22 October 2021
The European Banking Authority (EBA) publishes today its final draft Regulatory Technical Standards (RTS) on gross jump-to-default (JTD) amounts and on residual risk add-on (RRAO). These final draft RTS provide technical specifications for the implementation of these two elements of the alternative standardised approach for market risk. The draft RTS are part of the phase 3 deliverables of the EBA roadmap for the new market and counterparty credit risk approaches.
Institutions using the alternative standardised approach for market risk are required to compute, on top of the own funds requirements under the sensitivities-based method, own funds requirements for default risk and for residual risks.
The final draft RTS on gross JTD amounts specify key inputs needed for computing own funds requirements for default risk. Gross JTD amounts determined in accordance with these draft RTS are intended to be consistent with those determined in accordance with international standards, while employing the formulae and requirements set out in the Capital Requirements Regulation (CRR).
The draft RTS on RRAO clarify the scope of the RRAO, i.e. for which instruments the own funds requirements for residual risks should be determined. They specify a non-exhaustive list of instruments bearing residual risks, and a list of risks that, in themselves, do not constitute residual risks. These draft RTS also clarify that longevity risk, weather, natural disasters and future realised volatility should all be considered as exotic underlyings.
The final draft RTS published today have been finalised after a three-month public consultation.
The draft RTS on gross JTD amounts have been developed according to Article 325w(8) of Regulation (EU) No 575/2013 (CRR), which mandates the EBA to “specify (a) how institutions are to determine the components , , and when calculating the JTD amounts for different types of instruments in accordance with this Article; (b) which alternative methodologies institutions are to use for the purposes of the estimation of gross JTD amounts referred to Article 325w(7); (c) the notional amounts of instruments other than the ones referred to in points (a) and (b) of Article 325w(4)”.
The draft RTS on RRAO have been developed according to Article 325u(5) of that Regulation, which mandates the EBA to “specify what an exotic underlying is and which instruments are instruments bearing residual risks for the purposes of Article 325u(2)”.