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    PRA Consults on Stressed VaR and RNIV Calculations Under Market Risk

    October 06, 2020

    PRA is proposing, via the consultation paper CP15/20, to update its expectations on the measurement of risks not in value at risk (RNIV) and on the meaning of "period of significant financial stress relevant to the institution’s portfolio" for the stressed value at risk (sVaR) calculation. In light of the issues exposed by the COVID-19 event, PRA is proposing to set expectations that are intended to attenuate the procyclicality in own funds requirements for market risk. To this end, PRA has proposed amendments to the supervisory statement SS13/13 on market risk and the proposed changes would take effect from the publication date of the final policy. The consultation paper closes on November 06, 2020 and is relevant for all firms to which the Capital Requirements Directive (CRD) IV applies.

    PRA has identified that, due to the significant market volatility related to the COVID-19 outbreak, RNIV own funds requirements calculated at a single point in time (for example, at quarter-end) can increase suddenly and unexpectedly, where a sudden increase in market volatility occurs close to quarter-end. Therefore, PRA is proposing that RNIV own funds requirements should be calculated at quarter-end, as an average across the preceding twelve-week period of an RNIV measure calculated at least weekly. PRA is also proposing that, for the risk factors for which a firm calculates an RNIV measure less frequently than weekly, the firm should notify PRA and be able to justify on an ongoing basis the reasons for not performing that calculation at least weekly.

    Additionally, the PRA sets out proposals related to sVaR with the intent to improve consistency in the identification of the "period of significant financial stress relevant to the institution’s portfolio" across firms, ensure that firms consider a sufficiently broad observation period, and minimize overlaps between the VaR and sVaR measures. At present, Article 365(2) of the Capital Requirements Regulation (CRR) requires a firm using market risk internal models to calculate a sVaR that is calibrated to a "period of significant financial stress relevant to the institution’s portfolio." However, market volatility related to the COVID-19 outbreak has posed an additional question about the potential overlap between VaR and sVaR measures. Therefore, PRA is proposing the following:

    • For identifying a "period of significant financial stress relevant to the institution’s portfolio" for sVaR, firms should consider an observation period that starts at least from January 01, 2007. The observation period generally does not need to include the most recent 12 months of historical data immediately preceding the point of calculation.
    • Firms may include the most recent 12 months in their observation period, where it leads to a more appropriately prudent outcome.
    • Where a firm believes that the observation period for determining the sVaR stress period should exclude more than the most recent 12 months, the firm should contact PRA and set out and provide justification for its rationale.

    The proposals set out in CP15/20 have been designed in the context of 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 proposals would not need to be amended under the EU (Withdrawal) Act 2018.


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    Comment Due Date: November 06, 2020

    Effective Date: Final Policy Publication Date (Proposed)

    Keywords: Europe, UK, Banking, COVID-19, Market Risk, RNIV, Value-at-Risk, CRD IV, CRR, Basel, CP15/20, SS13/13, PRA

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