OSFI Revises Guideline on Interest Rate Risk Management by Banks

By Regulatory News

May 30, 2019

Basel III

OSFI revised the Guideline B-12 on interest rate risk management and published impact analysis statement on the guideline. The guideline provides a risk control framework for deposit-taking institutions to follow in identifying, assessing, and managing their interest rate risk. The revised version of Guideline B-12 will take effect from January 01, 2020 for domestic systemically important banks (D-SIBs) and from January 01, 2021 for other deposit-taking institutions. The current version of Guideline B-12 remains effective for non-D-SIBs until December 31, 2020.

The information to be provided by a third party seeking authorization to assess the compliance of securitizations with the STS criteria provided for in Securitization Regulation should enable a competent authority to evaluate whether and, to what extent, the applicant meets the conditions of Article 28(1) of the Securitization Regulation. An authorized third party will be able to provide STS assessment services across EU. The application for authorization should, therefore, comprehensively identify that third party, any group to which this third party belongs, and the scope of its activities. With regard to the STS assessment services to be provided, the application should include the envisaged scope of the services to be provided as well as their geographical scope, particularly the following:

To facilitate effective use of the authorization resources of a competent authority, each application for authorization should include a table clearly identifying each submitted document and its relevance to the conditions that must be met for authorization.
To enable the competent authority to assess whether the fees charged by the third party are non-discriminatory and are sufficient and appropriate to cover the costs for the provision of the STS assessment services, as required by Article 28(1)(a) of Securitization Regulation, the third party should provide comprehensive information on pricing policies, pricing criteria, fee structures, and fee schedules.
To enable the competent authority to assess whether the third party is able to ensure the integrity and independence of the STS assessment process, that third party should provide information on the structure of those internal controls. Furthermore, the third party should provide comprehensive information on the composition of the management body and on the qualifications and repute of each of its members.
To enable the competent authority to assess whether the third party has sufficient operational safeguards and internal processes to assess STS compliance, the third party should provide information on its procedures relating to the required qualification of its staff. The third party should also demonstrate that its STS assessment methodology is sensitive to the type of securitization and that specifies separate procedures and safeguards for asset-backed commercial paper (ABCP) transactions/programs and non-ABCP securitizations.

The use of outsourcing arrangements and a reliance on the use of external experts can raise concerns about the robustness of operational safeguards and internal processes. The application should, therefore, contain specific information about the nature and scope of any such outsourcing arrangements or use of external experts as well as the third party's governance over those arrangements. Regulation (EU) 2019/885 is based on the draft regulatory technical standards submitted by ESMA to EC.

Related Links

Effective Date: June 18, 2019

Press Release

Proposed Rule 1

Proposed Rule 2

Proposed Rule 3

Presentation on Regulatory Framework (PDF)

Presentation on Resolution Plan Rules (PDF)

OSFI had, in October 2018, issued a public consultation on revisions to the guideline on the interest rate risk in the banking book (IRRBB). The cover letter to the final guideline contains a summary of material comments received from stakeholders and an explanation of how they have been addressed. The key updates to OSFI Guideline B-12 include the following:

Additional guidance for the IRRBB governance processes of institutions
Expectations for the measurement of IRRBB, the development of stress and shock scenarios, and the key behavioral and modeling assumptions institutions should consider
Introduction of an outlier/materiality test that compares the maximum loss of an institution to its capital base under the prescribed scenarios

The updated guideline reflects international sound practices, as outlined in the 2016 BCBS framework for IRRBB. The OSFI guideline incorporates most of the BCBS guidance to reflect changes in the market; the methods expected to be used by deposit-taking institutions for measuring, managing, and monitoring IRRBB; and updates related to supervisory practices. The revised expectations will ensure that the OSFI standards for measuring and monitoring IRRBB are comprehensive and reflect sound practices. OSFI's application of the Guideline B-12 will be commensurate with each institution's nature, size, business, and complexity as well as its structure, economic significance, and the level of inherent interest rate risk.

Related Links

Effective Date: January 01, 2020 (D-SIBs); January 01, 2021 (Others)

Keywords: Americas, Canada, Banking, Basel III, IRRBB, Interest Rate Risk, Guideline B-12, OSFI

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OSFI Revises Guideline on Interest Rate Risk Management by Banks

By Regulatory News

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