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    EBA Publishes Standards on Key Aspects of Implementation of SA-CCR

    December 18, 2019

    EBA published the final draft regulatory technical standards on certain key aspects related to the implementation of the standardized approach for counterparty credit risk (SA-CCR). The standards set out the method for identifying the material risk drivers of derivative transactions, on the basis of which mapping to one or more of the risk categories is to be done. These technical standards also set out the formula that institutions are to use to calculate the supervisory delta of options, when mapped to the interest rate risk category, which is compatible with negative interest rates. Additionally, the draft regulatory standards introduce a method suitable for determining the direction of the position in a material risk driver. The regulation related to the regulatory technical standards shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.

    On the mapping of derivatives into risk categories, the final draft technical standards follow a three-pronged methodology for the identification of material risk driver(s) of derivative transactions:

    • The first approach relies on purely qualitative information and is suitable for simple and standard derivative transactions (for example, interest rate and cross currency swaps).
    • The second approach is more detailed and hinges on a quantitative assessment of the sensitivities to classify possible risk drivers based on materiality considerations.
    • The third approach is a conservative and simple backstop, which identifies all possible risk drivers of a transaction as material. This last approach will always be available as a fallback option and will allow a proportionate implementation of the framework when the second approach is too burdensome.

    The formula for the supervisory delta of interest rate options, specified in the technical standards, is an application of the Black-Scholes (BS) model, on which SA-CCR relies. Such an application is made feasible by shifting the interest rate curve to move interest rates back into positive territory. In addition, the technical standards specify the parameters that are to be used in the supervisory delta formula. Finally, for determining the direction of the position in a particular risk driver (long or short), the methodology introduced in these technical standards leverages on the same elements (that is, cash flows and sensitivities) used for the identification of the material risk driver(s) of derivative transactions, which are specifically envisaged for reducing the burden on institutions.

    The draft technical standards specify key aspects of the SA-CCR and represent an important contribution to its smooth harmonized implementation in the EU. The technical standards are part of the mandates assigned to EBA within its important role in implementing the SA-CCR and the Fundamental Review of the Trading Book (FRTB) frameworks in EU. EBA has developed these draft technical standards based on the proposed legislative text of Capital Requirements Regulation (CRR) 2. Where relevant, EBA adapted the draft technical standards to the final CRR 2 text. EBA also introduced other changes into the draft technical standards to appropriately reflect the comments received in response to (the May 2019) consultation paper on draft technical standards.

     

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    Effective Date: OJ+20 Days

    Keywords: Europe, EU, Banking, Basel III, SA-CCR, Credit Risk, Counterparty Credit Risk, Regulatory Technical Standards, OTC Derivatives, Market Risk, CRR2, FRTB, EBA

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