Response to consultation paper on ITS on amending Commission Implementing Regulation on benchmarking of internal models

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Question 1: For the purpose of reporting the above-mentioned fields, would you make use of the possibility to report the default and loss rate in template C 103 of Annex III with respect to a consistent but back-simulated definition of default or would you report these fields with respect to the definition of default that was in production at the time of the event? Please shortly explain the underlying reasons and your motivation.

N/A

a) Please comment on the expected operational burden if a reporting of realised losses/realised LGDs with respect to closed cases would be required (e.g., either by benchmarking portfolio as specified in c103 of Annex 1 or by LGD model as specified in C105 of Annex III).

N/A

b) Which alternative metrics could be used for the benchmarking of LGD estimates?

N/A

Question 3: In addition to the above discussed issues related to the reporting of a specific information, the EBA welcomes general comments where the clarity of the instructions could be improved?

N/A

Question 4: Do you agree with the new instruments added, according to section 3.3.2? Please provide any issues specified by instruments and provide an actual suggestion of potentially missing information in the instruments’ descriptions (as provided in Sections 2 and 5 of the Annex 5 of these ITS).

The Industry has identified issues with certain instrument specifications and is proposing the below amendments.
The Industry requests that instruments 122 and 123 be dropped from the exercise as both instruments are non-standard products which could increase the dispersion of the benchmarking results. These were instruments 1004 and 1005 in the Phase 3 benchmarking exercise conducted by ISDA and both instruments have subsequently been dropped from ISDA’s Phase 4 benchmarking exercise. At a minimum, instrument 123 should have additional specifications in Section 5.

Further Proposed actions:

Instrument 117 – Nikkei futures, expiry date should be 8 June Year T
Instrument 123 – Total return swap, should be Pay 1-month EURIBOR.
Instrument 202 – Swaption, should reference instrument 201. It is not clear if the swaption should hedge the swap, therefore the Industry recommends to restate the swap details
Instrument 205 – Collared note, should explicitly state ‘Base Currency USD’
Instrument 220 – MtM reset xccy swap, the Industry suggests to make this forward starting (6 months) so the exchange at Effective Date has not happened and there can be no confusion over the cash balance to be included or not
NB in Section 5, the Coupon Rate should be 3-month USD LIBOR (leg 1 and leg 2)
Instrument 221 – Receive ESTER pay floating rate, the description should be amended as ESTER is also a floating rate:
10-year IRS EURO – Receive ESTER and pay EURIBOR
ESTER leg: receive annually
3-month EURIBOR + Basis, pay quarterly
Instrument 223 – ZC inflation swap, should explicitly state ‘Base Currency EUR’
Instrument 224 – Swaption (+100bps), should reference instrument 219. It is not clear if the swaption should hedge the swap, therefore the Industry recommends to restate the swap details
Instrument 311 – EUR / BRL NDF, the instruction “cash settled” should be deleted
Instrument 532 – AT&T callable bond, USD 1 000 000
Instrument 533 – Bayer callable bond, EUR 1 000 000
Instrument 534 – AT&T callable bond, USD 1 000 000
Instrument 602 – iTraxx CDS, hedges instrument 601, not 6002. In addition, the Industry proposes:
CDS on iTraxx Europe index most recent on-the-run series
Also, the Notional adjusted to fully hedge the CS01 of 601 with no re-hedging required
Instrument 604 – iTraxx CDS, hedges instrument 603, ditto
Instrument 606 – iTraxx CDS, hedges instrument 605, ditto
Instrument 608 – iTraxx CDS, hedges instrument 607, ditto
Instrument 610 – iTraxx CDS, hedges instrument 609, ditto
Instrument 605 – Short position in iTraxx Europe, contrary to how this was specified in the ISDA Phase 3 exercise, the Industry would now recommend an attachment point of 12%
Instrument 607 – Long position in iTraxx Europe with an attachment point of 12%

Question 5: Do you agree with the new portfolios added, according section 3.3.3? Please provide any issues specified by portfolio and provide an actual suggestion to clarify the potentially misspecification in the portfolios’ composition (as provided in Sections 3 and 4 of the Annex 5 of these ITS).

The Industry asks below for further clarification on various portfolios:
Portfolio 2013 – Long 10 000 Bayer shares, short 1 000 Stellantis futures (1 000 shares / contract)
Is the mismatch in notional amounts designed to be as stated?
Portfolio 2015 – Swap USD 10m, US Govt bond USD 1m
Is the mismatch in notional amounts designed to be as stated?
Portfolio 2018 – 209 - 10 instruments. The change made for the 2022 exercise to normalise all notional amounts such that all portfolios had just 1 of each instrument was a significant simplification and greatly reduced the chance of booking errors.
It would be good to keep this approach for the 2023 exercise. The Industry notes that instrument 209 is defined as EUR 1m so it is sized appropriately for portfolio 2016.
However, to avoid the need to re-introduce instrument quantities all notional amounts could be set to 10 000 000 where appropriate.
Portfolio 2022 – No instruments defined. Should this be the below;
Instr. 209 – Long Italy Govt
Instr. 222 – Long Italy Govt (HICP)
(tests FRTB-SA aggregation of GIRR rates & inflation)
Portfolio 3002 – Long USD 1m cash, Long USD/EUR option EUR 10m
Is the mismatch in notional amounts designed to be as stated?
Portfolio 6002 – Need to specifify “Base currency is EUR”
Portfolio 6003 – Need to specifify “Base currency is EUR”
Portfolio 6004 – Need to specifify “Base currency is EUR”
Portfolio 6005 – Need to specifify “Base currency is EUR”
Portfolio 6007 – Long FTD swap, should be 611, not 612. Furthermore, the Industry recommends the CTP portfolios be hedged with CDS and not bonds

Question 6: Do you agree with the current wording provided in the Instruction of Annex 5, Section 1 in the letter (aa)? Please provide any suggestion that would be required, in your opinion, to update the instruction.

Paragraph (aa) leaves it up to institutions to substitute the prescribed reference rate with the alternative rate. Instead, for 2023, the instruments descriptions in Section 2 should be amended to explicitly specify the alternate rate where necessary:

Instrument 204 – GBP swap, replace LIBOR with SONIA rate compounded and paid annually
Instrument 220 – MtM reset xccy swap, the Industry suggests to make this SOFR/ESTER as this is the new market standard, with adjusted details per below;
EUR: ESTER, pay quarterly compounded with a payment lag 2D
USD: SOFR, receive quarterly compounded with a payment lag 2D
Leg 1: USD Notional EUR 10 000 000 equivalent adjusted on a quarterly basis
Leg 2: EUR Notional EUR 10 000 000

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