Commission Implementing Regulation (EU) No 680/2014Show full title

10. DERIVATIVES (10 AND 11) U.K.

64. The carrying amount and the notional amount of the derivatives held for trading and the derivatives held for hedge accounting shall be reported broken down by type of underlying risk, type of market (over-the-counter versus organised markets) and type of product. U.K.

65. Institutions shall report the derivatives held for hedge accounting broken down by type of hedge. U.K.

66. Derivatives included in hybrid instruments which have been separated from the host contract shall be reported in templates 10 and 11 according to the nature of the derivative. The amount of the host contract is not included in these templates. However, if the hybrid instrument is measured at fair value through profit or loss, the contract as a whole shall be included in the category of held for trading or financial instruments designated at fair value through profit or loss (and, thus, the embedded derivatives are not reported in 10 and 11). U.K.

10.1. Classification of derivatives by type of risk U.K.

67. All derivatives shall be classified into the following risk categories: U.K.

(a)

Interest rate: Interest rate derivatives are contracts related to an interest-bearing financial instrument whose cash flows are determined by referencing interest rates or another interest rate contract such as an option on a futures contract to purchase a Treasury bill. This category is restricted to those deals where all the legs are exposed to only one currency's interest rate. Thus it excludes contracts involving the exchange of one or more foreign currencies such as cross-currency swaps and currency options, and other contracts whose predominant risk characteristic is foreign exchange risk, which are to be reported as foreign exchange contracts. Interest rate contracts include forward rate agreements, single-currency interest rate swaps, interest rate futures, interest rate options (including caps, floors, collars and corridors), interest rate swaptions and interest rate warrants.

(b)

Equity: Equity derivatives are contracts that have a return, or a portion of their return, linked to the price of a particular equity or to an index of equity prices.

(c)

Foreign exchange and gold: These derivatives include contracts involving the exchange of currencies in the forward market and the exposure to gold. They therefore cover outright forwards, foreign exchange swaps, currency swaps (including cross-currency interest rate swaps), currency futures, currency options, currency swaptions and currency warrant. Foreign exchange derivatives include all deals involving exposure to more than one currency, whether in interest rates or exchange rates. Gold contracts include all deals involving exposure to that commodity.

(d)

Credit: Credit derivatives are contracts that do not meet the definition of financial guarantees and in which the payout is linked primarily to some measure of the creditworthiness of a particular reference credit. The contracts specify an exchange of payments in which at least one of the two legs is determined by the performance of the reference credit. Payouts can be triggered by a number of events, including a default, a rating downgrade or a stipulated change in the credit spread of the reference asset.

(e)

Commodity: These derivatives are contracts that have a return, or a portion of their return, linked to the price of, or to a price index of, a commodity such as a precious metal (other than gold), petroleum, lumber or agricultural products.

(f)

Other: These derivatives are any other derivative contracts, which do not involve an exposure to foreign exchange, interest rate, equity, commodity or credit risk such as climatic derivatives or insurance derivatives.

68. When a derivative is influenced by more than one type of underlying risk, the instrument shall be allocated to the most sensitive type of risk. For multi-exposure derivatives, in cases of uncertainty, the deals shall be allocated according to the following order of precedence: U.K.

(a)

Commodities: All derivatives transactions involving a commodity or commodity index exposure, whether or not they involve a joint exposure in commodities and any other risk category which may include foreign exchange, interest rate or equity, shall be reported in this category.

(b)

Equities: With the exception of contracts with a joint exposure to commodities and equities, which are to be reported as commodities, all derivatives transactions with a link to the performance of equities or equity indices shall be reported in the equity category. Equity deals with exposure to foreign exchange or interest rates should be included in this category.

(c)

Foreign exchange and gold: This category includes all derivatives transactions (with the exception of those already reported in the commodity or equity categories) with exposure to more than one currency, be it pertaining either to interest-bearing financial instruments or exchange rates.

10.2. Amounts to be reported for derivatives U.K.

69. The ‘carrying amount’ for all derivatives (hedging or trading) is the fair value. Derivatives with a positive fair value (above zero) are ‘financial assets’ and derivatives with a negative fair value (below zero) are ‘financial liabilities’. The ‘carrying amount’ shall be reported separately for derivatives with a positive fair value (‘financial assets’) and for those with a negative fair value (‘financial liabilities’). At the date of initial recognition, a derivative is classified as ‘financial asset’ or ‘financial liability’ according to its initial fair value. After initial recognition, as the fair value of a derivative increases or decreases, the terms of the exchange may become either favourable to the institution (and the derivative is classified as ‘financial asset’) or unfavourable (and the derivative is classified as ‘financial liability’). U.K.

70. The ‘Notional amount’ is the gross nominal of all deals concluded and not yet settled at the reference date. In particular, the following shall be taken account to determine the notional amount: U.K.

(a)

For contracts with variable nominal or notional principal amounts, the basis for reporting is the nominal or notional principal amounts at the reference date.

(b)

The notional amount value to be reported for a derivative contract with a multiplier component is the contract effective notional amount or par value.

(c)

Swaps: The notional amount of a swap is the underlying principal amount upon which the exchange of interest, foreign exchange or other income or expense is based.

(d)

Equity and commodity-linked contracts: The notional amount to be reported for an equity or commodity contract is the quantity of the commodity or equity product contracted for purchase or sale multiplied by the contract price of a unit. The notional amount to be reported for commodity contracts with multiple exchanges of principal is the contractual amount multiplied by the number of remaining exchanges of principal in the contract.

(e)

Credit derivatives: The contract amount to be reported for credit derivatives is the nominal value of the relevant reference credit.

(f)

Digital options have a predefined payoff which can be either a monetary amount or a number of contracts of an underlying. The notional amount for digital options is defined as either the predefined monetary amount or the fair value of the underlying at the reference date.

71. The column ‘Notional amount’ of derivatives includes, for each line item, the sum of the notional amounts of all contracts in which the institution is counterparty, independently of whether the derivatives are considered assets or liabilities on the face of the balance sheet. All notional amounts shall be reported regardless whether the fair value of derivatives is positive, negative or equal to zero. Netting among the notional amounts is not allowed. U.K.

72. The ‘Notional amount’ shall be reported by ‘total’ and by ‘of which: sold’ for the line items: ‘OTC options’, ‘Organised market options’, ‘Commodity’ and ‘Other’. The item ‘of which sold’ includes the notional amounts (strike price) of the contracts in which the counterparties (option holders) of the institution (option writer) have the right to exercise the option and for the items related to credit risk derivatives, the notional amounts of the contracts in which the institution (protection seller) has sold (gives) protection to their counterparties (protection buyers). U.K.

10.3. Derivatives classified as ‘economic hedges’ U.K.

73. Derivatives that are not effective hedging instruments in accordance with IAS 39 should be included in the ‘held for trading’ portfolio. This applies also to derivatives held for hedging purposes not meeting the requirements in IAS 39 to be effective hedging instruments as well as to derivatives linked to unquoted equity instruments whose fair value cannot be measured reliably. U.K.

74. Derivatives ‘held for trading’ that meet the definition of ‘economic hedges’ shall be reported separately for each type of risk. The item ‘economic hedges’ includes those derivatives that are classified as ‘held for trading’ but they are not part of the trading book as defined in Article 4(1)(86) of the CRR. This item does not include derivatives for proprietary trading. U.K.

10.4. Breakdown of derivatives by counterparty sector U.K.

75. The carrying amount and the total notional amount of derivatives held for trading, and also of derivatives held for hedge accounting, which are traded in the OTC market, shall be reported by counterparty using the following categories: U.K.

(a)

‘credit institutions’,

(b)

‘other financial corporations’, and

(c)

‘rest’ comprising all other counterparties.

76. All OTC derivatives, without regarding the type of risk to which they are related, shall be broken down by these counterparties. Counterparty breakdown for credit risk derivatives refers to the sector where the counterparty of the institution in the contract (buyer or seller of protection) is allocated. U.K.