Response to consultation on ITS on amending Commission Implementing Regulation on benchmarking of internal models
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- The statement fails to recognize that the SBM validated portfolios approach is an additional benchmarking exercise, and does not replace the benchmarking exercise through (portfolios of) hypothetical financial instruments.
- The statement fails to recognize that institutions targeting straight-through-processing in their FRTB-SA implementation, have not foreseen the option in their IT architecture to process (not even through manual intervention) validated portfolios of sensitivities (halfway) the FRTB OFR calculation. The institution is also of the opinion, that this exposes the FRTB-SA calculation process to new vulnerabilities, as it would require to foresee such possibility to manually intervene in the FRTB-SA calculations at an artificial point.
In conclusion, introducing the SBM validated portfolios approach further increase the cost of the benchmarking exercise at the institution (a significant development cost for changes in the IT architecture and a recurring maintenance and reporting cost for the yearly exercise) and the amendments required in the IT-architecture to facilitate such simulation could jeopardize the soundness and robustness of the regular FRTB end-to-end process.
MR 1: Do you see any issues or lack of clarity in the definition of the data points of templates C120.04 and C120.05? Do you foresee any issues in terms of compatibility of template C120.04 and data standards used by the industry?
Yes. The additional information requested in template C120.4 is deemed of limited added value for understanding (the drivers of) the DRC calculation of the institutions, nor is it providing high-value insights in the DRC capital of the institution’s actual portfolio. This leaves institutions, and especially those institutions having a low contribution of the DRC component to their overall FRTB-SA (ASA) capital requirements and who have not persisted this (redundant) information to their reporting environment, with a (significant) implementation and maintenance cost without a return. Indeed, the choice of an institution not to persist all this information in their initial set-up, has been based on regulation and on reporting requirements prevailing at the time (this info is not required in the prudential framework, i.e. COREP), and follows a risk-based approach as for as it concerns internal (management) reporting and risk monitoring (i.e. reporting environment is rich in information on components and portfolio attributes that matter to the institution). Considering that the cost of implementation of this additional data request would have to be attributed solely to the EBA benchmarking exercise, the institution kindly suggests to apply also in the EBA Benchmarking Exercise a risk-based approach, and allow institutions having a low amount of DRC OFR (e.g. less than 5% of FRTB OFR) to be exempted from reporting C120.04.MR 7: Do you agree with the proposed introduction of individual and aggregated portfolios for purposes of SBM validation?
No. Article 41 from the Consultation Paper states that “the approach [the SBM validated portfolios] can be used to comprehensively validate banks’ implementations at a comparatively low cost as the interpretation and booking burden of such instruments is considerably lower when compared to the hypothetical financial instruments generally used in the exercise.” The institution is of the opinion that this conclusion cannot be generalized.- The statement fails to recognize that the SBM validated portfolios approach is an additional benchmarking exercise, and does not replace the benchmarking exercise through (portfolios of) hypothetical financial instruments.
- The statement fails to recognize that institutions targeting straight-through-processing in their FRTB-SA implementation, have not foreseen the option in their IT architecture to process (not even through manual intervention) validated portfolios of sensitivities (halfway) the FRTB OFR calculation. The institution is also of the opinion, that this exposes the FRTB-SA calculation process to new vulnerabilities, as it would require to foresee such possibility to manually intervene in the FRTB-SA calculations at an artificial point.
In conclusion, introducing the SBM validated portfolios approach further increase the cost of the benchmarking exercise at the institution (a significant development cost for changes in the IT architecture and a recurring maintenance and reporting cost for the yearly exercise) and the amendments required in the IT-architecture to facilitate such simulation could jeopardize the soundness and robustness of the regular FRTB end-to-end process.