Featured Product

    EC Adopts Regulation on Residual Risk Add-On Under FRTB

    August 16, 2022

    EC adopted the Delegated Regulation that sets out the regulatory technical standards that specify exotic underlyings and the instruments bearing residual risks for the calculation of own funds requirements for residual risks. These regulatory standards constitute a further contribution to a smooth and harmonized implementation of the international market risk (or FRTB) standards in the European Union. This regulation, which has not yet been published in the Official Journal of European Union, supplements Article 325u(5) of the Capital Requirements Regulation or CRR (575/2013).

    The regulatory standards laid out in this Delegated Regulation provide technical specifications for the implementation of the certain elements of the alternative standardized approach for market risk. Institutions using the alternative standardized approach are required to compute three separate own funds requirements for market risk: the sensitivities-based method (SbM) own funds requirements, the residual risk add-on (RRAO), and own funds requirements for the default risk (DRC). These final regulatory technical standards specify what an exotic underlying is and which instruments are instruments bearing residual risks (listed in Annex to this regulation), for the purpose of Article 325u(2) of CRR. The standards also specify that longevity risk, weather, natural disasters and future realized volatility should be considered as exotic underlyings. In addition, the standards set out a non-exhaustive list of instruments bearing residual risks and a list of risks that, in themselves, do not constitute residual risks.

    The residual risk add-on is intended to provide a simple and conservative capital treatment for any other risks not covered by the sensitivities-based method or the default risk charge. Thus, the scope of instruments that are subject to the residual risk add-on must not have an impact in terms of increasing or decreasing the scope of risk factors subject to the other standardized approach components. Therefore, instruments exposed to residual risks—that is, instruments referencing an exotic underlying or instruments bearing other residual risks—are subject to the residual risk add-on treatment. The residual risk add-on amounts to 1% or 0.1% of the gross notional amount of the instrument, depending on whether the instrument is an instrument referencing an exotic underlying or an instrument bearing other residual risks, respectively. This Delegated Regulation is based on the draft regulatory technical standards submitted to the European Commission by the European Banking Authority or EBA. 


    Related Links



    Keywords: Europe, EU, Banking, Regulatory Technical Standards, CRR, Basel, Regulatory Capital, Exotic Underlyings, Longevity Risk, EBA, Residual Risk Add on, Market Risk, FRTB, EC

    Featured Experts
    Related Articles

    UK Authorities Consult on Implementation of Basel 3.1 Standards

    The UK authorities have published consultations with respect to the Basel requirements for banks. The Prudential Regulation Authority (PRA) published the consultation paper CP16/22 on rules for the implementation of Basel 3.1 standards.

    November 30, 2022 WebPage Regulatory News

    ESAs Issue Multiple Regulatory Updates for Financial Sector Entities

    The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.

    November 15, 2022 WebPage Regulatory News

    FSB and NGFS Publish Initial Findings from Climate Scenario Analyses

    The Financial Stability Board (FSB) and the Network for Greening the Financial System (NGFS) published a joint report that outlines the initial findings from climate scenario analyses undertaken by financial authorities to assess climate-related financial risks.

    November 15, 2022 WebPage Regulatory News

    FSB Issues Reports on NBFI and Liquidity in Government Bonds

    The Financial Stability Board (FSB) published a letter intended for the G20 leaders, highlighting the work that it will undertake under the Indian G20 Presidency in 2023 to strengthen resilience of the financial system.

    November 14, 2022 WebPage Regulatory News

    ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments

    The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.

    November 10, 2022 WebPage Regulatory News

    IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets

    The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.

    November 09, 2022 WebPage Regulatory News

    EBA Finalizes Methodology for Stress Tests, Issues Other Updates

    The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups

    November 09, 2022 WebPage Regulatory News

    EU Finalizes Rules Under Crowdfunding Service Providers Regulation

    The European Union has finalized and published, in the Official Journal of the European Union, a set of 13 Delegated and Implementing Regulations applicable to the European crowdfunding service providers.

    November 08, 2022 WebPage Regulatory News

    OSFI Sets Out Work Priorities and Reporting Updates for Banks

    The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.

    November 07, 2022 WebPage Regulatory News

    APRA Finalizes Changes to Capital Framework, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.

    November 03, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8597