Question
In case the bank invests in a structure with underlying assets (e.g. UCITS) that consist also of derivatives. Should the CVA also be calculated for these exposures?
Background on the question
UCITS usually invest into derivatives to reduce their credit-, market-, interest rate- and fx-risk or to adjust the overall risk/return profile. When an institution holds these UCITS, it will apply a look through onto the assets included in the structure, meaning the derivatives in the UCIT will be treated as if they are direct exposures from the institution.
Answer
Article 382(1) of the Regulation (EU) No 575/2013 (CRR) states that: ‘An institution shall calculate the own funds requirements for CVA risk in accordance with this title for all OTC derivative instruments in respect of all of its business activities …’. To that extent OTC derivative transactions included in UCITS are subject to the own funds requirement for CVA risk if the look-through approach set out under Article 132, 152 or 350 CRR is applied and if those positions are within the scope of Article 382 CRR.