The European Commission (EC) published text for the regulation that sets out regulatory technical standards specifying the criteria for assessing the modelability of risk factors under the internal model approach and specifying the frequency of that assessment under the Capital Requirements Regulation (CRR). EC also published text for the regulation that sets out regulatory technical standards specifying the technical details of back-testing and profit and loss attribution requirements under CRR. In addition, EC published text for the regulation that set out regulatory technical standards specifying the information to be provided by an undertaking in the application for authorization in accordance with Article 8a of the Capital Requirements Directive (CRD IV).
Regulation on Assessing Modelability of Risk Factors
This EC regulation, which shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union, sets out standards that establish two different criteria that institutions are allowed to use to assess the modelability of a risk factor: 1) identification, at a minimum, of 24 verifiable prices which are representative for the risk factor over the preceding 12-months, without any period of 90 days or longer with less than four verifiable prices that are representative for the risk factor; or 2) identification, at a minimum, of 100 verifiable prices that are representative for the risk factor over the preceding 12-months. In addition, the technical standards:
- specify both the requirements that a price should satisfy to be considered verifiable and the requirements under which verifiable prices are considered representative for risk factors, for the purposes of the assessment of modelability.
- include the specification of the criteria for assessing the modelability of risk factors belonging to specific typologies.
- include specific provisions for risk factors belonging to curves, surfaces, cubes, and parametric functions.
- specify the frequency under which the modelability assessment should be performed by institutions.
Regulation on Back-Testing and Profit & Loss Attribution Requirements
The regulation sets out regulatory technical standards that specify the technical elements to be included in the actual and hypothetical changes in the value of the portfolio of an institution for the purposes of back-testing requirements under CRR. The regulatory standards identify a specific framework with respect to the inclusion of adjustments in the actual and hypothetical changes and a specific treatment for each effect that is relevant in the computation of such changes. The standards also specify the frequency of the profit & loss attribution tests and the aggregation formula that institutions are to use for calculating the own funds requirements for market risk, in line with the provisions set out in the international regulatory standards. The EC regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.
Regulation on Application for Authorization
Article 8a of CRD IV empowers EC to adopt delegated acts to specify the information to be provided for the authorization of investment firms as credit institutions. This recently published regulatory text sets out regulatory technical standards that specify the information to be provided to competent authorities for authorization in accordance with the new definition of credit institutions introduced in CRR (as amended by CRR2). The technical standards consist of a subset of the information to be provided to competent authorities for authorization of a credit institution as they take into account the limited activities provided by the applicants. The technical standards provide the necessary flexibility to the competent authorities in requiring such information and, in well-defined cases, allow competent authorities to waive some information considering, in particular, any prior licenses the applicant might possess. The EC regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.
- Regulation on Assessing Modelability of Risk Factors
- Regulation on Back-Testing and Profit & Loss Attribution
- Regulation on Application for Authorization
Keywords: Europe, EU, Banking, CRR, CRD IV, Basel, Internal Model Approach, Back-testing, Profit and Loss Attribution, Investment Firms, Authorization Applications, Market Risk, FRTB, Regulatory Capital, EC
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