Response to cP on EBA launches consultation on technical standards on the standardised approach for counterparty credit risk
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• The larger the shift introduced, the larger the shifted log normal distribution could move from log-normal to normal.
• As evidenced in the EBA CP, the necessary adjustment of volatility for larger shift could be particular complex as it depends on the option details. The Industry is incline to put forward simplicity: no volatility adjustment but with a shift as small as possible.
• A threshold of 1 bp combined with the most negative combination of strikes/forwards would pose no issue from a computational perspective as it would be well within the bounds of any machine precision.
The method proposed by EBA for determining whether a transaction is a long or short position in the primary risk driver or in the most material risk driver in a given risk category shall allow the qualitative approach set out in Article 6(b) for transaction where the classification is done using article 1. The Industry suggests the removal of the following part of Article 6(b): « where institutions apply the approach set out in Article 3(1)(a), ».
Which one of the three options (option 4a: 1 bp, option 4b: 0.1% or option 4c: 1%) do you think is more appropriate as a threshold? Please provide the rationale for the chosen option.
The Industry strongly supports the adoption of option 4a which implies a threshold 1bp. Main rationales are:• The larger the shift introduced, the larger the shifted log normal distribution could move from log-normal to normal.
• As evidenced in the EBA CP, the necessary adjustment of volatility for larger shift could be particular complex as it depends on the option details. The Industry is incline to put forward simplicity: no volatility adjustment but with a shift as small as possible.
• A threshold of 1 bp combined with the most negative combination of strikes/forwards would pose no issue from a computational perspective as it would be well within the bounds of any machine precision.
Please provide examples of cases where the possibility to set the shift ? according to the prevalent market conditions (option 4) might: - provide some benefits - raise some concerns
Setting the shift to prevalent market conditions would be operationally burdensome, in particular it would be extremely challenging to react sufficiently quickly to new options with negative strikes.The potential benefits are not sufficiently clear to warrant operational difficulties. The Industry is strongly against the potential adoption of this approach.Do you consider necessary an adjustment to the supervisory volatility parameter ? as defined in Article 5? In the case an adjustment is considered necessary, how should it be carried out?
As evidenced by EBA CP, an adjustment of volatility is theoretically required to ensure that a shifted log-normal delta aligns with the corresponding log-normal delta with a volatility of 50% (when both are defined).The size of this adjustment depends on the option details, and is practically complex to put in place. We would favour simplicity and not adjust volatility while keeping the distortion as low as possible (via a threshold of 1bp, see response to question 5).Do you think the specified method for determining whether a transaction is a long or short position in a material risk driver is adequate? If not, please provide an explanation.
The industry considers the definition provided in Regulation (EU) 2019/876, “CRR2” to be sufficiently clear. Where the relationship between risk driver and the derivative trade is one-to-one and a regulatory prescribed list is used to map trades to risk categories, the definition in “CRR2” will be used. However, where sensitivities are used to assign trades to risk categories, sensitivities could be used to determine whether a transaction is long or short.The method proposed by EBA for determining whether a transaction is a long or short position in the primary risk driver or in the most material risk driver in a given risk category shall allow the qualitative approach set out in Article 6(b) for transaction where the classification is done using article 1. The Industry suggests the removal of the following part of Article 6(b): « where institutions apply the approach set out in Article 3(1)(a), ».