The prudent valuation requirements are described in article 105 of CRR. Article 105, point (10) lists all the valuation adjustments that institutions must formally consider, and these include operational risks.

The prudent valuation requirements are further described in delegated regulation (DR) 2016/101, including specifications on the calculation of operational risk AVA in article 17.  According to this article an institution shall either report “a zero operational risk AVA on condition that it provides evidence that the operational risk relating to valuation processes […] is fully accounted for by the Advanced Measurement Approach calculation.” (see article17 point (2) of DR 2016/101), or “the institution shall calculate an operational risk AVA of 10 % of the sum of the aggregated category level AVAs for market price uncertainty and close-out costs.” (see article17 point (3) of DR 2016/101). 

CRR3 (REGULATION (EU) 2024/1623) has replaced all methods of Operational Risk RWA computation with a single standardized approach.

The background on the first question is as follows: 

1. CRR3 (REGULATION (EU) 2024/1623) states in point (45) of its recital:

 “Therefore, and in order to simplify the operational risk framework, all existing approaches for estimating the own funds requirements for operational risk were replaced by a single non-model-based method.”

2. Operational Risk within CRR3 is treated under the Title III of Part Three (OWN FUNDS REQUIREMENT FOR OPERATIONAL RISK) which contains two chapters. The first one describes the “calculation of the own funds requirement for operational risk” and the second one is titled “data collections and governance”. 

The purpose of the first chapter is to define all the calculation rules around the Business Indicator and, hence, the amount of RWAs that an institution must compute for its operational risks in its own funds.

The second chapter defines data collection and governance requirements. Article 316 specifies the computation method of the annual operational risk loss, which corresponds according to article 316 point (1) to “the sum of all net losses over a given financial year”. A net loss derives from the gross loss defined in article 318 point (1) as “a loss linked to an operational risk event before recoveries of any type”.

Article 311 point (1) defines “operations risk event” as any event linked to an operational risk which generates a loss or multiple losses, within one or multiple financial years. 

The definition of operational risk has been detailed in CRR3 (article 4 point (52)) and includes model risk (article 4, point (52b) which encompasses “incorrect mark to market valuation and risk measurement as result of an error when booking a trade” or “errors in parameters estimation”).

Art 317.6 also clarifies that “Operational risk events related to market risk shall be treated as operational risk and shall be included in the loss data set”. 

As per the description above, losses linked to operational risk events related to the valuation process are requested to be qualified as operational risk events according to CRR3 and therefore shall be included in the annual operational risk loss. 

Consistently, losses linked to operational risk events related to the valuation process are expected to be included in the calculation of own funds requirements for operational risk defined in chapter one.

3. The business indicator is made of several components, one of which being the financial component. 

The financial component is defined as the sum of:

• the trading book component, which is the annual average of the absolute values over the last three financial years of the net profit or loss, as applicable, on the institution’s trading book

• the banking book component, which is the annual average of the absolute values over the last three financial years of the net profit or loss, as applicable, on the institution’s non-trading book,

This component is therefore seated in term of scope on the financial instruments measured at fair value. This component is using the PnL metric which is based on fair value measurement. Such component aims by design to capture, among others, potential operational risk relating to valuation processes.

In addition, any operational risk incident losses, including those relating to valuation processes are recognized in the Service Component. 

Thus, both historically suffered operational risk incident losses (through absolute value of losses included in Service Component) and forward looking prospective operational risk incident losses via the Financial Component are considered by this standard approach.

Regarding the second question, the background is as follows: 

Delegated Regulation 2016/101 considers that if an institution can evidence that the operational risk relating to the valuation process is fully accounted for by the Advanced Measurement Approach calculation, such institution is entitled to report 0 operational risk AVA. This precision was driven by the objective to avoid double counting between the operational risk own funds requirement and the calculation of operational risk valuation adjustment. 

If the answer to the first question is yes, then this second question is legitimate and the uncertainty of the regulatory texts arising from the removal of the AMA, while still having similar situation of double counting, requires applying a new interpretation.