The EBA publishes final standards for assessing the materiality of extensions and changes to new market risk internal models

The European Banking Authority (EBA) today published its final draft Regulatory Technical Standards (RTS) on the conditions for assessing the materiality of model extensions and changes, as well as changes to the subset of modellable risk factors, applicable under the Fundamental Review of the Trading Book (FRTB) rules. With the submission of these final draft RTS to the European Commission, the EBA completes its roadmap on market and counterparty credit risk approaches published on 27 June 2019.

In line with the Capital Requirements Regulation (CRR), the final draft RTS differentiate between material extensions and changes under the internal models approach (IMA), to be approved by competent authorities (CA), and non-material extensions and changes, to be notified to CAs four weeks in advance. This last category is further divided into two sub-categories: extensions and changes notified with additional information, and extensions and changes with basic information.

For the categorisation of extensions and changes to the relevant categories and sub-categories, the final draft RTS set out a combination of qualitative and quantitative conditions. In particular, the quantitative conditions aim at assessing the effect of the extension or change on the IMA own funds requirements and on the relevant components of the FRTB IMA (Expected Shortfall, Stress Scenario Risk Measure and Default Risk Charge), before and after the planned extension or change. The final draft RTS also include guiding principles that institutions should follow in the categorisation process, provisions on the implementation of extensions and changes and documentation requirements.

Legal basis and background

These draft RTS have been developed according to Article 325az(8)(a) of Regulation (EU) No 575/2013 (Capital Requirements Regulation - CRR), which mandates the EBA to specify the conditions for assessing the materiality of extensions and changes to the use of alternative internal models and changes to the subset of the modellable risk factors.

The CRR allows institutions to calculate their own funds requirements for market risk using the alternative IMA, provided that permission from CAs is granted. According to the CRR, material changes to the use of the IMA, the extension of the use of the IMA and material changes to the institution's choice of the subset of the modellable risk factors require separate permission from competent authorities. All other extensions and changes to the use of the IMA require notification to the competent authorities.