Draft technical standards on the IMA under the FRTB

Status: Under development

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.

Consultation Paper on draft RTS on back-testing and PLA attribution requirements

Summary
27/06/2019

The European Banking Authority (EBA) published today its roadmap on the new market and counterparty credit risk approaches and launched a consultation on eleven draft Regulatory Technical Standards (RTS) on the new Internal Model Approach (IMA) under the FRTB (Fundamental Review of the Trading Book) standards along with a data collection exercise on non-modellable risk factors (NMRF). The consultations run until 4 October 2019.

The roadmap provides a comprehensive overview of EBA deliverables in the area of market and counterparty credit risk and outlines EBA intentions and roadmap with the view of ensuring a smooth implementation of the new approaches in the EU. In particular, the roadmap reflects a prioritisation of the EBA work according to four phases, which is broadly in line with the deadlines included in the CRR2, starting with the implementation of the essential parts of the framework.

The eleven draft technical standards have been included into 3 different Consultation Papers (CP): the CP on draft RTS on liquidity horizons, the CP on draft RTS on back-testing and profit and loss attribution (PLA) requirements and the CP on draft RTS on criteria for assessing the modellability of risk factors under the IMA. All these draft technical standards specify essential aspects of the IMA under the FRTB and represent an important contribution to a smooth and harmonised implementation of the FRTB in the EU.

The draft standards were developed considering the proposals included in the EBA Discussion Paper (DP) on ‘Implementation in the EU of the revised market risk and counterparty credit risk frameworks’ published on 18 December 2017 and the industry feedback received as a result of the subsequent consultation. The entry into force of these technical standards will trigger the three-year-period after which institutions, which have been granted permission to use the new IMA for reporting purposes, will be required to report IMA figures. The consultation on these RTS runs until 4 October 2019.

In parallel with the consultation, the EBA is launching a data collection exercise on NMRF, which is meant to support the EBA in fine-tuning and calibrating the methodology presented in the DP with respect to the computation under the IMA of the capital charge corresponding to risk-factors that have been identified as non-modellable. In order to help banks fill in the template, instructions, specifying also the timeline of the exercise, are available on this webpage. Participating IMA institutions are requested to provide data by 4 September 2019.

Consultation process

Comments to this consultation 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 4 October 2019.

A public hearing will then take place at the EBA premises in Paris on 5 September 2019 from 11:00 to 13:00 Paris time. All contributions received will be published following the close of the consultation, unless requested otherwise.

Legal basis

These draft RTS have been developed according to Article 325bd(7), 325be(3), 325bf(9), 325bg(4) of REGULATION (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013.

Article 325bd(7), mandates the EBA to develop RTS to specify: (a) how institutions are to map the risk factors of the positions to broad categories of risk factors and broad sub-categories of risk factors; (b) which currencies constitute the most liquid currencies sub-category of the broad category of interest rate risk factor; (c) which currency pairs constitute the most liquid currency pairs sub-category of the broad category of foreign exchange risk factor; (d) the definitions of small market capitalisation and large market capitalisation for the purposes of the equity price and volatility sub-category of the broad category of equity risk factor.

Article 325be(3), mandates the EBA to develop RTS to specify the criteria to assess the modellability of risk factors and to specify the frequency of that assessment.

Article 325bf(9), mandates the EBA to develop RTS to specify the technical elements to be included in the actual and hypothetical changes to the value of the portfolio of an institution for the purposes of the back-testing.

Article 325bg(4), mandates the EBA to develop RTS to specify: (a) the criteria necessary to ensure that the theoretical changes in the value of a trading desk's portfolio is sufficiently close to the hypothetical changes in the value of a trading desk's portfolio, taking into account international regulatory developments; (b) the consequences for an institution where the theoretical changes in the value of a trading desk's portfolio are not sufficiently close to the hypothetical changes in the value of a trading desk's portfolio; (c) the frequency at which the P&L attribution is to be performed by an institution; (d) the technical elements to be included in the theoretical and hypothetical changes in the value of a trading desk's portfolio for the purposes of the P&L attribution; (e) the manner in which institutions that use the internal model are to aggregate the total own funds requirement for market risk for all their trading book positions and non-trading book positions that are subject to foreign exchange risk or commodity risk, taking into account the consequences referred to in point (b).

Consultation Paper on draft RTS on criteria for assessing risk factors modellability under the IMA

Summary
27/06/2019

The European Banking Authority (EBA) published today its roadmap on the new market and counterparty credit risk approaches and launched a consultation on eleven draft Regulatory Technical Standards (RTS) on the new Internal Model Approach (IMA) under the FRTB (Fundamental Review of the Trading Book) standards along with a data collection exercise on non-modellable risk factors (NMRF). The consultations run until 4 October 2019.

The roadmap provides a comprehensive overview of EBA deliverables in the area of market and counterparty credit risk and outlines EBA intentions and roadmap with the view of ensuring a smooth implementation of the new approaches in the EU. In particular, the roadmap reflects a prioritisation of the EBA work according to four phases, which is broadly in line with the deadlines included in the CRR2, starting with the implementation of the essential parts of the framework.

The eleven draft technical standards have been included into 3 different Consultation Papers (CP): the CP on draft RTS on liquidity horizons, the CP on draft RTS on back-testing and profit and loss attribution (PLA) requirements and the CP on draft RTS on criteria for assessing the modellability of risk factors under the IMA. All these draft technical standards specify essential aspects of the IMA under the FRTB and represent an important contribution to a smooth and harmonised implementation of the FRTB in the EU.

The draft standards were developed considering the proposals included in the EBA Discussion Paper (DP) on ‘Implementation in the EU of the revised market risk and counterparty credit risk frameworks’ published on 18 December 2017 and the industry feedback received as a result of the subsequent consultation. The entry into force of these technical standards will trigger the three-year-period after which institutions, which have been granted permission to use the new IMA for reporting purposes, will be required to report IMA figures. The consultation on these RTS runs until 4 October 2019.

In parallel with the consultation, the EBA is launching a data collection exercise on NMRF, which is meant to support the EBA in fine-tuning and calibrating the methodology presented in the DP with respect to the computation under the IMA of the capital charge corresponding to risk-factors that have been identified as non-modellable. In order to help banks fill in the template, instructions, specifying also the timeline of the exercise, are available on this webpage. Participating IMA institutions are requested to provide data by 4 September 2019.

Consultation process

Comments to this consultation 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 4 October 2019.

A public hearing will then take place at the EBA premises in Paris on 5 September 2019 from 11:00 to 13:00 Paris time. All contributions received will be published following the close of the consultation, unless requested otherwise.

Legal basis

These draft RTS have been developed according to Article 325bd(7), 325be(3), 325bf(9), 325bg(4) of REGULATION (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013.

Article 325bd(7), mandates the EBA to develop RTS to specify: (a) how institutions are to map the risk factors of the positions to broad categories of risk factors and broad sub-categories of risk factors; (b) which currencies constitute the most liquid currencies sub-category of the broad category of interest rate risk factor; (c) which currency pairs constitute the most liquid currency pairs sub-category of the broad category of foreign exchange risk factor; (d) the definitions of small market capitalisation and large market capitalisation for the purposes of the equity price and volatility sub-category of the broad category of equity risk factor.

Article 325be(3), mandates the EBA to develop RTS to specify the criteria to assess the modellability of risk factors and to specify the frequency of that assessment.

Article 325bf(9), mandates the EBA to develop RTS to specify the technical elements to be included in the actual and hypothetical changes to the value of the portfolio of an institution for the purposes of the back-testing.

Article 325bg(4), mandates the EBA to develop RTS to specify: (a) the criteria necessary to ensure that the theoretical changes in the value of a trading desk's portfolio is sufficiently close to the hypothetical changes in the value of a trading desk's portfolio, taking into account international regulatory developments; (b) the consequences for an institution where the theoretical changes in the value of a trading desk's portfolio are not sufficiently close to the hypothetical changes in the value of a trading desk's portfolio; (c) the frequency at which the P&L attribution is to be performed by an institution; (d) the technical elements to be included in the theoretical and hypothetical changes in the value of a trading desk's portfolio for the purposes of the P&L attribution; (e) the manner in which institutions that use the internal model are to aggregate the total own funds requirement for market risk for all their trading book positions and non-trading book positions that are subject to foreign exchange risk or commodity risk, taking into account the consequences referred to in point (b).

Consultation Paper on draft RTS on liquidity horizons for the IMA

Summary
27/06/2019

The European Banking Authority (EBA) published today its roadmap on the new market and counterparty credit risk approaches and launched a consultation on eleven draft Regulatory Technical Standards (RTS) on the new Internal Model Approach (IMA) under the FRTB (Fundamental Review of the Trading Book) standards along with a data collection exercise on non-modellable risk factors (NMRF). The consultations run until 4 October 2019.

The roadmap provides a comprehensive overview of EBA deliverables in the area of market and counterparty credit risk and outlines EBA intentions and roadmap with the view of ensuring a smooth implementation of the new approaches in the EU. In particular, the roadmap reflects a prioritisation of the EBA work according to four phases, which is broadly in line with the deadlines included in the CRR2, starting with the implementation of the essential parts of the framework.

The eleven draft technical standards have been included into 3 different Consultation Papers (CP): the CP on draft RTS on liquidity horizons, the CP on draft RTS on back-testing and profit and loss attribution (PLA) requirements and the CP on draft RTS on criteria for assessing the modellability of risk factors under the IMA. All these draft technical standards specify essential aspects of the IMA under the FRTB and represent an important contribution to a smooth and harmonised implementation of the FRTB in the EU.

The draft standards were developed considering the proposals included in the EBA Discussion Paper (DP) on ‘Implementation in the EU of the revised market risk and counterparty credit risk frameworks’ published on 18 December 2017 and the industry feedback received as a result of the subsequent consultation. The entry into force of these technical standards will trigger the three-year-period after which institutions, which have been granted permission to use the new IMA for reporting purposes, will be required to report IMA figures. The consultation on these RTS runs until 4 October 2019.

In parallel with the consultation, the EBA is launching a data collection exercise on NMRF, which is meant to support the EBA in fine-tuning and calibrating the methodology presented in the DP with respect to the computation under the IMA of the capital charge corresponding to risk-factors that have been identified as non-modellable. In order to help banks fill in the template, instructions, specifying also the timeline of the exercise, are available on this webpage. Participating IMA institutions are requested to provide data by 4 September 2019.

Consultation process

Comments to this consultation 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 4 October 2019.

A public hearing will then take place at the EBA premises in Paris on 5 September 2019 from 11:00 to 13:00 Paris time. All contributions received will be published following the close of the consultation, unless requested otherwise.

Legal basis

These draft RTS have been developed according to Article 325bd(7), 325be(3), 325bf(9), 325bg(4) of REGULATION (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013.

Article 325bd(7), mandates the EBA to develop RTS to specify: (a) how institutions are to map the risk factors of the positions to broad categories of risk factors and broad sub-categories of risk factors; (b) which currencies constitute the most liquid currencies sub-category of the broad category of interest rate risk factor; (c) which currency pairs constitute the most liquid currency pairs sub-category of the broad category of foreign exchange risk factor; (d) the definitions of small market capitalisation and large market capitalisation for the purposes of the equity price and volatility sub-category of the broad category of equity risk factor.

Article 325be(3), mandates the EBA to develop RTS to specify the criteria to assess the modellability of risk factors and to specify the frequency of that assessment.

Article 325bf(9), mandates the EBA to develop RTS to specify the technical elements to be included in the actual and hypothetical changes to the value of the portfolio of an institution for the purposes of the back-testing.

Article 325bg(4), mandates the EBA to develop RTS to specify: (a) the criteria necessary to ensure that the theoretical changes in the value of a trading desk's portfolio is sufficiently close to the hypothetical changes in the value of a trading desk's portfolio, taking into account international regulatory developments; (b) the consequences for an institution where the theoretical changes in the value of a trading desk's portfolio are not sufficiently close to the hypothetical changes in the value of a trading desk's portfolio; (c) the frequency at which the P&L attribution is to be performed by an institution; (d) the technical elements to be included in the theoretical and hypothetical changes in the value of a trading desk's portfolio for the purposes of the P&L attribution; (e) the manner in which institutions that use the internal model are to aggregate the total own funds requirement for market risk for all their trading book positions and non-trading book positions that are subject to foreign exchange risk or commodity risk, taking into account the consequences referred to in point (b).