EBA proposed the draft regulatory technical standards to calculate gross jump-to-default amount and residual risk add-on under the standardized market risk approach as part of the Capital Requirements Regulation or CRR. One set of proposed regulatory standards specifies how gross jump-to-default amounts are to be determined for calculating the default risk charge for non-securitization instruments while the other set specifies how to identify instruments exposed to residual risks for the residual risk add on. These draft standards are part of the phase 3 deliverables of the EBA roadmap for the new market and counterparty credit risk approaches. The comment period on the proposals ends on June 12, 2021.
Institutions using the alternative standardized approach are required to compute three separate own funds requirements for market risk—namely, the sensitivities-based method (SbM) requirements, the residual risk add-on, and the default risk charge. To determine the default risk charge under the alternative standardized approach for market risk, the gross jump-to-default (JTD) amount of exposures are to be calculated. The first set of regulatory technical standards specify how gross jump-to-default amounts are to be determined for institutions’ exposures in the trading book under the alternative standardized approach for market risk, in scope of the default risk charge for non-securitization instruments. These draft standards are intended to address the following three mandates set out in CRR:
- How the components P&Llong, P&Lshort, Adjustmentlong, and Adjustmentshort are to be determined to calculate gross jump-to-default amounts of exposures to debt and equity instruments with the formulae in Article 325w(1), (2), and (5)
- Which alternative methodologies institutions are to use for estimating gross jump-to-default amounts of exposures referred to in Article 325w(7)
- How to determine the notional amount of instruments other than the ones referred to in Article 325w(4)
The second set of proposed standards clarify the scope of residual risk add-on instruments for which the own funds capital requirements for residual risks should be determined. The standards specify a non-exhaustive list of instruments bearing residual risks and a list of risks that do not constitute residual risks. The standards also clarify that longevity risk, weather, natural disasters, and future realized volatility should all be considered as exotic underlyings. The residual risk add-on is intended to provide a simple and conservative capital treatment for any other risks not covered by the sensitivities-based method or the default risk charge. Therefore, instruments exposed to residual risks—that is, instruments referencing an exotic underlying or instruments bearing other residual risks, are subject to the residual risk add-on treatment. The residual risk add-on amounts to 1% or 0.1% of the gross notional amount of the instrument, depending on whether the instrument is an instrument referencing an exotic underlying or an instrument bearing other residual risks, respectively.
- Press Release
- Consultation on Jump-to-Default Amounts (PDF)
- Consultation on Residual Risk Add-On (PDF)
Comment Due Date: June 12, 2021
Keywords: Europe, EU, Banking, FRTB, Standardized Approach, CRR, Regulatory Technical Standards, Jump to Default, Residual Risk Add on, Market Risk, Regulatory Capital, Basel, EBA
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