Response to consultation on draft ITS amending Regulation (EU) 2021/453 with regard to the specific reporting requirements for market risk
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Moreover, we would appreciate further clarifications from EBA in relation to how the reporting should be done when a group has a partially authorised netting perimeter. We are assuming that the authorised perimeter should be provided as sole offsetting group, and that the following unauthorised entities should be reported as single offsetting groups – i.e., one offsetting group per single entity as they are most likely not authorised to net with any other entity of the group –, together with an aggregate template for the group as the sum of each single offsetting group.
Should this be the case, the requirement to report at offsetting group level may add some reporting burden that is in our view against the original purpose of the CRR. Let us consider a group that comprises two offsetting groups: offsetting group 1 with significant trading activity in accordance with art. 94(1) of CRR, and offsetting group 2, with little to no trading book business.
In this example the group level – i.e., the sum of the two offsetting groups – needs to submit the reporting templates. So, it does the offsetting group 1, which has material trading activity as per art. 94(1). However, what remains unclear is whether the offsetting group 2 should as well. This last offsetting group is below the thresholds of art. 94(1) and, even though it contributes to some extent to the consolidated entity figures, it would be disproportionate to have to submit the templates at the required level of detail for this offsetting group as well. Notice that this offsetting group on an individual basis would not have the obligation to comply with the reporting requirements.
In our view, the EBA should consider some materiality thresholds at single offsetting group level in order to avoid reporting for entities or offsetting groups without material trading book activity: in other terms, the whole set of templates specified in the Consultation Paper might be filled provided that the materiality thresholds specified by C90.00 are exceeded. Following the example above, this would imply reporting at group and offsetting group 1 levels only. Being the offsetting group 2 considered within the consolidated group reporting, without requiring a stand-alone reporting for it. We therefore believe that the aforementioned two reports would be sufficient for EBA’s monitoring purposes. Otherwise, the regulatory burden is further increased for no additional value added from a reporting standpoint.
The level of data granularity required, together with the increase in the number of templates with respect to the current reporting framework. All this implies significant interventions in existing processes that are not necessarily covered by current calculation frameworks
In short, the number of templates required, together with the notorious amount of data-points to be filled in in each, adds a significant cost that one may question whether it is offset by the benefits, adding a significant net regulatory burden on banks.
Should we assume that the purpose of the EBA is to somehow use the P&L together with the relative sensitivity values in order to fine tune the calibration of the model from these data or analyse other sort of effects, please note that the sensitivities are referred to a portfolio as of the end of quarter, while the daily P&Ls might have been generated from an entirely different portfolio, due to the high turnover that this kind of business has.
Additionally, there may be necessary further clarification regarding the field 0025, specifically whether it is optional or should be populated in each row.
In addition, given that Article 105(3) of the CRR of the current legislation provides that the data concerning the losses and gains of all the positions placed in the trading book are available to institutions, the compilation of the template "C99.00 MKR PL" would result challenging in light of the greater level of detail with which such recorded information must be represented. It should be noted that the complexity is greater for institutions that use the Standardized Approach (A-SA).
Following this premise and in order to correctly represent the information requested, the following significant concerns are listed:
- Profits and losses not attributable to market risk: Since P&L can arise from arbitrages, bid-ask spreads, and commissions, it is questioned whether these should be included in the C99.00 template. If the answer is affirmative, it is asked whether they should be entered in the "Total" column as a complement to the P&L to which a risk factor has been assigned.
- Intraday P&L: Since the representation of gains and losses for each business day of the reference quarter is required, the question arises whether the P&L of intraday deals should also be represented.
- An additional clarification concerns the compatibility between daily P&L and the market risk requirement calculated based on the end-of-quarter snapshot. With regard to this point, it is wondered whether the interpretation for which information regarding profits and losses on the closing positions of each business day is required, which could in fact differ from the regulatory picture at the end of the quarter, is correct.
- The last additional specification concerns the completion of the "Comments and explanations" field. In regard to this item, it is asked in which cases this field should be filled out and whether the frequency should be daily.
Since the reclassification of a position is precisely regulated by Article 104a, and the guidelines for determining the boundary between the trading book and banking book are clearly defined by the regulations, it is hypothesized that the use of the MOV template should be limited to marginal circumstances.
However, the question arises as to whether the template should also be used in cases where an instrument effectively belongs to the trading book, and it is impossible to calculate the requirement using the reference regulations of the trading book. For example, let us consider the treatment of investment funds (OICR).
From a regulatory perspective, such instruments are subject to strict guidelines when information about their nature or market data is not available. Specifically, for investment funds where an institution is unable to apply the Look-Through Approach (LTA) or does not have the related mandate, they must be treated as part of the Banking Book, despite the fact that they are trading instruments. With regard to this case study, as well as for any similar case studies, it is wondered if there is a need to compile the MOV template.
Regarding the current monitoring of the boundary, we assume that individual policies within banks should govern the allocation of each deal to the trading (TB) or banking book (BB) based on the established boundary framework. Concerning the existing boundary supervision, in our view no additional templates are necessary, as they would only result in resource and time expenditure for information already produced.
Furthermore, with the amendments introduced by CRRII and subsequently with the prescriptions provided in CRRIII, the elements on the basis of which institutions will have to redraw their internal policies have been clearly provided to determine which instruments should belong to the trading book and which to the banking book. Currently, therefore, since the reference regulations for the boundary are already comprehensive and stringent, especially when read in conjunction with reclassification issues, the introduction of an additional template dedicated to the boundary between accounting books would not be seen as a benefit for institutions.
As already stated above, the requirement to report at offsetting group level can in some cases result in having to report the trading book activity at individual legal entity level where part a group, even when these entities have a small or negligible trading book. This requirement implies that in a group formed of several entities, where some of which are not authorised to offset positions, the reporting obligation for the latter is equivalent to having to report at individual level. Notice that in the extreme of cases this implies having to report even when the only exposure might arise as a result of foreign exchange risk in the banking book, without no trading book activity.
In our view, a comprehensive revisitation of the regulatory requirements is recommended to achieve a more balanced and feasible approach that gives answer the intended objectives while containing the regulatory burden.
The EBA should aim at finding a balance between compliance requirements and operational feasibility for banks. It is paramount to ensure that the requested amendments to the reporting requirements are proportionate and do not create an excessive net regulatory burden. Additionally, the level of detail and granularity associated with certain monitoring aspects may not be relevant for FRTB reporting purposes, as this information is already captured in other financial reports.
Our suggestion would be that of diminishing the amount of reporting requirements by tackling the following:
1. Offsetting group reporting requirements: This in our view is relevant only if the offsetting group itself has material trading book or foreign exchange activity, otherwise it does not. We strongly recommend EBA considering reporting only at individual and/or (sub-)consolidated level, if applicable. In case the offsetting group requirement is deemed unmovable, we recommend adding some thresholds on reporting requirements at offsetting level – e.g., in line with those of the 94(1) or 325a(1) of CRR2 –. This would, at least, avoid having to report for offsetting groups that contribute little to nothing in terms of consolidated requirement.
2. Templates required: Although we realise that EBA needs to have certain insights into the inputs and intermediate steps of the OFR calculation, we retain this number of template and datapoints too extensive as to justify the benefit that EBA will obtain from having them.
All in all, we urge EBA to reconsider the requirements described in this draft ITS.
a) Did you identify any issues regarding the implementation and use of the offsetting group-concept of Article 325b CRR in the context of these ITS?
In relation to the level of detail provided in the draft ITS regarding the diversification of different positions under offsetting groups, in accordance with Article 325b of the CRR, it would be beneficial if the EBA clarifies whether the information pertaining to each individual entity, whose positions are not eligible for netting against the positions of any other group entity, should be referenced in other regulatory template (e.g., template C 06.02). Otherwise, we see a potential information gap, as the offsetting group naming – which appears to be left open to banks’ discretion –, may lose significance if not read together with the legal entities that are comprised within.Moreover, we would appreciate further clarifications from EBA in relation to how the reporting should be done when a group has a partially authorised netting perimeter. We are assuming that the authorised perimeter should be provided as sole offsetting group, and that the following unauthorised entities should be reported as single offsetting groups – i.e., one offsetting group per single entity as they are most likely not authorised to net with any other entity of the group –, together with an aggregate template for the group as the sum of each single offsetting group.
Should this be the case, the requirement to report at offsetting group level may add some reporting burden that is in our view against the original purpose of the CRR. Let us consider a group that comprises two offsetting groups: offsetting group 1 with significant trading activity in accordance with art. 94(1) of CRR, and offsetting group 2, with little to no trading book business.
In this example the group level – i.e., the sum of the two offsetting groups – needs to submit the reporting templates. So, it does the offsetting group 1, which has material trading activity as per art. 94(1). However, what remains unclear is whether the offsetting group 2 should as well. This last offsetting group is below the thresholds of art. 94(1) and, even though it contributes to some extent to the consolidated entity figures, it would be disproportionate to have to submit the templates at the required level of detail for this offsetting group as well. Notice that this offsetting group on an individual basis would not have the obligation to comply with the reporting requirements.
In our view, the EBA should consider some materiality thresholds at single offsetting group level in order to avoid reporting for entities or offsetting groups without material trading book activity: in other terms, the whole set of templates specified in the Consultation Paper might be filled provided that the materiality thresholds specified by C90.00 are exceeded. Following the example above, this would imply reporting at group and offsetting group 1 levels only. Being the offsetting group 2 considered within the consolidated group reporting, without requiring a stand-alone reporting for it. We therefore believe that the aforementioned two reports would be sufficient for EBA’s monitoring purposes. Otherwise, the regulatory burden is further increased for no additional value added from a reporting standpoint.
b) Are instructions regarding the reporting by offsetting group clear? If you identify any issues, please include suggestions how to rectify them.
Please see Question 1, point A)Is it clear how positions in CIUs are to be reflected in the three template groups (SBM, RRAO, DRC) of the A-SA templates? If you identify any issues, please suggest how to clarify their treatment in the templates and/or instructions.
NAa) Did you identify any issues regarding the representation of A-SA (policy) framework in the reporting templates?
In analysing the representation of the A-SA (policy) framework in the reporting templates, there have identified several concerns: in our opinion the requests outlined in the ITS impose a significant burden, appear disproportionate compared to the intended benefits.The level of data granularity required, together with the increase in the number of templates with respect to the current reporting framework. All this implies significant interventions in existing processes that are not necessarily covered by current calculation frameworks
In short, the number of templates required, together with the notorious amount of data-points to be filled in in each, adds a significant cost that one may question whether it is offset by the benefits, adding a significant net regulatory burden on banks.
clear? If you identify any issues, please clearly specify the affected templates and instructions and include suggestions how to rectify the issues.
Please see Question 3, point A)a) Did you identify any issues regarding the representation of A-IMA (policy) framework in the reporting templates?
NAclear? If you identify any issues, please clearly specify the affected templates and instructions and include suggestions how to rectify the issues.
NADoes this approach work for you? Or do you need any further, or different, guidance regarding the elements of the P&L and the scope of the positions to be covered by that P&L? Which additional specifications could facilitate your compliance with this reporting requirement? Which general methodology would you envisage to allocate P&L to the risk classes of the sensitivities-based method?
The compilation and management of the Reporting of P&L information, particularly in relation to offsetting groups, present a significant increase in effort and the requirement to provide daily P&L data on each risk factor appears to be excessively burdensome, especially considering that daily data is not useful for the EBA in terms of compared to the own funds requirements calculated on the basis of the FRTB approaches. There are also challenges in clustering P&L within different risk factors.Should we assume that the purpose of the EBA is to somehow use the P&L together with the relative sensitivity values in order to fine tune the calibration of the model from these data or analyse other sort of effects, please note that the sensitivities are referred to a portfolio as of the end of quarter, while the daily P&Ls might have been generated from an entirely different portfolio, due to the high turnover that this kind of business has.
Additionally, there may be necessary further clarification regarding the field 0025, specifically whether it is optional or should be populated in each row.
In addition, given that Article 105(3) of the CRR of the current legislation provides that the data concerning the losses and gains of all the positions placed in the trading book are available to institutions, the compilation of the template "C99.00 MKR PL" would result challenging in light of the greater level of detail with which such recorded information must be represented. It should be noted that the complexity is greater for institutions that use the Standardized Approach (A-SA).
Following this premise and in order to correctly represent the information requested, the following significant concerns are listed:
- Profits and losses not attributable to market risk: Since P&L can arise from arbitrages, bid-ask spreads, and commissions, it is questioned whether these should be included in the C99.00 template. If the answer is affirmative, it is asked whether they should be entered in the "Total" column as a complement to the P&L to which a risk factor has been assigned.
- Intraday P&L: Since the representation of gains and losses for each business day of the reference quarter is required, the question arises whether the P&L of intraday deals should also be represented.
- An additional clarification concerns the compatibility between daily P&L and the market risk requirement calculated based on the end-of-quarter snapshot. With regard to this point, it is wondered whether the interpretation for which information regarding profits and losses on the closing positions of each business day is required, which could in fact differ from the regulatory picture at the end of the quarter, is correct.
- The last additional specification concerns the completion of the "Comments and explanations" field. In regard to this item, it is asked in which cases this field should be filled out and whether the frequency should be daily.
a) Did you identify any issues regarding the representation of the prudential framework for reclassifications and the associated own funds requirement in the reporting template?
With regard to the provisions relating to the reclassification of instruments, the institutions, by transposing the non-action Letter of 27 February 2023, will standardize their entry into force on 1 January 2025, aligning it with the entry into force of the FRTB regulation. It is a common opinion that the non-action Letter was used to replace the opening of a process dedicated to updating the legislation, reducing its publication times. It should be specified, however, that this interpretation does not yet appear to be supported in terms of primary legislation at Community level.Since the reclassification of a position is precisely regulated by Article 104a, and the guidelines for determining the boundary between the trading book and banking book are clearly defined by the regulations, it is hypothesized that the use of the MOV template should be limited to marginal circumstances.
However, the question arises as to whether the template should also be used in cases where an instrument effectively belongs to the trading book, and it is impossible to calculate the requirement using the reference regulations of the trading book. For example, let us consider the treatment of investment funds (OICR).
From a regulatory perspective, such instruments are subject to strict guidelines when information about their nature or market data is not available. Specifically, for investment funds where an institution is unable to apply the Look-Through Approach (LTA) or does not have the related mandate, they must be treated as part of the Banking Book, despite the fact that they are trading instruments. With regard to this case study, as well as for any similar case studies, it is wondered if there is a need to compile the MOV template.
b) Are the scope of application of the reporting requirement, the scope of transactions to be reported in the template, the template itself and the instructions clear? If you identify any issues, please include suggestions how to rectify them.
Please see Question 6, point A)Which breakdowns do you monitor internally, and are there any constraints regarding the use of certain metrics for certain breakdowns?
In terms of the data to be provided in the template, we deem market value as the most appropriate measure for monitoring the boundary between the books.Regarding the current monitoring of the boundary, we assume that individual policies within banks should govern the allocation of each deal to the trading (TB) or banking book (BB) based on the established boundary framework. Concerning the existing boundary supervision, in our view no additional templates are necessary, as they would only result in resource and time expenditure for information already produced.
Furthermore, with the amendments introduced by CRRII and subsequently with the prescriptions provided in CRRIII, the elements on the basis of which institutions will have to redraw their internal policies have been clearly provided to determine which instruments should belong to the trading book and which to the banking book. Currently, therefore, since the reference regulations for the boundary are already comprehensive and stringent, especially when read in conjunction with reclassification issues, the introduction of an additional template dedicated to the boundary between accounting books would not be seen as a benefit for institutions.
b) Which benefits and challenges do you foresee as regards this reporting? Which issues should be taken into account or addressed, to maximise the benefit and reduce the cost of compliance with this particular reporting requirement?
Please see Question 7, point A)a) Do you have any comments on the considerations regarding the interactions and links between the ITS on FRTB reporting and the ITS on Supervisory Reporting presented above?
NAb) Did you identify any other issues regarding the interactions and conceptual links between the ITS on FRTB reporting and the ITS on Supervisory Reporting, either resulting from the CRR or the discussion on the CRR3, that should be considered? If yes, please also include suggestions how to rectify those issues.
NA(1) specify which element(s) of the proposal trigger(s) that particularly high cost of compliance, (2) explain the nature/source of the cost (i.e. explain what makes it costly to comply with this particular element of the proposal) and specify whether the cost arises as part of the implementation, or as part of the on-going compliance with the reporting requirements, (3)offer suggestions on alternative ways to achieve the same/a similar result with lower cost of compliance for you.
As previously addressed, the proposal for new and amended reporting requirements raises concerns regarding the disproportionate effort and cost of compliance it may entail, not offset by the benefits it may bring to EBA in terms of monitoring of the measures. Namely, the considerable number of reporting templates, the quantity of data-points required in each – some of which are by products of the calculation, some of which require further methodological developments to be calculated –, especially when considering smaller trading books, is deemed excessive and not proportionate to the benefits. The extensive amount of detailed information requested, such as to provide daily P&L data for each offsetting group, would result in an excessive burden.As already stated above, the requirement to report at offsetting group level can in some cases result in having to report the trading book activity at individual legal entity level where part a group, even when these entities have a small or negligible trading book. This requirement implies that in a group formed of several entities, where some of which are not authorised to offset positions, the reporting obligation for the latter is equivalent to having to report at individual level. Notice that in the extreme of cases this implies having to report even when the only exposure might arise as a result of foreign exchange risk in the banking book, without no trading book activity.
In our view, a comprehensive revisitation of the regulatory requirements is recommended to achieve a more balanced and feasible approach that gives answer the intended objectives while containing the regulatory burden.
The EBA should aim at finding a balance between compliance requirements and operational feasibility for banks. It is paramount to ensure that the requested amendments to the reporting requirements are proportionate and do not create an excessive net regulatory burden. Additionally, the level of detail and granularity associated with certain monitoring aspects may not be relevant for FRTB reporting purposes, as this information is already captured in other financial reports.
Our suggestion would be that of diminishing the amount of reporting requirements by tackling the following:
1. Offsetting group reporting requirements: This in our view is relevant only if the offsetting group itself has material trading book or foreign exchange activity, otherwise it does not. We strongly recommend EBA considering reporting only at individual and/or (sub-)consolidated level, if applicable. In case the offsetting group requirement is deemed unmovable, we recommend adding some thresholds on reporting requirements at offsetting level – e.g., in line with those of the 94(1) or 325a(1) of CRR2 –. This would, at least, avoid having to report for offsetting groups that contribute little to nothing in terms of consolidated requirement.
2. Templates required: Although we realise that EBA needs to have certain insights into the inputs and intermediate steps of the OFR calculation, we retain this number of template and datapoints too extensive as to justify the benefit that EBA will obtain from having them.
All in all, we urge EBA to reconsider the requirements described in this draft ITS.