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    EBA Consults on Calculation of Own Funds Requirements for Market Risk

    January 13, 2020

    EBA is consulting on the draft regulatory technical standards for calculation of the own funds requirements for market risk, under the standardized and internal model approaches of the Fundamental Review of the Trading Book (FRTB) framework. These own funds requirements are for the non-trading book positions that are subject to foreign-exchange risk or commodity risk. The consultation period ends on April 10, 2020. EBA is mandated to develop these standards in accordance with Article 325(9) of the revised Capital Requirements Regulation (CRR2).

    The proposed regulatory standards specify the value of non-trading book positions that institutions should use when computing the own funds requirements for market risk for those positions. In this respect, the standards require that institutions should use either the last available accounting value or the last available fair value for positions attracting foreign-exchange risk. In addition, institutions are not requested to perform a daily re-valuation of non-trading book positions attracting foreign-exchange risk. However, they are required to reflect on a daily basis the changes in the foreign-exchange component. For positions attracting commodity risk, a daily fair-valuation should be performed.

    Additionally, the proposed standards lay down prudential treatment for the calculation of the own funds requirements for market risk of non-monetary items held at historical cost that may be impaired due to changes in the foreign-exchange rate. In this respect, the standards identify a specific methodology that institutions should use when capitalizing the foreign-exchange risk stemming from those items under the standardized approach. Furthermore, the proposed standards require institutions to directly model the risk of impairment due to changes in the relevant exchange rate in the case of an internal model approach being used. 

    Finally, the standards specify an ad-hoc treatment with respect to the calculation of the actual and hypothetical changes associated to non-trading book positions for the purpose of the back-testing and the profit and loss attribution requirements. This is to address the issue of jumps in the value of the portfolio that may lead to over-shootings in the back-testing that are not due to changes in the foreign-exchange risk component of the price.

     

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    Comment Due Date: April 10, 2020

    Keywords: Europe, EU, Banking, FRTB, Own Funds Requirement, CRR2, Non Trading Book Positions, Market Risk, Basel III, Internal Models, Standardized Approach, Regulatory Technical Standards, Foreign Exchange Risk, Commodity Risk, EBA

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