Question
Under the provisions of Article 162(2)(a) of Regulation (EU) No 575/2013 (CRR), how should an instrument with a scheduled cash flow, where the institution may opt for prolonging the contract for another period, be treated?
Background on the question
The customer cannot influence the length of the contract, apart from cancelling the contract, i.e. the institution has the decisive power to prolong or not prolong the contract. It is expected that the terms of the contracts should be followed i.e. the scheduled cash flow should be applied when calculating effective maturity, is it the correct interpretation?
Answer
Yes, the contractually scheduled cash flow can be applied for determining M (the maturity) according to Article 162(2)(a) of Regulation (EU) No 575/2013 (CRR) where the obligor is not in the position to prolong the contract or to otherwise change the schedule in a way resulting in longer maturities. A potential change to the schedule that would solely depend on a prolongation decision by the institution need not be taken into account when determining M. Were this required, the institution may have difficulty to applying a formula which is based on a fixed schedule. Where an institution is not in a position to calculate M as set out in Article 162(2)(a) of the CRR, it is instead required by Article 162(2)(f) to determine M as the maximum remaining time (in years) that the obligor is permitted to take to fully discharge its contractual obligations, where M shall be at least 1 year. Consequently, where the obligor is not in the position to prolong the time permitted to take to fully discharge its contractual obligations, the institution is still not required to use an M that is longer than according to the original schedule. In conclusion, considering a longer maturity resulting from a prolongation by the institution instead of the original schedule is neither required by point (a), nor by point (f), of Article 162(2) of the CRR. This makes clear that a longer maturity that could result from potential changes to the schedule solely because of a prolongation decision by the institution need not be taken into account before the institution has made such a decision. See further Q&A 2013 686.