Response to consultation on draft technical standards in relation to credit valuation adjustment risk
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1) Non-IMM part is small and internationally aligned;
2) It is already difficult to split netting sets between IMM and non-IMM for capital purposes, but even more difficult for CVA capital;
3) Implementing a hybrid between standardised and advanced CVA can be complicated from a systems point of view and is methodologically inconsistent (by introducing two methods, a misalignment is created between the legally enforceable netting sets and the regulatory netting sets).
If EBA were to conclude that extra conditions are necessary, we strongly recommend reconsidering the percentage as specified for condition b), currently suggested at 1%. This is a very small bandwidth. We propose to apply 3% instead.
Please provide information and data concerning the availability of CDS data with respect to the minimum categories for ‘rating’, ‘industry’ and ‘region’ defined in points (b), (c) and (d).
There are concerns in terms of the availability of data. To demonstrate this, we have included exhibits in our pdf response, which cannot be included in a text only format.Paragraph 3 allows for the proxying of the spread of the subsidiary by the spread of the parent company. Where no rating is available for the subsidiary or the parent undertaking or both, should the entities be considered equal in terms of the ratings attribute? Do you think that this treatment is appropriate? Please state the reason(s) in favour and/or against.
Two of the three attributes (sector, rating or region) should not be the only basis for applying a proxy spread. If the parent is fully liable for its subsidiary, the spread of the parent should be used in any case.Please indicate other particular cases in which single named proxies might be appropriate.
Pension funds are temporarily exempt from RC for CVA. At this point, there are no CDSs available for pension funds. Consequently, no relevant rating/sector/region curves are available. A single name proxy might be the best solution, which could be based on for example the relevant sovereign.Do the proposed thresholds of [15] % for the number of non-IMM portfolios, of [1] % for each individual non-IMM portfolio, and [10] % for the total size non-IMM portfolios, together with the definitions, provide an incentive for institutions to limit their portfolio exposures not covered by the IMM? Will the defined thresholds of [15] %, [1] % and [10] % cause any impact for your institution?
We would encourage the regulator to issue clear and consistent guidelines on the allowed size of non-IMM portfolios, when seeking IMM approval. If banks have IMM approval, they should have the freedom to choose between applying the standardised or the advanced CVA charge for the non-IMM portfolios. This because:1) Non-IMM part is small and internationally aligned;
2) It is already difficult to split netting sets between IMM and non-IMM for capital purposes, but even more difficult for CVA capital;
3) Implementing a hybrid between standardised and advanced CVA can be complicated from a systems point of view and is methodologically inconsistent (by introducing two methods, a misalignment is created between the legally enforceable netting sets and the regulatory netting sets).
If EBA were to conclude that extra conditions are necessary, we strongly recommend reconsidering the percentage as specified for condition b), currently suggested at 1%. This is a very small bandwidth. We propose to apply 3% instead.
The EBA expects that only a limited number of counterparties/names will receive a proxy spread. Do you agree with this conclusion? If not, could you explain why and state how many of your names will require a proxy spread?
Please refer to our answer in the pdf doc, as this includes exhibits re the CDS spread of BBVA, which we took as an example.Do you agree with the above analysis of the costs and benefits of the proposals? If not, please provide any evidence or data that would further inform the analysis of the likely cost and benefit impacts of the proposals.
Alignment across the board is desirable. Also alignment within the different capital frameworks is desirable. As already stated, using already developed parts of the Market Risk framework is desirable from a consistency and efficiency perspective.Upload files
BR2008.pdf
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