Response to consultation on ITS amending Commission Implementing Regulation EU 2016-2070 on Benchmarking
Go back
Having banks provide the sensitivities of the instruments to assigned risk factors would likely not improve insight into differences in interpretation and therefore would not be worth the considerable amount of effort needed from both the industry and the EBA to collect for several reasons:
1. The risk taxonomies banks use and approaches banks take to calculate sensitivities will vary widely and rather than providing a deeper look into each firm’s approach to its risk modeling would likely blur the view and introduce the need for significant explanation and investigation. Comparing sensitivities across multiple banks would be challenging and likely inconclusive.
2. There is no standardized approach for reporting sensitivities. Reporting standard measures such as VaR consistently generates variation due to factors such as sign, horizon length and currency. Reporting sensitivities (1st and 2nd order partial derivatives of the pricing function) will almost certainly generate a far greater magnitude of variation that will be very challenging to decipher.
3. With the proposed sensitivities information, being able to identify statistically significant subgroups with common risk factors and calculation methods to compare sensitivities and provide meaningful conclusions about appropriate values seems very unlikely.
In many cases, firms’ risk models use PV ladders or full revaluation rather than sensitivities and, in some cases, sensitivities are not currently calculated at all for internal purposes. Therefore, the effort involved in generating and reporting the sensitivities for the banks would be significant, especially given the short time window between the proposed IMV reference date (26 September 2019) and the IMV/sensitivities submission date (4 October 2019). Similarly, the effort involved in understanding and analyzing the submissions for the EBA would be considerable. And even with all this effort, given the challenges with aligning submissions noted, the benefit would likely be minimal.
• For portfolios containing instruments specified in different currencies (e.g., Portfolios 10 and 50), the EBA should clarify whether banks must calculate risk figures inclusive or exclusive of any FX risk beyond that intrinsically included in the instruments.
• For any position intended in a listed instrument, we suggest providing the contract reference and the exchange (e.g., Eurex FGBL June 19 for Euro-Bund Future) to reduce uncertainty.
• For Swaps, we suggest clarifying if banks should assume to have a collateral agreement with the counterparty.
We also believe it would be helpful to publish specific instrument parameters which cannot be specified until the booking date, such as spot prices, strike prices, coupon rates, reference rates, etc. This would allow banks to enter the positions in line with market conventions and would further reduce the IMV variability due to misinterpretation.
• Instruments 1, 3-17: For the IMV phase, 100 contracts are used for these instruments (according to (jj)), but the number of contracts varies from 100 to 1000 in the portfolio definitions. This creates additional operational burdens, since two different setups of the positions must be entered. We suggest making the number of contracts constant in IMV and risk phases.
• Instruments 9-16: The expiration date for options expiring in December is the end of December whereas the expiration date for options expiring in June is the third Friday of the month, in line with market standard. We suggest changing the expiration date for options expiring in December to “December Year T”.
• Instrument 17: “Short Future NIKKEY 225 (Ticker NKY) (1 point equals 1000 JPY)”. The index traded on the standard exchange uses a ratio of 500 JPY per point instead of 1000 JPY. We suggest using the standard exchange.
• Instrument 23. “Cap and floor 10-year UBS AG Notes”. We suggest using an actual bond (rather than having banks build or approximate bonds that do not typically exist in this form) or replacing this instrument with a vanilla instrument that has similar risk characteristics such as an IR cap or floor.
• Instrument 37: “'5-year IRS EURO – Receive floating rate and pay fixed rate. Fixed leg: pay annually. Floating rate: 6-month EURIBOR, receive quarterly”. Market convention would be to receive payments every 6 months, not quarterly. We suggest changing the payments to be received every 6 months, following the market convention.
• Instruments 38, 39: “Short 6-month EUR/USD (or EUR/GBP respectively) forward contract” is misleading. Direction of forward contract should be defined by the currency exchange rate. We suggest removing the descriptions “long/short” for forward contracts.
• Instrument 40: “Long 1 MLN USD at the EUR/USD ECB reference spot rate” is misleading. We suggest changing the description to “Long 1 MLN USD Cash”.
• Instrument 47. For this cross-currency swap, please indicate if risk measures should include FX hedge amounts or not. In addition, market convention would be to book the swap with a spread on the floating leg so that that value is zero at inception. Please indicate if a spread should be included.
• Instruments 58-62, 65: For the CDS credit entities, more than one name can be found. We suggest providing the RED code for each CDS credit entity specified.
Do you agree that the combined split of rating and country in template C103 can generally be replaced by a simpler rating split per model (i.e., rating distribution) in template 105, which will cover all models in the scope of the benchmarking exercise (HDP and LDP) without losing explanatory information on the variability of benchmarking parameters? Is there any data point collected in the new template 105.04 that involve significant IT costs or burden and should be dropped?
NADo you agree that SLE portfolios should be reported in a separate exposure class? Do you agree that the proposed level-2 breakdown on (a) the proposed sectors of counterparties and (b) the proposed types of exposures (i.e. categories of specialized lending) might be relevant components to explain the variability of risk parameters? Which option do you prefer with respect to the rating split under the slotting approach?
NADo you expect that the LDP sub-portfolio characterized by eligible covered bods will cover a material share of exposure? Do you expect that the separation of these exposures can contribute to explain RWA variability?
NADo you think the alternative portfolio split would provide for a higher explanatory power as regards RWA variability induced by differences in CRM usage?
NADo you expect that the proposed NACE Code breakdown for HDP sub-portfolios will provide more explanation for RWA variability for a material share of exposure? Do you expect that the separation of these exposures can contribute to explain RWA variability in the according HDP portfolios or do you consider the current split using only NACE code F sufficient? Does the selection of a subset of NACE codes significantly reduce the burden of the data collection (compared to a comprehensive collection of all NACE codes)?
NADo you expect that the proposed ILTV buckets for HDP sub-portfolios secured by immovable property will provide more explanation for RWA variability for a material share of exposure? Do you expect that the separation of these exposures can contribute to explain RWA variability in the according HDP portfolios?
NADo you agree with the Additional pricing information requested? Please, provided detailed explanation for your answer.
With the goal of avoiding misinterpretation of portfolio instruments, we note that for considerably less effort than collecting additional pricing information, the EBA could work with the industry to develop more detailed term sheets for the entire portfolio (or portions that have been consistently misinterpreted). This approach has the greatest potential for improving the interpretation of the instruments and ultimately the validity of the submitted risk measures and would be less disruptive to the primary focus of the exercise.Having banks provide the sensitivities of the instruments to assigned risk factors would likely not improve insight into differences in interpretation and therefore would not be worth the considerable amount of effort needed from both the industry and the EBA to collect for several reasons:
1. The risk taxonomies banks use and approaches banks take to calculate sensitivities will vary widely and rather than providing a deeper look into each firm’s approach to its risk modeling would likely blur the view and introduce the need for significant explanation and investigation. Comparing sensitivities across multiple banks would be challenging and likely inconclusive.
2. There is no standardized approach for reporting sensitivities. Reporting standard measures such as VaR consistently generates variation due to factors such as sign, horizon length and currency. Reporting sensitivities (1st and 2nd order partial derivatives of the pricing function) will almost certainly generate a far greater magnitude of variation that will be very challenging to decipher.
3. With the proposed sensitivities information, being able to identify statistically significant subgroups with common risk factors and calculation methods to compare sensitivities and provide meaningful conclusions about appropriate values seems very unlikely.
In many cases, firms’ risk models use PV ladders or full revaluation rather than sensitivities and, in some cases, sensitivities are not currently calculated at all for internal purposes. Therefore, the effort involved in generating and reporting the sensitivities for the banks would be significant, especially given the short time window between the proposed IMV reference date (26 September 2019) and the IMV/sensitivities submission date (4 October 2019). Similarly, the effort involved in understanding and analyzing the submissions for the EBA would be considerable. And even with all this effort, given the challenges with aligning submissions noted, the benefit would likely be minimal.
Do you agree with the simplification introduced in the time setting of the references date for the instruments?
Yes, this simplification improves the current specifications and will allow banks to input reference dates for instruments in a manner consistent with market conventions.Do you have any concerns on the clarity of the instructions?
We surveyed banks currently participating in the 2019 EBA Market Risk Benchmarking Exercise about the clarity of the proposed 2020 instrument specifications. Generally, the EBA has taken steps to address many of the questions raised by banks about the specifications for the 2019 exercise. A few additional general clarifications would be helpful:• For portfolios containing instruments specified in different currencies (e.g., Portfolios 10 and 50), the EBA should clarify whether banks must calculate risk figures inclusive or exclusive of any FX risk beyond that intrinsically included in the instruments.
• For any position intended in a listed instrument, we suggest providing the contract reference and the exchange (e.g., Eurex FGBL June 19 for Euro-Bund Future) to reduce uncertainty.
• For Swaps, we suggest clarifying if banks should assume to have a collateral agreement with the counterparty.
We also believe it would be helpful to publish specific instrument parameters which cannot be specified until the booking date, such as spot prices, strike prices, coupon rates, reference rates, etc. This would allow banks to enter the positions in line with market conventions and would further reduce the IMV variability due to misinterpretation.
Can you please provided detailed explanation of the instruments that are not clear and a way to clarify the description?
Specific instrument clarifications and suggestions are:• Instruments 1, 3-17: For the IMV phase, 100 contracts are used for these instruments (according to (jj)), but the number of contracts varies from 100 to 1000 in the portfolio definitions. This creates additional operational burdens, since two different setups of the positions must be entered. We suggest making the number of contracts constant in IMV and risk phases.
• Instruments 9-16: The expiration date for options expiring in December is the end of December whereas the expiration date for options expiring in June is the third Friday of the month, in line with market standard. We suggest changing the expiration date for options expiring in December to “December Year T”.
• Instrument 17: “Short Future NIKKEY 225 (Ticker NKY) (1 point equals 1000 JPY)”. The index traded on the standard exchange uses a ratio of 500 JPY per point instead of 1000 JPY. We suggest using the standard exchange.
• Instrument 23. “Cap and floor 10-year UBS AG Notes”. We suggest using an actual bond (rather than having banks build or approximate bonds that do not typically exist in this form) or replacing this instrument with a vanilla instrument that has similar risk characteristics such as an IR cap or floor.
• Instrument 37: “'5-year IRS EURO – Receive floating rate and pay fixed rate. Fixed leg: pay annually. Floating rate: 6-month EURIBOR, receive quarterly”. Market convention would be to receive payments every 6 months, not quarterly. We suggest changing the payments to be received every 6 months, following the market convention.
• Instruments 38, 39: “Short 6-month EUR/USD (or EUR/GBP respectively) forward contract” is misleading. Direction of forward contract should be defined by the currency exchange rate. We suggest removing the descriptions “long/short” for forward contracts.
• Instrument 40: “Long 1 MLN USD at the EUR/USD ECB reference spot rate” is misleading. We suggest changing the description to “Long 1 MLN USD Cash”.
• Instrument 47. For this cross-currency swap, please indicate if risk measures should include FX hedge amounts or not. In addition, market convention would be to book the swap with a spread on the floating leg so that that value is zero at inception. Please indicate if a spread should be included.
• Instruments 58-62, 65: For the CDS credit entities, more than one name can be found. We suggest providing the RED code for each CDS credit entity specified.