Regulatory Technical Standards in relation to credit valuation adjustment risk

Status: Adopted and published in the Official Journal

These Regulatory Technical Standards (RTS) specify certain elements of the calculation of own funds requirements for credit valuation adjustment (CVA) risk. CVA is the risk of loss caused by changes in the credit spread of a counterparty on derivatives transactions due to changes in its credit quality. The Capital Requirements Regulation (CRR) introduces two methods for calculating CVA risk, respectively a standardised and an advanced method, and mandates the EBA to specify how a proxy spread should be determined for the purposes of identifying the LGDMKT (Loss given default of the counterparty) and to provide details on what constitutes a limited number of smaller portfolios under the advanced method for calculating CVA risk.

Consultation on draft technical standards in relation to credit valuation adjustment risk (EBA/CP/2013/24)

Summary
05/07/2013

The European Banking Authority (EBA) launches today a second consultation on Draft Regulatory Technical Standards (RTS) for credit valuation adjustment risk (CVA) to further specify how a proxy spread should be determined for the calculation of own funds requirements and to provide additional details on a limited number of smaller portfolios. These RTS will be part of the Single rulebook aimed at enhancing regulatory harmonisation in Europe. The consultation runs until 25 September 2013.

The proposed draft RTS do not deal directly with the Value at Risk (VaR) spread methodology but specify the criteria this methodology has to satisfy to allow for a proxy spread to be used in the calculation of the advanced CVA adjustment. In particular, they specify how the rating, industry and region criteria should be incorporated in a proxy spread.

The requirements contained in these draft RTS are mainly addressed directly to institutions and only in some cases to competent authorities.

Consultation process

Comments can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 25 September 2013

All contributions received will be published following the close of the consultation, unless requested otherwise.

A public hearing will take place at the EBA premises on 17 July 2013 from 14:00 to 16:00 hours UK time.

Legal basis

The proposed draft RTS have been developed on the basis of Regulation 575/2013 published in the Official Journal of the European Union on 28 June 2013. The EBA is expected to submit these draft RTS to the European Commission for endorsement by 1 January 2014. Before submission to the Commission, the EBA will review the draft RTS to include the feedback arising from the consultation process.

EBA consults on technical standards in relation with credit valuation adjustment risk (EBA/CP/2012/09)

Summary
11/07/2012

The European Banking Authority (EBA) launches today a consultation on Draft Regulatory Technical Standards (RTS) for credit valuation adjustment risk on the determination of a proxy spread and the specification of a limited number of smaller portfolios. These RTS will be part of the Single rulebook aimed at enhancing regulatory harmonisation in Europe. The consultation runs until 15 September.

Main features of the RTS

The proposed draft RTS elaborate on specific elements of the calculation of own funds requirements for credit valuation adjustment (‘CVA’) risk. In particular they specify:

  1. How a proxy spread should be determined for the purposes of identifying LGDMKT for the calculation required by Article 373(1); and
  2. The criterion of ‘a limited number of smaller portfolios’ referred to in Article 373(4).

Next steps

The proposed consultation paper is based on the draft Capital Requirements Regulation (CRR) as proposed by the European Commission on 20th July 2011. As the text is still being discussed by the EU legislator (European Parliament and Council), some of the mandates for the EBA to develop Binding Technical Standards (BTS) may be modified, added or deleted in the adopted Regulation. Therefore, the proposed RTS may be amended after the consultation to take into account the final CRR text.

These RTS have to be submitted to the EU Commission by 1 January 2013.

Responses