20 that is structural, which, however, could not be re￾moved because of the cap imposed by the maximum open position. The computation of the own funds requirements for FX risk stemming from those positions must be done considering that positions stemming from the subsidiary and the parent bank cannot be netted. Deciding where the remaining structural position that has to be capitalised (20) stems from may not be trivial in some cases; indeed, the remaining position could be allocated to both the subsidiary and the parent bank (e.g. in the case where there are long structural positions at both levels). When the permission referred to in Article 325b has been granted, it is not relevant whether the remaining position is assumed to be in the parent bank or in the subsidiary, since the final own funds requirements will not change; however, where such permission has not been granted, then assuming it to be at the level of the parent bank or at the level of the subsidiary is actually relevant in term of final own funds requirements. In the context of GBP, the maximum open position is lower than the size of the structural net position. The structural position stems only from the parent bank. Accordingly, the institution should calculate the own funds requirements for foreign exchange risk as if only a position of 10 (i.e. structural net position – maximum net open position = 30 – 20) actually stems from the parent bank, along with the position of 20 stemming from the subsidiary that was assessed to be non￾structural. In the context of DKK, the maximum open position is greater than the structural net position; as a result, all positions in DKK stemming from the subsidiary can be excluded when computing the own funds requirements for FX risk. However, the institution still needs to capitalise the short position

FINAL DRAFT RTS ON STRUCTURAL FX 86 at the parent bank level. It should be noted that, in cases of under-hedges (i.e. the maximum open position is greater than the structural net position), it is not relevant to identify where the remaining structural position to be capitalised has to be ‘allocated’, since there is no structural position that exceeds the maximum open position.

CONSULTATION PAPER ON DRAFT RTS ON STRUCTURAL FX (INCL. REPORTING) 87 Annex III: Reporting on Structural FX positions: Templates (green = new template) C 24.02 Market risk: Structural foreign exchange positions (MKR SFX) Items referred to in Article 6(1), point (a) of Delegated Regulation X/Y S_OP Trading book positions subject to own funds requirements for FX risk (net) Banking book positions not meeting the S￾FX requirements (net) 0010 0020 0030 0040 0050 0060 0070 0080 0090 0100 0110 0120 0130 Currency Sensitivity according to internal methodology RWEAi Art92(4)(a) / ∑jRWEAj Art92(4)(a) Sensitivity of the capital ratio with respect to changes in the FX rate Positions that are structural and deliberately taken for hedging the ratio Positions that are not structural or are not deliberately taken for hedging the ratio Capital ratio hedged Maximum core open position Hedging technique Overall risk position (before any exemption) Sensitivity according to regulatory formula

FINAL DRAFT RTS ON STRUCTURAL FX (INCL. REPORTING) 88 Annex IV: Reporting on Structural FX positions: Instructions ‘9.4 C 24.02 - Reporting on the exemptions for structural foreign exchange positions 9.4.1 General Remarks

1. This template contains information for assessing and monitoring the imple￾mentation of the exemption of risk positions that institutions have deliberately taken in order to hedge, at least partially, against adverse movements in for￾eign exchange rates on any of its capital ratios, from the own funds require￾ments for foreign exchange risk, granted in accordance with Article 104c of Regulation (EU) No 575/2013.
2. Where institutions have obtained a permission to exempt risk positions de￾nominated in one or several currencies in accordance with Article 104c of Regulation (EU) No 575/2013, they shall provide the information set out in this template separately for each such currency. 9.4.2 Instructions concerning specific positions Column Legal references and instructions 0010 Currency The ISO code of the currency shall be reported. This is a row identifier, and shall be unique for every row reported in this template. 0020 Overall risk position (before any exemption) Article 7(1), point (o)(i), of [the RTS on S-FX] 0030 Positions that are structural and deliberately taken for hedging the ratio Article 7(1), point (o)(ii), of [the RTS on S-FX] The overall risk position relating to positions that meet the requirements re￾ferred to in Article 2(1), of [the RTS on S-FX] shall be reported. 0040 Items referred to in Article 6(1), point (a), of Delegated Regulation X/Y Article 7(1), point (o)(iii), of [the RTS on S-FX] The overall risk position relating to items referred to in Article 5(1), point (a), of [the RTS on S-FX] (‘complementary open position’) shall be reported. 0050 S_OP Article 7(1), point (o)(iv), of [the RTS on S-FX]

FINAL DRAFT RTS ON STRUCTURAL FX (INCL. REPORTING) 89 0060- 0070 Positions that are not structural or are not deliberately taken for hedging the ratio 0060 Trading book positions subject to own funds requirements for FX risk (net) The overall risk position relating to items allocated to the trading book that are subject to own funds requirements for foreign exchange risk shall be reported. 0070 Banking book positions not meeting the S-FX requirements The overall risk position relating to items allocated to the non-trading book (banking book) that do not meet the requirements referred to in Article 2(1) of [the RTS on S-FX] shall be reported. 0080 Capital ratio hedged The ratio that the institution aims to hedge shall be indicated as one of the following:

• CET1 ratio
• T1 ratio
• Total capital ratio 0090 Maximum core open position Article 5(3), of [the RTS on S-FX] 0100 Hedging technique The hedging technique applied by the institution, as referred to in Article 6(1), point (b), of [the RTS on S-FX], shall be indicated as one of the follow￾ing:
• Under-hedge
• Perfect hedge
• Over-hedge 0110- 0120 Sensitivity of the capital ratio with respect to changes in the FX rate 0110 Sensitivity according to regulatory formula Article 7(1), point (o)(vi)(i), of [the RTS on S-FX] 0120 Sensitivity according to internal methodology Article 78(1), point (o)(vi)(ii), of [the RTS on S-FX]

FINAL DRAFT RTS ON STRUCTURAL FX (INCL. REPORTING) 90 0130 𝑹𝑾𝑬𝑨𝒊 𝑨𝒓𝒕𝟗𝟐(𝟒)(𝒂) ∑ 𝑹𝑾𝑬𝑨𝒋 𝑨𝒓𝒕𝟗𝟐(𝟒)(𝒂) 𝒋 Article 7(1), point (o)(xii), of [the RTS on S-FX] Institutions shall report RWEA as referred to in Article 92(4), point (a), of Regulation (EU) No 575/2013, pertaining to exposures denominated in the foreign currency 𝑖 (𝑅𝑊𝐸𝐴𝑖 𝐴𝑟𝑡92(4)(𝑎) ) in percent of the RWEA referred to in Article 92(4), point (a), of that Regulation, pertaining to exposures in all for￾eign currencies (∑ 𝑅𝑊𝐸𝐴𝑗 𝐴𝑟𝑡92(4)(𝑎) 𝑗 , 𝑖 ∈ [1, … ,𝑗]).