Response to consultation on RTS on Assessment Methodology for Market Risk Internal Models
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Further, we do not believe that the requirement for sequencing is conceptually necessary. For example, Debt-General and Debt-Specific risk categories are not variants of the same asset class, but essentially represent different asset classes (Interest Rate and Credit Spread, respectively), which are often traded on different systems, by different lines of businesses, using different risk and valuation methodologies. This means, for example, that it would be impossible under the proposed standards for a firm to seek model approval for a credit trading business (using mostly credit derivatives, with little general interest rate risk) without also having approval for its rates business – because the credit business would fail the significance test for general risk, but would be unable to seek specific risk approval without it.
Lastly, there would seem to be no downside in allowing firms to seek specific risk approvals in the absence of general risk – it would not appear to present an opportunity to ‘game’ the approval process and, as noted above, the CRR already requires firms seeking specific risk approval to have in place risk measurement and modelling standards super-equivalent to those for general risk.
On this basis we consider there should be no requirement for general risk model approval automatically to precede or accompany an application for specific risk model approval.
The threshold levels set for positions intended for IMA of a given Risk Category at 90%-95% are extremely high. The language used in the CRR requires a ‘significant share’ of positions in a risk category to be captured – this is not the same as the ‘vast majority’ or even ‘most’ of the positions, and would not appear to justify the 90-95% level proposed in the CP. Furthermore, the thresholds are much higher than the 10% of the bank’s aggregated market risk capital coming from IMA-approved desks which is viewed as a ‘significant share’ under the equivalent FRTB requirement.
We also consider that allowing differentiation by, or exclusion of, positions by product complexity or business area (perhaps temporarily to allow phasing of the model application process) would not contradict the CRR text, whilst granting firms and supervisory authorities the flexibility required to manage the approval process. This would be more consistent with FRTB (which allows differentiation, subject to the 10% threshold, by trading desk), and is also consistent with current supervisory practice, for example in the case of the UK PRA, which differentiates model permission scope by broad classes of positions within each risk category (PRA Supervisory Statement 13/13 9.4).
Q1: What are stakeholders’ views regarding the two proposed interpretations for the capture or exclusion of an institution’s own creditworthiness as a risk factor in internal models (non-default only), and consistent treatment for back-testing purposes?
-Q2: What is industry current practice in this regard for VaR, SVaR and IRC?
-Q3: What are the main operational challenges?
-Q4: Do stakeholders agree with the General-Specific model application hierarchy introduced by the RTS?
The requirement for General approval before Specific approval is not required under FRTB and we believe that there is nothing in CRR Art.367 or Art.370 that makes specific risk permissions contingent on general permissions. The consultation paper (CP) does suggest that the CRR requires this sequencing. However, we consider that the CRR merely applies standards for specific risk modelling which include all those required for general risk. This does not logically require that a firm has to have both approvals, but rather means that both sets of standards need to be met for specific risk approval to be granted.Further, we do not believe that the requirement for sequencing is conceptually necessary. For example, Debt-General and Debt-Specific risk categories are not variants of the same asset class, but essentially represent different asset classes (Interest Rate and Credit Spread, respectively), which are often traded on different systems, by different lines of businesses, using different risk and valuation methodologies. This means, for example, that it would be impossible under the proposed standards for a firm to seek model approval for a credit trading business (using mostly credit derivatives, with little general interest rate risk) without also having approval for its rates business – because the credit business would fail the significance test for general risk, but would be unable to seek specific risk approval without it.
Lastly, there would seem to be no downside in allowing firms to seek specific risk approvals in the absence of general risk – it would not appear to present an opportunity to ‘game’ the approval process and, as noted above, the CRR already requires firms seeking specific risk approval to have in place risk measurement and modelling standards super-equivalent to those for general risk.
On this basis we consider there should be no requirement for general risk model approval automatically to precede or accompany an application for specific risk model approval.
Q5: Do Stakeholders consider that the categories of instruments listed above provide an appropriate guide to assess the complexity of an internal model?
-Q6: Do stakeholders agree with the use of two differentiated approaches for general and specific risk to assess the significance of positions included in the scope of the model?
-Q7: What levels do stakeholders consider are appropriate for the proposed thresholds? Please provide your answer considering the calculation before and after positions have been excluded by the competent authority.
We believe that the threshold levels for assessing ‘significant’ and assessment method by Risk Category are too high, and go directly against the approach used in FRTB.The threshold levels set for positions intended for IMA of a given Risk Category at 90%-95% are extremely high. The language used in the CRR requires a ‘significant share’ of positions in a risk category to be captured – this is not the same as the ‘vast majority’ or even ‘most’ of the positions, and would not appear to justify the 90-95% level proposed in the CP. Furthermore, the thresholds are much higher than the 10% of the bank’s aggregated market risk capital coming from IMA-approved desks which is viewed as a ‘significant share’ under the equivalent FRTB requirement.
We also consider that allowing differentiation by, or exclusion of, positions by product complexity or business area (perhaps temporarily to allow phasing of the model application process) would not contradict the CRR text, whilst granting firms and supervisory authorities the flexibility required to manage the approval process. This would be more consistent with FRTB (which allows differentiation, subject to the 10% threshold, by trading desk), and is also consistent with current supervisory practice, for example in the case of the UK PRA, which differentiates model permission scope by broad classes of positions within each risk category (PRA Supervisory Statement 13/13 9.4).