Article 92(5) sub para (a) of the CRR prescribes the method for calculating the standardised total risk exposure amount (S-TREA):

“The standardised total risk exposure amount shall be calculated as the sum of paragraph 4, points (a) to (g), after having taken into account paragraph 6 and the following requirements:

(a) the risk-weighted exposure amounts for credit risk, including counterparty credit risk, and dilution risk, referred to in paragraph 4, point (a), and for counterparty credit risk arising from the trading book business of the institution as referred to in point (g) of that paragraph shall be calculated without using any of the following approaches:

(i) the internal model approach for master netting agreements set out in Article 221; 

(ii) the Internal Ratings Based Approach set out in Title II, Chapter 3; 

(iii) the Securitisation Internal Ratings Based Approach set out in Articles 258, 259 and 260 and the Internal Assessment Approach set out in Article 265; 

(iv) the Internal Model Method set out in Title II, Chapter 6, Section 6;”

Whilst the scope of Article 92(5) includes CVA (by virtue of the fact that Article 92(4)(e) is scoped in by the clause “…shall be calculated as the sum of paragraph 4, points (a) to (g)…”)  it does not instruct Firms to re-perform the calculations for CVA.

This is consistent with the fact that both Basic Approach CVA (BA-CVA) and Standardised CVA (SA-CVA) are considered non-modelled standardised approaches.

Furthermore, the  reporting templates (ANNEX II INSTRUCTIONS FOR REPORTING ON OWN FUNDS AND OWN FUNDS REQUIREMENTS) expect the RWAs for the standardised total risk exposure amount (S-TREA) and the un-floored total risk exposure amount (U-TREA) to be the same where RWAs have been calculated using a standardised approach.  As stated above, both BA-CVA and SA-CVA are standardised approaches.

However, as the CVA formulae for both SA-CVA and BA-CVA use the “exposure at default” (EAD) calculated under the counterparty credit risk (CCR) framework there could be instances where this EAD is derived using the internal modelled approach (IMM). 

Therefore, the question on which clarification is being sought is: in scenarios where the EAD has been derived under a modelled approach, does the CVA calculation need to be re-performed using a non-model derived EAD when calculating S-TREA? 

The CRR text does not specifically deal with the scenario where IMM derived EADs have been used in the calculation of CVA RWAs.  As laid out above, both the CRR text and the associated reporting template instructions expect CVA RWAs to be the same under S-TREA and U-TREA.  However, this appears not to be consistent with the Basel text.  Basel standards (RBC 20.12) states that advanced approaches, including IMM, “are not permitted to be used, directly or by cross reference, in the calculation of the base of the output floor”.