Response to consultation on draft Regulatory Technical Standards (RTS) on prudent valuation
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We do not understand the rationale for using also the unrealized profit as the base for the calculation (and presumably the more important one). It implies that instruments whose FV has decreased since their initial valuation actually lower the AVA costs (and vice versa, instruments with increasing FV increase AVA costs). In reality, there is no reason to think that the types of risk covered by this regulation have any connection to the upside/downside development of fair value of any individual instrument. We would agree with increasing the weight towards the total value of FV priced instruments. Further it might make the AVA provisions less volatile and unpredictable given the size of the portfolio.
If we consider PL as a source for AVA calculation, we do not comprehend why AVA is calculated from net realized profits and not from both net realized profits and losses.
In case the parameters used for calculation (25% and 0.1%) are outputs from a calibration exercise we think the RTS should describe how they were derived.
The provisions do not appear consistent from a systematic point of view.
This approach would lead to an extremely high additional value adjustment. If institutions are not able to calculate a single valuation exposure they should use a percentage of the aggregate absolute value of fair valued positions. The percentage should be retrieved from other banks which are able to calculate this AVA figure.
Further the source of uncertainty mentioned in Art. 10 would already be covered by the Credit Valuation Adjustment.
Neither the reason for including administrative costs in AVA is obvious, nor how it should be done.
2.) We propose to set administrative costs AVA equal to 0 for very standardized and liquid instruments.
The capital requirements for OpRisk are already specifically met, independent from any AMA.
Do you agree with the minimum list of alternative methods and sources of information defined above for expert based approaches? If not, what others could be included, or which points from the current list should be removed? State your reasons.
The “natural bound of an instrument” as stated in Art. 3 (3) c should be specified.Do you agree with the proposed simplified approach? Do you think the risk sensitiveness of the approach is appropriate? Are there alternative approaches that you believe would be more appropriate? State your reasons.
In principal we do agree with a simplified approach, although double-counting has to be avoided. The disadvantage for institutions with a high amount of unrealized gains is substantial. Reducing the percentage from 25% and instead increasing the percentage of the overall fair valued assets and liabilities might be a less volatile alternative.We do not understand the rationale for using also the unrealized profit as the base for the calculation (and presumably the more important one). It implies that instruments whose FV has decreased since their initial valuation actually lower the AVA costs (and vice versa, instruments with increasing FV increase AVA costs). In reality, there is no reason to think that the types of risk covered by this regulation have any connection to the upside/downside development of fair value of any individual instrument. We would agree with increasing the weight towards the total value of FV priced instruments. Further it might make the AVA provisions less volatile and unpredictable given the size of the portfolio.
If we consider PL as a source for AVA calculation, we do not comprehend why AVA is calculated from net realized profits and not from both net realized profits and losses.
In case the parameters used for calculation (25% and 0.1%) are outputs from a calibration exercise we think the RTS should describe how they were derived.
Could a differentiated treatment for some asset/liability classes be considered, for example with regard to their liquidity? Please state the pros and cons of such a differentiation. How would you define the degree of liquidity of an asset/liability class (e.g. fair value hierarchy, eligibility for the LCR, other)?
In our opinion we would exclude instruments which are central bank eligible. Those instruments can be used as collateral for immediate cash and therefore reduce the pressure to close the position. For the liability side we would differentiate between liabilities which are valued using the own funding curve and liabilities valued using a market implied CDS curve.Do you agree with the approach defined above to calculate an AVA where the approaches in Article 8 and 9 are not possible for a valuation exposure? If not, what other approach could be prescribed? Explain your reasoning.
No.The provisions do not appear consistent from a systematic point of view.
This approach would lead to an extremely high additional value adjustment. If institutions are not able to calculate a single valuation exposure they should use a percentage of the aggregate absolute value of fair valued positions. The percentage should be retrieved from other banks which are able to calculate this AVA figure.
Do you agree with the approaches defined above to calculate AVAs for market price uncertainty, close-out costs, and unearned credit spreads? If not, what other approach could be prescribed? State your reasons.
In principle the calculation is understandable, although a possible double-counting might occur. Furthermore the ongoing calculation on a regular basis implies a high amount of methodological, implementation, IT and validation efforts. It should be considered to apply already available tools, e.g. the VaR approach or the Bloomberg/Reuters scores for market depth.Further the source of uncertainty mentioned in Art. 10 would already be covered by the Credit Valuation Adjustment.
Do you agree with the approaches defined in Articles 11 to 16 to calculate the various categories of AVAs? If not, what other approach could be prescribed for each AVA? State your reasons.
For concentrated positions the information on the liquidity of a certain instrument is not always available. Those articles are very general, there is not much to comment on (especially the investing and funding AVA could me elaborated in more detail).Neither the reason for including administrative costs in AVA is obvious, nor how it should be done.
Are there cases where the above AVAs may have a zero value that could be defined in the RTS? If yes, please specify.
1.) We propose to set AVA equal to 0 in case the asset is in Level 1 or Level 2 IFRS class.2.) We propose to set administrative costs AVA equal to 0 for very standardized and liquid instruments.
The capital requirements for OpRisk are already specifically met, independent from any AMA.