Market risk

Market risk can be defined as the risk of losses in on and off-balance sheet positions arising from adverse movements in market prices. From a regulatory perspective, market risk stems from all the positions included in banks' trading book as well as from commodity and foreign exchange risk positions in the whole balance sheet. Traditionally, trading book portfolios consisted of liquid positions easy to trade or hedge. However, developments in banks' portfolios have led to an increase in the presence of credit risk and illiquid positions not suited to the original market capital framework. To address these flaws, material changes in the market risk framework (generally known as ‘Basel 2.5') have been introduced by the CRD III. The EBA, through the publication of its guidelines intend to foster convergence in the implementation of some of these new capital requirements, namely the stressed value at risk (stressed VaR) and the incremental risk charge (IRC) introduced to adequately capture credit risk. The EBA will also draft some draft regulatory standards (RTS) to clarify and better articulate some requirements provided for in the new CRDIV/CRR text.

Technical Standards, Guidelines & Recommendations

  • Draft technical standards on the IMA under the FRTB

    This package of 11 draft technical standards specifies essential aspects of the Internal Model Approach (IMA) under the Fundamental Review of the Trading Book (FRTB) and represents an important contribution to a smooth and harmonised implementation of the FRTB in the EU. The package includes (i) the draft RTS on liquidity horizons for the IMA, which specify how institutions should map risk factors to risk factors categories and subcategories, the currencies that constitute the most liquid currencies for interest rate risk, the currency pairs that constitute the most liquid pairs for foreign exchange (FX) risk and the definition of a small and large capitalisation for equities; (ii) the draft RTS on back-testing and profit and loss attribution (PLA) requirements, which specify the technical elements that institutions should consider where calculating the hypothetical, actual and risk-theoretical changes (HPL, APL and RTPL) in the relevant portfolio’s value for the purpose of the back-testing and the PLA test, as well as the criteria ensuring that the RTPL is sufficiently close to the HPL, the consequences for institutions with desks showing misalignments between RTPL and HPL, the frequency at which the PLA tests should be performed and the formula to be used where aggregating the own funds requirements for market risk for reporting purposes; and (iii) the draft RTS on the criteria for assessing the modellability of risk factors under the IMA, which set out how institutions should determine whether a risk factor is modellable or not, and the frequency of the assessment.

    Status: Under development

  • Draft technical standards on the standardised approach for counterparty credit risk

    These draft technical standards specify key aspects of the SA-CCR and represent an important contribution to its smooth harmonised implementation in the EU. In particular, they specify methods for the mapping of derivative transactions to risk categories, a formula for the calculation of the supervisory delta of options mapped to the interest rate risk category and a method for determining whether derivative transactions are long or short in their risk drivers.

    Status: Under development

  • Discussion Paper on EU implementation of MKR and CCR revised standards

    This paper discusses some of the most important technical and operational challenges to implement the FRTB and SA-CCR in the EU. The paper aims at providing some preliminary views on how these implementation issues could be addressed and, at the same time, seeks early feedback from the stakeholders on the proposals. The paper also puts forward a roadmap for the development of the regulatory deliverables on the FRTB and SA-CCR included in the CRR2 proposal.

    Status: Under development

  • Discussion paper on the treatment of structural FX under Article 352(2) of the CRR

    The paper outlines the rationale behind the treatment of structural positions as well as broader issues related to the structural FX concept, such as the actual nature of FX risk, considering both the accounting and regulatory perspectives. It also examines in greater detail the potential inconsistencies in the articulation of the FX requirements, both in the current Capital Requirements Regulation (CRR) as well as in the CRR2 proposal for institutions applying the standardised and internal model approaches.

    Status: Under development

Opinions, Reports and other Publications