EC published the Delegated Regulation 2020/866 with regard to regulatory technical standards for prudent valuation under the Capital Requirements Regulation or CRR. Regulation 2020/866 amends Regulation 2016/101, which supplements CRR (575/2013). In the light of extreme volatility in market prices and systemic shock due to the COVID-19 pandemic, amendments have been made to the formulae to be used for aggregating additional valuation adjustments (AVAs) under the Article 9(6), Article 10(7), and Article 11(7) of Regulation 2016/101. Regulation 2020/866 shall enter into force on the day following that of its publication in the Official Journal of the European Union.
Regulation 2016/101 provides that individual AVAs related to market price uncertainty, close-out costs, and model risk are to be determined with reference to a 90% level of certainty based on the applicable market conditions at the time of the calculation. Regulation 2016/101 also specifies an aggregation approach for the calculation of the total category level AVAs based on those individual AVAs; this approach takes account of overlaps among individual AVAs that occur in the aggregation of the categories of AVAs. The ongoing COVID-19 pandemic has triggered levels of extreme volatility throughout financial markets worldwide. It is, therefore, expected that individual AVAs computed at the level of valuation exposures will significantly increase in comparison with their levels in normal times. It is to be expected that due to the COVID-19 pandemic and the decisions of public authorities to halt economic activity in a large number of areas, the aggregation of significantly increased individual AVAs will have a disproportionate impact on the aggregated AVA amounts.
The rules for prudent valuation have, therefore, been revised so that, in addition to providing for an aggregation factor to be used under normal market conditions, they also provide that institutions should apply a higher aggregation factor for this period of extreme volatility in market prices and systemic shock due to the COVID-19 pandemic. The higher aggregation factor should only apply for the expected duration of extreme market volatility combined with systemic shock, which has been assessed to last until December 31, 2020. Therefore, the Annex of Regulation 2016/101 containing formulae to be used for the purpose of aggregating AVAs has been replaced by the Annex of Regulation 2020/866.
Effective Date: June 26, 2020
Keywords: Europe, EU, Banking, COVID-19, Prudent Valuation, CRR, AVA, Regulation 2016/101, Regulation 2020/866, Basel, Regulatory Capital, EC
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