EBA Proposes Standards on Standardized Approach for Market Risk
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.
Related Links
- Press Release
- Consultation on Jump-to-Default Amounts (PDF)
- Consultation on Residual Risk Add-On (PDF)
- Roadmap
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
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
BDF Publishes Information on Reporting Under AnaCredit RegulationRelated Articles
HKMA Finalizes Policy Modules on Group-Wide Approach and Remuneration
The Hong Kong Monetary Authority (HKMA) revised the Supervisory Policy Manual module CG-5 that sets out guidelines on a sound remuneration system for authorized institutions.
EBA Guide to Monitor Threshold for Intermediate Parent Undertakings
The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).
PRA Finalizes Approach to Supervision of International Banks
In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.
FCA Issues PS21/9 on Implementation of Investment Firms Regime
The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.
EBA Proposes Regulatory Standards to Identify Shadow Banking Entities
The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.
IOSCO Proposes Recommendations on ESG Ratings and Data Providers
The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.
ESMA Group Issues Recommendations on RFR Switch in Interdealer Market
The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.
ECB Study Assesses Impact of Basel III Finalization Package
The European Central Bank (ECB) published a paper as well as an article in the July Macroprudential Bulletin, both of which offer insights on the assessment of the impact of Basel III finalization package on the euro area.
ISDA Finds FRTB Results in Higher Capital Charges for Carbon Trading
The International Swaps and Derivatives Association (ISDA) published a paper that explores the impact of the Fundamental Review of the Trading Book (FRTB) on the trading of carbon certificates.
PRA Updates Remuneration Policy Statement Templates and Tables
The Prudential Regulation Authority (PRA) published the remuneration policy self-assessment templates and tables on strengthening accountability.
