May 02, 2019

EBA proposed draft regulatory technical standards on the Standardized Approach for Counterparty Credit Risk (SA-CCR). The regulatory technical standards specify methods for mapping of derivative transactions to risk categories, a formula for calculation of the supervisory delta of options mapped to the interest rate risk category, and a method for determining whether derivative transactions are long or short in their risk drivers. The consultation runs until August 02, 2019.

 EBA is proposing a three-pronged methodology for the mapping of derivative transactions to risk categories.

  • The first approach is purely qualitative and suitable for simple and standard derivative transactions; it refers to certain criteria that have to be satisfied.
  • The second approach hinges on a quantitative assessment of the sensitivities with respect to each possible risk driver, to identify the material ones.
  • The third approach, intentionally simple and conservative, identifies all possible risk drivers of a transaction as material and allocates the transaction to all relevant risk-categories. This last approach is always available as a fallback to the second approach.

EBA also proposes to use, in line with Basel standards, a supervisory delta formula based on a shifted Black-Scholes model that allows dealing with situations of negative interest rates. The shift is intended to move interest rates back into positive territory to make the application of the Black-Scholes model feasible. EBA proposes a methodology for determining the shift to be included in the formula and requests feedback with respect to the different options proposed, including on the possible level of application. Finally, EBA tried to reduce the burden for institutions in the determination of the direction of the position in that particular risk driver (long or short) by leveraging on the same elements (that is, cash flows and sensitivities) that institutions use for the mapping of derivatives to risk categories.

These draft technical standards specify key aspects of the SA-CCR and represent an important contribution to its smooth harmonized implementation in EU. The draft technical standards were developed based on the mandates included in the latest available version of the proposed amended Capital Requirements Regulation (CRR 2). As all the stages of the legislative procedure for the CRR 2 text have not been completed, the version that was taken into account for drafting these draft regulatory technical standards is the European Parliament legislative resolution of April 16, 2019. Therefore, the proposed draft standards may be amended after the consultation to take into account potential changes in the final CRR 2 text. 

 

Related Links

Comment Due Date: August 02, 2019

Keywords: Europe, EU, Banking, Basel III, SA-CCR, Credit Risk, Counterparty Credit Risk, Regulatory Technical Standards, OTC Derivatives, Market Risk, CRR 2, EBA

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