PRA Policy on Stressed VaR and RNIV Calculations Under Market Risk
PRA published the policy statement PS23/20 on the calculation of stressed value at risk (sVAR) and risks not in value at risk (RNIV) under the market risk framework. The policy statement updates the supervisory statement SS13/13 and provides feedback to responses to the consultation paper CP15/20. CP15/20 had proposed to update SS13/13 with expectations related to measurement of RNIV and to the meaning of “period of significant financial stress relevant to the institution’s portfolio” for sVaR calculation. PS23/20 is relevant to all firms to which the Capital Requirements Directive (CRD) IV applies and the updated SS13/13 on market risk will become effective on November 26, 2020.
Following consideration of the responses received to CP1520, PRA has changed the draft policy to expect that RNIV own funds requirements should be calculated as the average across the preceding three-month period, of an RNIV measure calculated at least monthly (rather than weekly, as proposed in CP15/20). PRA has set an additional expectation that firms should still consider whether more frequent calculation than monthly may be appropriate for more material, or more variable, RNIV positions. PRA has also set an expectation that the relevant RNIV measure for at least 90% of RNIV own funds requirements should be calculated at least monthly. This means that the RNIV measure for up to 10% of RNIV own funds requirements may be calculated less frequently than monthly.
With respect to sVAR calculation, the majority of respondents that expressed a view agreed with the PRA’s proposed expectations on the observation period used for determining the sVaR stress period. Thus, PRA has decided not to change its expectation that firms should consider an observation period that starts from Monday, January 01, 2007, particularly as the market stresses in 2007 and 2008 remain the most relevant period of stress for a number of firms’ portfolios. PRA notes that its expectation is also consistent with the revised BCBS market risk framework and the Capital Requirement Regulation (CRR) alternative internal model approach for market risk.
The policy set out in PS23/20 has been designed in the context of the withdrawal of UK from EU and entry into the transition period, during which time UK remains subject to European law. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with EU take effect. PRA has assessed that the policy would not need to be amended under the EU (Withdrawal) Act 2018.
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Effective Date: November 26, 2020
Keywords: Europe, UK, Banking, COVID-19, Market Risk, RNIV, Value at Risk, CRD IV, CRR, Basel, PS23/20, CP15/20, SS13/13, PRA
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