ID: 2023_6746 – Correlation parameter for Intra-bucket correlations for credit spread risk for non-securitisations

EBA has published the following new Q&A regarding issues relating to the CRR:
2023_6746- Market risk – Correlation parameter for Intra-bucket correlations for credit spread risk for non-securitisations:
QUESTION: In the first subparagraph of Article 325m of Regulation (EU) No 575/2013 (CRR) it is stated that institutions apply a risk factor per issuer and per maturity, irrespective of whether these credit spread rates of the issuer derive from debt instruments or credit default swaps. However, the correlation factor linked to the basis risk is present in article 325ai of (CRR). Must this value always be equal to 1 since there is no longer a division between the two types of curve as regards risk factors or does this basis risk refer to another type of risk? In this second case to which?
Final Answer: Bond and CDS curves are to be treated as two separate curves (i.e. two separate risk factors) in accordance with Article 325m(1) of Regulation (EU) No 575/2013 (CRR) for the purpose of computing delta risk. For example, a CDS curve on the single name X, and a Bond curve on the same single name, shall constitute two curves, and rho_kl(basis) shall be set at 99.9% to reflect the CDS-bond basis.
On the contrary, a single credit spread curve specific to the issuer shall be used for curvature risk in accordance with Article 325m(3) of Regulation (EU) No 575/2013.