EBA publishes final draft technical standards on the treatment of non-trading book positions subject to foreign-exchange risk or commodity risk under the FRTB framework

The European Banking Authority (EBA) published today final draft Regulatory Technical Standards (RTS) on how institutions are to calculate the own funds requirements for foreign-exchange and commodity risk stemming from banking book positions under the FRTB standardised and internal model approaches.

The final draft standards specify the value that institutions are to use when computing the own funds requirements for market risk for banking book positions. In this respect, the standards require institutions to use the last available accounting value or the last available fair value for positions attracting foreign-exchange risk. In addition, institutions are not required to perform a daily re-valuation of banking book positions attracting foreign-exchange risk. However, they must reflect the changes in the position’s foreign-exchange component on a monthly basis under the standardised approach and on a daily basis under the internal model approach. For positions attracting commodity risk, institutions are required to use the fair value as a basis of their calculations.

In addition, the final draft standards lay down a 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 capitalising the foreign-exchange risk stemming from those items under the standardised approach. Furthermore, the standards require institutions to model directly 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 banking book positions for the purpose of the backtesting and the profit and loss attribution requirements. This is to address the issue of jumps in the value of banking book positions that may lead to over-shootings in the backtesting that are not due to changes of market risk factors.

Legal basis

In accordance with Article 325(9) of Regulation (EU) No 575/2013 (the Capital Requirement Regulation, ‘CRR’), as amended by Regulation (EU) 2019/876, the EBA is required to develop RTS specifying how institutions are to calculate the own funds requirements for foreign-exchange and commodity risk of non-trading book positions. In addition, Articles 325bf(9) and 325bg(4) of that Regulation require the EBA to specify the technical elements to be included in the actual and hypothetical P&L for the purpose of the back-testing and Profit&Loss attribution requirements. The EBA included in a single draft Regulation the provisions covering the mandate in Article 325(9), and those covering the mandates in Article 325bf(9) and Article 325bg(4) when they relate to foreign-exchange and commodity risk in the non-trading book so as to ensure coherence among those provisions.