EC Adopts Regulation on Residual Risk Add-On Under FRTB
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
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
CMF Consults on Methodology to Calculate Consumer Loan ProvisionsNext Article
MNB Determines O-SII Capital Buffers for 2023Related Articles
EBA Proposes Standards for IRRBB Reporting Under Basel Framework
The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.
FED Issues Further Details on Pilot Climate Scenario Analysis Exercise
The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
