7. Examination of the merits – assessment of the structural nature of the positions and of the intention to hedge the ratio

The following positions should be considered as positions of a structural nature:

• (a) where the institution requesting the permission referred to in Article 352(2) of Regulation (EU) No 575/2013 applies the requirements of that Regulation on an individual basis, a position in the relevant currency which corresponds to investments in subsidiaries that are included in the same scope of consolidation as the institution requesting the permission;
• (b) where the institution requesting the permission referred to in Article 352(2) of Regulation (EU) No 575/2013 applies the requirements of that Regulation on a consolidated basis, a position for which both of the following conditions are met:
• (i) it stems from an investment in a subsidiary that has been included in the consolidation;
• (ii) the currency of the position coincides with the reporting currency used by the subsidiary holding the item to which such position corresponds.

Other positions not meeting the conditions referred to in paragraph 27 could be considered of a structural nature where there is an adequate justification that should be built considering the following:

• (a) whether those positions are related to the cross-border nature of the institution;
• (b) whether those positions are related to a business of the institution which is consolidated and stable over time;
• (c) how the institution plans to manage those positions over time.

Assessment of the intention to hedge the ratio – governance and risk management strategy of the structural positions

In order for the competent authorities to be able to establish that the position in the relevant currency has been taken or is maintained for the purpose of hedging the relevant ratio, all of the following conditions should be met:

• (a) the institution operates and documents the risk-management framework for managing such positions;
• (b) the risk management framework referred to in point (a) 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) the risk management framework referred to in point (a) 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) the risk management framework referred to in point (a) includes a limit of the maximum loss that is deemed acceptable for the institution to incur due to the choice of maintaining the positions for which the permission referred to in Article 352(2) of Regulation (EU) No 575/2013 is sought;
• (e) the risk management framework referred to in point (a) 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;
• (f) in the risk management framework referred to in point (a) there is an explicit warning that the open position that is maintained for hedging the ratio will lead to losses as soon as the relevant currency depreciates, and that hedging the ratio leads to an increase in the volatility of the own funds due to changes in the relevant exchange rate;
• (g) the risk management framework referred to in point (a) and the documentation describing it, is approved by the management board of the institution;
• (h) the risk management framework referred to in point (a) specifies a strategy for achieving the objective referred to in point (b), which includes at least the following:

institution categorises as structural and taken with the purpose of hedging the ratio and those that are not, and requires that such boundaries are used by the institution where 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:

• (iv) where applicable, it describes how positions that have been taken with the only purpose of hedging the ratio in accordance with paragraphs 2 5 and 2 6 are managed in order to meet the objective referred to in point (b);
• (i) the strategy referred to in point ( h ) has a time horizon of at least six months;
• (j) the documentation describing the risk management framework referred to in point (a) includes all of the following:

quantitative measures referred to in point (b) and the maximum net open position referred to in paragraph 31;

• (ii) where the institution took some positions with the sole purpose of hedging the ratio in accordance with paragraphs 25 and 26, it includes evidence that those positions were taken with that purpose only;
• (iii) it 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 maximum net open position in accordance with paragraph 31, by providing at least a gap analysis showing that the simplifications made do not lead to an overestimation of the maximum net open position.