04 July 2014
The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) specifying the minimum margin periods of risk (MPOR) that institutions acting as clearing members may use for the calculation of their capital requirements for exposures to clients. These RTS will be part of the Single Rulebook aimed at enhancing regulatory harmonisation in the banking sector in the European Union.
In order to incentivise the use of central counterparties (CCPs), and in line with the international standards that amended the Basel II text, the Capital Requirements Regulation (CRR) introduces a special treatment for centrally cleared derivatives. These draft RTS do not deal with institutions' exposures to central counterparties (CCPs).
In particular, these draft RTS specify the level of a particular parameter and the margin period of risk (MPOR) that clearing members may use to calculate the regulatory requirements for counterparty credit risk (CCR) when they apply the internal model method (IMM) or the other non-internal methods (i.e. the mark-to-market method, the standardised method and the original exposure method).
In the case of the IMM, the MPOR will be an input into the model, whereas for non-internal methods, the MPOR will determine a multiplier of the exposure value that is less than one. These draft RTS specify the MPOR for different classes of derivatives, covering the full spectrum of derivative types and all the methodologies for the calculation of capital requirements against counterparty credit risk.
The proposed methodology aims at properly capturing the risk arising from derivatives exposures to clients adding very limited operational burden on institutions. This is done by identifying the liquidation periods estimated by CCPs for margin purposes as proxies for the margin periods of risk.
The draft RTS have been developed on the basis of Regulation (EU) 575/2013 (Capital Requirements Regulation – CRR) and in particular Article 304(5), which mandates the EBA to draft regulatory technical standards specifying the minimum margin periods of risk (MPOR) that institutions acting as clearing members may use for the calculation of their capital requirements for exposures to clients.
The final draft standards have been sent today to the European Commission for their adoption as EU Regulations that will be directly applicable throughout the EU.