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

  • 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

  • Amending RTS on CVA proxy spread

    These amending RTS on CVA proxy spread address difficulties associated with the determination of proxy spreads for large numbers of counterparties as well as issues linked with LGDMKT. They specify cases where alternative approaches can be used for the purposes of identifying an appropriate proxy spread and LGDMKT thus leading to a more adequate calculation of own funds requirements for CVA risk.

    Status: Final draft adopted by the EBA and submitted to the European Commission

  • Guidelines on corrections to modified duration for debt instruments

    These Guidelines establish what type of adjustments to the Modified Duration (MD), defined according to the formulas in Article 340(3) of the CRR, have to be performed in order to reflect appropriately the effect of the prepayment risk. These draft Guidelines are relevant for institutions applying the standardised approach for general risk on debt instruments under the Duration-Based calculation.

    Status: Final and translated into the EU official languages

  • RTS on Internal Model Approach for Assessment Methodology

    These draft Regulatory Technical Standards (RTS) specify the conditions under which competent authorities assess the significance of positions included in the scope of market risk internal models, as well as the methodology that competent authorities shall apply to assess an institution’s compliance with the requirements to use an Internal Model Approach (IMA) for market risk. They are a key component of the EBA's work to ensure consistency in models outputs and comparability of risk-weighted exposures and will contribute to harmonise the supervisory assessment methodology across all EU Member States.

    Status: Final draft adopted by the EBA and submitted to the European Commission

  • Guidelines on the treatment of CVA risk under SREP

    The Guidelines are based on a policy recommendation contained in the EBA’s CVA report and aim to provide a common European approach to assessing CVA risk under SREP. Additionally, these Guidelines will provide a common European approach to the assessment of capital adequacy of own funds and the determination of potential additional own funds requirements for CVA risk.

    Status: Under development

  • Regulatory Technical Standards on exclusion from CVA of non-EU non-financial counterparties

    These Regulatory Technical Standards (RTS) align the treatment of non-financial counterparties (NFCs) established in a third country with the treatment of EU NFCs. As NFCs established in a third country are not directly subject to EU regulation, these RTS specify that it is for the institution to check that a counterparty established in a third country would qualify as a NFC if it were established in the EU and, if that is the case, that this NFC calculates and does not exceed the clearing threshold in accordance with EMIR provisions in this respect.

    Status: Adopted and published in the Official Journal

  • Regulatory and Implementing Technical Standards on benchmarking portfolios

    Internal approaches used for the calculation of own funds requirements for market and credit risk are subject to an annual assessment by competent authorities. The EBA assists competent authorities in their assessment by providing a report including benchmarks which help to identify any material differences in RWA outcomes. The legal framework for the above is provided by Directive 2013/36/EU (CRD) and in particular Article 78 thereof as well as by the following technical standards provided by the EBA: a) Regulatory technical standards (RTS) laying down standards for competent authorities as regards the assessment of the internal approaches adopted by institutions and the procedures for sharing of those assessments between competent authorities; b) Implementing technical standards (ITS) specifying the benchmarking portfolios and reporting instructions for institutions to be applied in the annual benchmarking exercises.

    Status: Adopted and published in the Official Journal

  • Regulatory Technical Standards in relation to credit valuation adjustment risk

    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.

    Status: Adopted and published in the Official Journal

  • Regulatory Technical Standards (RTS) on the definition of market

    The objective of these Regulatory Technical Standard is to define the term market for the purpose of calculating the ‘general’ component of market risk for equities under the standardised rules.

    Status: Adopted and published in the Official Journal

  • Regulatory Technical Standards (RTS) on the definition of materiality thresholds for specific risk in the trading book

    These RTS set out criteria for assessing when the specific risk of debt instruments in the trading book is ‘material’ enough to trigger an evaluation by the competent Authority. After this evaluation, competent Authorities will be able to determine whether they shall encourage banks to enhance their internal assessment capacity and increase the use of internal models for capital calculations.

    Status: Adopted and published in the Official Journal

  • Implementing Technical Standards (ITS) on appropriately diversified indices

    These ITS list relevant exchange traded and appropriately diversified indices for which specific risk incorporated in a stock index can be ignored.

    Status: Adopted and published in the Official Journal

  • Implementing Technical Standards (ITS) on closely correlated currencies

    These draft ITS provide a list of relevant closely correlated currencies. Currencies are considered to be closely correlated if they meet the specific criteria set out in Article 354 of the Capital Requirements Regulation (CRR). Positions in currency pairs that are deemed to be closely correlated are subject to lower capital requirements.

    Status: Final and translated into the EU official languages

  • Draft Regulatory Technical Standards (RTS) on non-delta risk of options in the standardised market risk approach

    These draft RTS aim at defining a range of methods to reflect, in the own funds requirements, all the risks, other than delta risk, in a manner proportionate to the scale and complexity of institutions’ activities in options and warrants.

    Status: Adopted and published in the Official Journal

  • Regulatory Technical Standards (RTS) on prudent valuation

    These draft RTS set out the requirements related to prudent valuation adjustments of fair valued positions. Their objective is to determine prudent values that can achieve an appropriate degree of certainty while taking into account the dynamic nature of trading book positions.

    Status: Adopted and published in the Official Journal

  • Regulatory Technical Standards (RTS) on the conditions for assessing the materiality of extensions and changes of internal approaches for credit, market and operational risk

    These Regulatory Technical Standards aim at harmonising the assessment of the materiality of extensions and changes to credit institutions’ internal approaches and to ensure that the approved internal approaches comply with the regulatory requirements. In particular, these RTS specify the conditions for assessing the materiality of extensions and changes to: the Internal Rating Based approach (IRB approach) for credit risk; the Advanced Measurement Approach (AMA) for operational risk and the Internal Models Approach (IMA) for market risk.

    Status: Adopted and published in the Official Journal

  • Guidelines on the Incremental Default and Migration Risk Charge (IRC)

    These Guidelines include provisions on the IRC modelling approaches employed by credit institutions using the Internal Model Approach (‘IMA’) for the calculation of the required capital for specific interest risk in the trading book. The incremental risk charge is intended to complement additional standards being applied to the value-at-risk (VaR) modelling framework in the trading book. These Guidelines are seen as an important means of addressing weaknesses in the regulatory capital framework and in the risk management of financial institutions.

    Status: Final and translated into the EU official languages

  • Guidelines on Stressed Value-At-Risk (Stressed VaR)

    These Guidelines include provisions on Stressed VaR modelling by credit institutions using the Internal Model Approach (IMA) for the calculation of the required capital for market risk in the trading book. These Guidelines are seen as an important means of addressing weaknesses in the regulatory capital framework and in the risk management of financial institutions.

    Status: Final and translated into the EU official languages

Opinions, Reports and other Publications

 

Opinions

Reports

  • Report on 2016 CVA risk monitoring exercise [1,022.6KB]

    The European Banking Authority (EBA) published today a Report on its 2016 CVA risk monitoring exercise, which assesses the impact on own funds requirements of the reintegration of the transactions... Read more

    04/05/2018

  • EBA Report on CRM framework [952.7KB]

    The European Banking Authority (EBA) published today a Report, which assesses the current Credit Risk Mitigation (CRM) framework, as part of its work on the review of the IRB approach. This Report... Read more

    19/03/2018

  • Report on 2015 CVA risk monitoring exercise [607.6KB]

    The European Banking Authority (EBA) announced today it has put on hold its draft Guidelines on the treatment of CVA risk under SREP until further notice, due to continued developments in the CVA... Read more

    21/06/2017