EBA Publishes Standards on Key Aspects of Implementation of SA-CCR
EBA published the final draft regulatory technical standards on certain key aspects related to the implementation of the standardized approach for counterparty credit risk (SA-CCR). The standards set out the method for identifying the material risk drivers of derivative transactions, on the basis of which mapping to one or more of the risk categories is to be done. These technical standards also set out the formula that institutions are to use to calculate the supervisory delta of options, when mapped to the interest rate risk category, which is compatible with negative interest rates. Additionally, the draft regulatory standards introduce a method suitable for determining the direction of the position in a material risk driver. The regulation related to the regulatory technical standards shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.
On the mapping of derivatives into risk categories, the final draft technical standards follow a three-pronged methodology for the identification of material risk driver(s) of derivative transactions:
- The first approach relies on purely qualitative information and is suitable for simple and standard derivative transactions (for example, interest rate and cross currency swaps).
- The second approach is more detailed and hinges on a quantitative assessment of the sensitivities to classify possible risk drivers based on materiality considerations.
- The third approach is a conservative and simple backstop, which identifies all possible risk drivers of a transaction as material. This last approach will always be available as a fallback option and will allow a proportionate implementation of the framework when the second approach is too burdensome.
The formula for the supervisory delta of interest rate options, specified in the technical standards, is an application of the Black-Scholes (BS) model, on which SA-CCR relies. Such an application is made feasible by shifting the interest rate curve to move interest rates back into positive territory. In addition, the technical standards specify the parameters that are to be used in the supervisory delta formula. Finally, for determining the direction of the position in a particular risk driver (long or short), the methodology introduced in these technical standards leverages on the same elements (that is, cash flows and sensitivities) used for the identification of the material risk driver(s) of derivative transactions, which are specifically envisaged for reducing the burden on institutions.
The draft technical standards specify key aspects of the SA-CCR and represent an important contribution to its smooth harmonized implementation in the EU. The technical standards are part of the mandates assigned to EBA within its important role in implementing the SA-CCR and the Fundamental Review of the Trading Book (FRTB) frameworks in EU. EBA has developed these draft technical standards based on the proposed legislative text of Capital Requirements Regulation (CRR) 2. Where relevant, EBA adapted the draft technical standards to the final CRR 2 text. EBA also introduced other changes into the draft technical standards to appropriately reflect the comments received in response to (the May 2019) consultation paper on draft technical standards.
Related Links
Effective Date: OJ+20 Days
Keywords: Europe, EU, Banking, Basel III, SA-CCR, Credit Risk, Counterparty Credit Risk, Regulatory Technical Standards, OTC Derivatives, Market Risk, CRR2, FRTB, EBA
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
OCC Report Examines Key Risks for the Federal Banking SystemRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.