Response to public hearing on the Consultation paper on the RTS on IMMV
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For the first time, the industry has itself developed a Standard Initial Margin Model, which guarantees a level playing field for highly sophisticated banks as well as smaller regional banks, since 99% of model users use the same model.
The validation requirements of the draft RTS derive their structure from the final draft RTS on internal model assessment methodology for market risk; smaller banks do not use internal models in the market risk area and hence have no experience of the internal validation process. Some banks do not have capabilities or the will to invest in validation process – thus, the validation requirement (either simplified or standard) would create a gap between banks. Is this the intention of the EBA?
In our opinion, it would be justified to include the Standard Initial Margin Model (SIMM) as a standard method and to postpone the entry into force of the RTS.
There is an issue with the given timeline; transitional supervisory procedures give two years for competent authorities to object the initial application – it is likely that there will changes in the industry standard model between initial validation and initial approval, which will then require at least a notification of changes in industry standard model. Given the formal nature of the process, it could prove difficult for competent authorities to separate the initial application, notifications and the possible application to change the model in cases where the initial application is still under process.
Q1: What are the stakeholders’ views regarding the split between standard and simplified validation processes?
Finance Finland welcomes the split between standard and simplified validation. From our point of view, as banks use Standard Initial Margin Model (SIMM) to calculate IM requirement, it is in our expectations that the core model (SIMM) will be validated via standard validation before validating the same model using simplified approach.For the first time, the industry has itself developed a Standard Initial Margin Model, which guarantees a level playing field for highly sophisticated banks as well as smaller regional banks, since 99% of model users use the same model.
The validation requirements of the draft RTS derive their structure from the final draft RTS on internal model assessment methodology for market risk; smaller banks do not use internal models in the market risk area and hence have no experience of the internal validation process. Some banks do not have capabilities or the will to invest in validation process – thus, the validation requirement (either simplified or standard) would create a gap between banks. Is this the intention of the EBA?
Q2: What are the stakeholders’ views regarding the Euro 750 bn threshold selected?
whatever threshold is chosen, the Standard Initial Margin Model will be validated first by counterparties with larger portfoliosQ3: What are the stakeholders’ views regarding Article 2, Par 2, and the 50 Euro bn. threshold selected to allow the switch from simplified to standardised validation processes?
-Q4: What are the stakeholders’ views regarding Article 2, Par 3, that would allow a temporary implementation of the model to subject in the simplified validation process?
-Q5: What are the stakeholders’ views regarding section 1? Please specify the issue by article where possible.
As stated in our answer to question 1, counterparties with AANA above 750 bn will validate their Standard Initial Margin Model using standardized approach. In our understanding, most or all banks that use a model to calculate IM-requirement, use SIMM and others use standard calculation known as grid. To require validation of an industry standard model for every bank would seem very excessive and would create unnecessary burden for banks and competent authorities and that costs/the burden would outweigh any benefits.In our opinion, it would be justified to include the Standard Initial Margin Model (SIMM) as a standard method and to postpone the entry into force of the RTS.
Q6: What are stakeholders’ views regarding the methodology applied to identify material changes and extensions in the IM model?
-Q7: What are the stakeholders’ views regarding the threshold selected (5% and 10%) in order to trigger the process?
-Q8: What are the stakeholders’ views regarding the selected extensions and changes in the Annex I Part I and II?
-Q9: What are the stakeholders’ views regarding the documentation to be provided for the application under the Standardised supervisory process.
-Q10: What are the stakeholders’ views regarding the section 2 subsection 1 in general? Please specify the issue by article where possible.
-Q11: What are the stakeholders’ views regarding the outsourcing provisions proposed by Article 7 in the RTS?
-Q12: What are the stakeholders’ views regarding the use of validation results proposed by Article 8 in the RTS?
Subparagraphs 1 and 4d both refer solely to Article 13 (“Internal validation”,under Section 2, Standardised Supervisory Procedures) and not to Section 2 and the relevant parts concerning supervisory validation, nor to Section 3 (Simplified Supervisory Procedures); Article 8 should refer to both sections and the validation procedures laid down therein, or a corresponding article should be included in Section 3.Q13: What are the stakeholders’ views regarding the possibility to rely on the assessment of a third country competent authority and the treatment proposed by Article 8 in the RTS?
-Q14: What are the stakeholders’ general views regarding the senior management requirements as stated in article 10? Also, please highlight specific issues.
-Q15: What are the stakeholders’ general views regarding the model implementation unit requirements as stated in article 11? Also, please highlight specific issues.
-Q16: What are the stakeholders’ general views regarding the audit requirements as stated in article 12? Also, please highlight specific issues.
-Q17: What are the stakeholders’ general views regarding the internal validation requirements as stated in article 13? Also, please highlight specific issues.
-Q18: What are the stakeholders’ views regarding the split between the general structure of the model and the actual implementation of the model for the validation as stated in article 13(2)?
-Q19: What are the stakeholders’ views regarding the thresholds suggested to trigger for the CAs notification, as described in paragraph 5 of article 14?
-Q20: What would be the stakeholders’ choice on the value of Ks, as described in paragraph 7 of article 14?
-Q21: What would be the stakeholders’ choice on the distribution of Xi applied? Could you please specify the first four moments (mean, standard deviation, standardized skewness and standardized excess kurtosis)? Additionally, could you please describe the distribution Xi, e.g., by means of an analytical approximation or a plot of the empirical distribution density, with the normal distribution included as comparison?
-Q22: What would be the stakeholders’ choice on the values of Ng,s and Nr,s. Would you please provide a concise description of the methodology to obtain Ng,s and Nr,s?
-Q23: What are the stakeholders’ methods applied to transactions maturing in less days than the MPoR?
-Q24: What are the stakeholders’ views on the static backtesting proposal as stated in article 14?
-Q25: What are the stakeholders’ views regarding the thresholds suggested to trigger for the CAs notification, as described in paragraph 5 of article 17?
-Q26: What would be the stakeholders’ choice on the value of Kd, as described in paragraph 7 of article 17?
-Q27: What are the stakeholders’ views regarding the dynamic backtesting as set in article 17?
-Q28: What are the stakeholders’ views regarding the treatment of the Valuations Adjustments within the requirement of the backtesting programme as set in article 14 and the monitoring programme of article 17?
-Q29: What are the stakeholders’ views regarding the requirement in the backtesting programmes as set in Articles 14 and 17? Should the requirements be specified in terms of IM collected only?
-Q30: What are the stakeholders’ views regarding Articles 18 through 23? Please specify the issue by article where possible.
-Q31: What are the stakeholders’ views regarding the section 2 subsection 2 in general? Please specify the specific issue by article where possible.
-Q32: What are the stakeholders’ views regarding section 3 in general? Please specify the issue by article where possible.
The requirement in the proposed Article 25(1) for counterparties to apply for validation by the competent authorities in cases of material changes and extensions to their initial margin model would create unnecessary burden for both banks as well as for competent authorities, and even more so than initial validation, since in the case of the changes to the industry standard, all banks would change their model as soon as possible and thus all submit their application to their competent authorities at the same time.Q33: What are the stakeholders’ views regarding the thresholds selected (10% and 20%) to trigger the process for model changes and extensions in Article 25 for the simplified assessment?
The thresholds seem unjustified. The industry standard model (ISDA SIMM) is constantly evolving in order to capture changes in bilateral derivatives and market conditions. When new versions are rolled out, banks will change their model as soon as possible, and if thresholds are triggered, banks with similar positions will thus submit their applications to their competent authorities at the same time. Changes in the industry standard model might create larger changes for banks with smaller or concentrated positions, triggering an application to change the model, while banks with bigger or non-concentrated positions might not experience a similar change in their position. Competent authorities would need to have enough resources to validate multiple applications at the same time.Q34: What are the stakeholders’ views regarding the scope of the documentation requirements in Articles 27 and 28 for the simplified assessment?
Requiring application for initial validation, material and non-material extensions and changes would create unnecessary burden for banks as well as for competent authorities. In our understanding, validating (either standard or simplified) an industry standard model multiple times would not create any added value - nor would it increase the robustness of the modelQ35: What are the stakeholders’ views regarding the transitional provision in Article 30? Are the two years of transition suggested sufficient to have a first validation of the models in place?
The proposed timeline (requirement of initial validation within one month at the latest from the date of application) would be acceptable if smaller banks were to be given enough time to prepare for the application (Article 31:“3 years from the date of entry into force of this Regulation”). The validation requirements derive their structure from the final draft RTS on internal model assessment methodology for market risk; smaller banks do not use internal models in the market risk area and hence have no experience of the internal validation process.There is an issue with the given timeline; transitional supervisory procedures give two years for competent authorities to object the initial application – it is likely that there will changes in the industry standard model between initial validation and initial approval, which will then require at least a notification of changes in industry standard model. Given the formal nature of the process, it could prove difficult for competent authorities to separate the initial application, notifications and the possible application to change the model in cases where the initial application is still under process.