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    EC Consults on Alternative Standardized Approach for Market Risk

    October 21, 2019

    EC is consulting on a delegated regulation amending the Capital Requirements Regulation (CRR) with regard to the alternative standardized approach for market risk. The delegated act complements certain elements of the sensitivities-based method to make the corresponding reporting requirement, contained in the CRR, operational; it clarifies how institutions need to carry out the calculations, the results of which need to be reported. The objective of the consultation is to obtain views on certain technical aspects of the proposed delegated act by November 11, 2019. The adoption of this proposal by EC is envisaged for June 2020.

    The alternative standardized approach has three components: the sensitivities-based method, the default risk charge, and the residual risk add-on. Each of these three components covers specific types of risks, with the overall own funds requirement for market risk under the alternative standardized approach being the sum of the individual risk charges for all three elements. The introduction of an own funds requirement for market risk based on the new market risk framework requires the EC proposal to amend the CRR. The draft delegated regulation presents the intentions of the "Directorate-General for Financial stability, financial services and capital markets union" regarding incorporation of the revisions in CRR, particularly:

    • Consistent shocks to similar risk factors and revisions to the aggregation formula for the calculation of curvature risk
    • Possibility to subject instruments without optionality to curvature risk
    • Three approaches for the calculation of own funds requirements for positions in collective investment undertakings and conditions for their use
    • Possibility to treat positions in a collective investment undertaking that tracks an index as a direct position in that index
    • An additional method to determine the own funds requirement for delta and curvature risks for foreign exchange risk factors, the so-called base currency approach

    Earlier, as part of the banking package in May 2019, CRR had introduced a new reporting requirement based on the new market risk framework. As the changes to the standardized approach for market risk agreed in the second Basel review could not be incorporated in the banking package before its adoption, the co-legislators empowered EC to introduce them by means of a delegated act. The delegated act will contain the necessary elements to make the reporting requirement operational. The adoption by EC of this delegated act will represent a part of the implementation of the new market risk framework.

     

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    Comment Due Date: November 11, 2019

    Keywords: Europe, EU, Banking, CRR, Market Risk, Standardized Approach, Commission Delegated Regulation, FRTB, Basel III, Banking Package, EC

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