CSSF Circular 16/647 - Shadow banking entities

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CSSF Circular 16/647 updating CSSF circular 12/552 in relation to exposures to shadow banking entities

22 March 2017

Capital Requirements Regulation (CRR)

The EBA guidelines (GL/2015/20) on limits on exposures to shadow banking entities which carry out banking activities outside a regulated framework have been transposed into the CSSF circular 16/647.This circular amends the Circular CSSF 12/552 on matters relating to the management of risks.

The Circular sets out strong internal control principles as well as quantitative limits to shadow banking entities exposures.

According to those principles, entities should:

  • put in place an internal framework in order to list, manage control and mitigate risks inherent to shadow banking activity;
  • take into account the materiality threshold which sets each individual exposition on a shadow banking entity superior or equal to 0,25% of eligible own funds; and
  • integrate the risks inherent to those exposures in the Internal Capital Adequacy Assessment Process.

Entities should limit their exposures to shadow banking entities according to the principal or "the fallback approach" as defined in the EBA guidelines.

The principal approach requires the setting of:

  • an aggregated limit on those exposures according to their eligible own funds
  • stricter individual limits on exposures to those entities

If not possible, entities should apply the fallback approach to their total exposure. The fallback approach requires to sum all the expositions on shadow banking entities.

The CSSF Circular is applicable to entities subject to large exposures as defines in part IV of the CRR as of January 1, 2017.

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