EBA published the final draft regulatory technical standards on the new internal model approach under the Fundamental Review of the Trading Book (FRTB). These technical standards, which have been stipulated under the revised Capital Requirements Regulation (CRR2), conclude the first phase of EBA roadmap toward the implementation of the market and counterparty credit risk frameworks in EU. Within this announcement, EBA also acknowledged and welcomed the decision by the Group of Central Bank Governors and Heads of Supervision (GHOS) to defer the implementation date of the revised market risk framework by one year to January 01, 2023, which will allow EU banks to benefit from a longer implementation time.
These recently published technical standards specify essential aspects of the internal model approach under FRTB and represent an important contribution to a smooth and harmonized implementation of FRTB in EU. Under CRR2, the adoption of these regulatory technical standards is expected to trigger a three-year period after which institutions with the permission to use the FRTB internal models are required, for reporting purposes only, to calculate their own funds requirements for market risk with those internal models. Thus, in light of the current situation linked to COVID-19, these regulatory technical standards will not impose a burden on the industry. On the contrary, EBA trusts that providing early information to all market participants about key aspects for the EU implementation of the FRTB framework will be beneficial to ensure a smooth and harmonized process. The final draft technical standards cover 11 mandates and have been grouped in three different documents:
- The final draft regulatory technical standards on liquidity horizons for the internal model approach clarify how institutions are expected to map the risk factors to the relevant category and subcategory, along with specifications with respect to the list of currencies and currency pairs that can be mapped to a ten-day liquidity horizon under the interest rate and the foreign-exchange risk category. The standards also provide a definition of large and small capitalization reflecting the specificities of the EU equity market.
- The final draft regulatory technical standards on back-testing and P&L attribution requirements specify the elements to be included for the purpose of the tests in the hypothetical, actual, and risk-theoretical P&L (HPL, APL, and RTPL respectively). Furthermore, they set all key elements characterizing the P&L attribution requirements: the tests ensuring that HPL and RTPL are sufficiently close, the consequences for institutions with desks where those changes are not close, and the frequency at which the assessment of the P&L attribution requirement has to be performed. These standards also set the aggregation formula that institutions are expected to use for aggregating the own funds requirements.
- The final draft regulatory technical standards on criteria for assessing the modelability of risk factors under the internal model approach set out the criteria for identifying the risk factors that are modelable and that institutions are, therefore, allowed to include in their expected shortfall calculations. The modelability assessment is intended to ensure that only risk factors that are sufficiently liquid and observable are included into expected shortfall calculations so that reliable risk measures are calculated. The technical standards also set the frequency under which the modelability assessment should be performed by institutions.
- Press Release
- Final Draft Standards on Liquidity Horizons (PDF)
- Final Draft Standards on Back-Testing and P&L Attribution (PDF)
- Final Draft Standards on Risk Factor Modelability (PDF)
- EBA Roadmap (PDF)
Keywords: Europe, EU, Banking, Securities, Market Risk, CRR2, Data Collection, COVID-19, Regulatory Technical Standards, FRTB, Internal Model Approach, Counterparty Credit Risk, Credit Risk, Basel III, EBA
Previous ArticleECB Amends Guideline on Euro Short-Term Rate
EBA finalized the two sets of draft regulatory technical standards on the identification of material risk-takers and on the classes of instruments used for remuneration under the Investment Firms Directive (IFD).
EC published, in the Official Journal of the European Union, a notification that the European Court of Auditors (ECA) has published a special report on resolution planning in the Single Resolution Mechanism.
BoE published a scenario against which it will be stress testing banks in 2021, in addition to setting out the key elements of the 2021 stress test, guidance on the 2021 stress test, and the variable paths for the 2021 stress test.
PRA published a consultation paper (CP3/21) proposes rules regarding the timing of identity verification required for eligibility of depositor protection under the Financial Services Compensation Scheme (FSCS).
FSB published the work program for 2021, which reflects a strategic shift in priorities in the COVID-19 environment.
FCA announced that 50% firms have started using the new data collection platform RegData, which is slated to replace the existing platform known Gabriel.
Bundesbank published Version 5.0 of the derivation rules for completeness check at the form level, with respect to the data quality of the European harmonized reporting system.
FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.
ECB published results of the quarterly lending survey conducted on 143 banks in the euro area.
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.