Featured Product

    PRA Explains Approach to CCR Calculation Under Internal Models Method

    March 30, 2020

    PRA published a statement that sets out its approach to calculate exposure for counterparty credit risk, or CCR, under the internal models method (IMM). It published another statement that sets out its approach for the Value-at-Risk (VAR) back-testing, with this temporary approach being relevant for firms experiencing an elevated level of VAR back-testing exceptions. Both these statements have been published in light of the COVID-19 outbreak.

    Statement on exposure value for counterparty risk under IMM

    The Capital Requirements Regulation (CRR) does not preclude firms using the IMM to measure the exposure value, including collateral which has not yet settled at the time of calculation. Where a shortfall between the collateral for which a firm has called and the collateral which has settled arises as a result of the ordinary collateral settlement cycle, including this shortfall in the calculation of exposure may lead to unwarranted volatility in the exposure value and therefore unwarranted volatility in risk-weighted assets. Firms with permission under CRR Article 285 are required to capture the effects of margining within the calculation of Effective Expected Positive Exposure, which is derived from the profile of estimated Expected Exposure. PRA considers that firms are not required to estimate the initial Expected Exposure recognizing only collateral that has settled at the time of calculation. According to PRA, a firm which calculates the initial Expected Exposure on the basis of collateral that has not yet settled would be expected to monitor the impact of this modeling choice on an ongoing basis and hold capital against any understatement of economic risk. Firms would not be expected to recognize collateral in the initial Expected Exposure which has been called for but disputed by the counterparty.

    If a firm makes a change to any IMM model as a result of this guidance then this would constitute a post-approval model change requiring post-notification as per Section 6.16 of PRA Supervisory Statement SS12/13, unless the impact of that change exceeded the materiality threshold as set out in Section 6.10(b) of the statement, in which case it would require pre-notification as set out in Section 6.15.

    Statement on temporary approach to VAR back-testing exceptions

    PRA mentioned that the exceptional levels of market volatility over the past few weeks have led to an elevated level of VAR back-testing exceptions across the industry. To mitigate the possibility of excessively pro-cyclical market risk capital requirements through the automatic application of a higher VAR multiplier, PRA will allow firms—on a temporary basis—to offset increases due to new exceptions through a commensurate reduction in risks-not-in-VAR (RNIV) capital requirements. The statement notes that the baseline number of back-testing exceptions to be used, which will determine the point at which the RNIV reduction starts, should be agreed with PRA at the outset. Firms are expected to continue to monitor and analyze exceptions during this temporary period and, when the situation returns to normal (that is, after the end of the temporary period), PRA will consider which (if any) of the exceptions can reasonably be discounted (per section 6 of PRA supervisory statement on market risk). This approach will be reviewed by PRA after six months—that, is in September 2020. 

     

    Related Links

    Keywords: Europe, UK, Banking, Value-at-Risk, COVID-19, CRR, Counterparty Credit Risk, Back-Testing, Risk-Weighted Assets, Regulatory Capital, Internal Models, PRA

    Featured Experts
    Related Articles
    News

    BIS Innovation Hub Sets Out Work Program for 2021

    BIS Innovation Hub published the work program for 2021, with focus on suptech and regtech, next-generation financial market infrastructure, central bank digital currencies, open finance, green finance, and cyber security.

    January 22, 2021 WebPage Regulatory News
    News

    EC Plans to Consult on Crisis Management and EDIS Framework Revisions

    In an article published by SRB, Mairead McGuinness, the European Commissioner for Financial Services, Financial Stability, and Capital Markets Union, discussed the progress and next steps toward completion of the Banking Union.

    January 21, 2021 WebPage Regulatory News
    News

    EBA Finalizes Remuneration Standards for Investment Firms in EU

    EBA finalized the two sets of draft regulatory technical standards on the identification of material risk-takers and on the classes of instruments used for remuneration under the Investment Firms Directive (IFD).

    January 21, 2021 WebPage Regulatory News
    News

    ECA Recommends Actions to Enhance Resolution Planning for Banks

    EC published, in the Official Journal of the European Union, a notification that the European Court of Auditors (ECA) has published a special report on resolution planning in the Single Resolution Mechanism.

    January 20, 2021 WebPage Regulatory News
    News

    BoE Publishes Key Elements of the 2021 Stress Testing for Banks in UK

    BoE published a scenario against which it will be stress testing banks in 2021, in addition to setting out the key elements of the 2021 stress test, guidance on the 2021 stress test, and the variable paths for the 2021 stress test.

    January 20, 2021 WebPage Regulatory News
    News

    PRA Proposes Rules on Identity Verification of Depositor Protection

    PRA published a consultation paper (CP3/21) proposes rules regarding the timing of identity verification required for eligibility of depositor protection under the Financial Services Compensation Scheme (FSCS).

    January 20, 2021 WebPage Regulatory News
    News

    FSB Publishes Work Program for 2021

    FSB published the work program for 2021, which reflects a strategic shift in priorities in the COVID-19 environment.

    January 20, 2021 WebPage Regulatory News
    News

    FCA Issues Update on Move to New Data Collection Platform

    FCA announced that 50% firms have started using the new data collection platform RegData, which is slated to replace the existing platform known Gabriel.

    January 20, 2021 WebPage Regulatory News
    News

    Bundesbank Publishes Derivation Rules for Reporting by Banks

    Bundesbank published Version 5.0 of the derivation rules for completeness check at the form level, with respect to the data quality of the European harmonized reporting system.

    January 19, 2021 WebPage Regulatory News
    News

    FED Revises Capital Planning and Stress Testing Requirements for Banks

    FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.

    January 19, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6488