Response to cP on EBA launches consultation on technical standards on the standardised approach for counterparty credit risk
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However, the EBF would also like to emphasize that the impact of the different thresholds varies from bank to bank and depends on several factors, such as the directionality of the relevant portfolio. Therefore, the EBF’s recommendation to the EBA would be that the EBA should reassess the impact of the various options based on additional examples and decide on this matter once the assessment has been concluded. The industry would be available for further exchanges on the topic.
When assuming that (R+λ) is log-normal (instead of R in the initial formula) we should introduce σ’ defined as follows:
We consider that (dR/R+λ) = σ’ dW instead of (dR/R) = σ dW, we can then deduce that σ * R* dW = σ’ * (R+λ) * dW, which means that σ in the formula should be replaced with σ'= σ*R/(R+λ)
However, the EBF is aware that the calculation of the supervisory delta has already reached a situation where it is highly complex. Adjusting the volatility will therefore increase complexity. The new EBA proposal to set the supervisory volatility at 50%, which was not present in the earlier EBA discussion paper, is a welcome contribution to current discussion, because it would help to reduce complexity. Consequently, in order to minimize the operational burden on banks, the EBF proposes that banks should be free to apply the abovementioned proposal for adjusting the supervisory volatility or a fixed 50% supervisory volatility.
Which one of the three options (option 4a: 1 bp, option 4b: 0.1% or option 4c: 1%) do you think is more appropriate as a threshold? Please provide the rationale for the chosen option.
The EBF agrees with the EBA assessment that it would be preferable to set the threshold at a level where the distortions are reduced to a minimum, which is, as stated by the EBA, in line with the objectives of the BCBS. Therefore, the threshold should be set as low as possible (1bp).However, the EBF would also like to emphasize that the impact of the different thresholds varies from bank to bank and depends on several factors, such as the directionality of the relevant portfolio. Therefore, the EBF’s recommendation to the EBA would be that the EBA should reassess the impact of the various options based on additional examples and decide on this matter once the assessment has been concluded. The industry would be available for further exchanges on the topic.
Please provide examples of cases where the possibility to set the shift ? according to the prevalent market conditions (option 4) might: - provide some benefits - raise some concerns
NADo you consider necessary an adjustment to the supervisory volatility parameter ? as defined in Article 5? In the case an adjustment is considered necessary, how should it be carried out?
In the response to the EBA discussion paper titled “Implementation in the European Union of the revised market risk and counterparty credit risk frameworks”, the EBF has noted that some problems could arise from introducing the λ shift into the formula. Therefore, the EBF would like to restate its preference for slightly adjusting the supervisory volatility parameter σ as follows:When assuming that (R+λ) is log-normal (instead of R in the initial formula) we should introduce σ’ defined as follows:
We consider that (dR/R+λ) = σ’ dW instead of (dR/R) = σ dW, we can then deduce that σ * R* dW = σ’ * (R+λ) * dW, which means that σ in the formula should be replaced with σ'= σ*R/(R+λ)
However, the EBF is aware that the calculation of the supervisory delta has already reached a situation where it is highly complex. Adjusting the volatility will therefore increase complexity. The new EBA proposal to set the supervisory volatility at 50%, which was not present in the earlier EBA discussion paper, is a welcome contribution to current discussion, because it would help to reduce complexity. Consequently, in order to minimize the operational burden on banks, the EBF proposes that banks should be free to apply the abovementioned proposal for adjusting the supervisory volatility or a fixed 50% supervisory volatility.