Response to consultation on ITS amending Implementing Regulation (EU) No 680/2014 with regard to operational risk and sovereign exposures

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Question 1: Could you please quantify both the implementation costs and recurring production costs (expressed in man days) that would arise when implementing the changed reporting requirements on OpRisk as part the regular reporting framework? How would these recurring production costs compare to a situation in which institutions were required to comply with ad-hoc data requests that are required to comply with current competent authorities’ requests on institutions’ OpRisk losses (e.g. SSM short-term exercise)? [see page 16]

1. The EBA Consultation was launched on 16 November 2016, specifying that it runs until 7 January 2017. This means that the consultation period is less than two months. This is not in accordance with EBA’s “Public Statement on Consultation Practices” of 25 September 2012 which states that EBA will allow those consulted adequate time to respond, according to the complexity of the issue and the time available. The EBA will generally aim at allowing a three-month consultation period for public consultation, unless reasons exist to the contrary, for example an external timetable is imposed or the measure requires urgent action.

It is a basic principle of European Administrative Law that administrative agencies need to comply with the rules that they have set for themselves (“Patere legem quam ipse fecisti”). The Consultation nowhere makes mention of reasons to the contrary which would require the consultation period to be restricted to less than one month. We believe that, under European Administrative Law, agencies which claim that there would be cogent reasons justifying any departure from their internal rules, are obliged to be specific these .

We conclude that due process requirements have not been met and that, as a consequence, the EU Commission is not legally authorised to endorse any draft ITS which the EBA would submit to it on the subject matter concerned.

2. Because the proposed reporting requirements involve an increase in the granularity of data, their implementation will require significant changes in reporting systems. It would, therefore, be reasonable and appropriate, to allow institutions more time for preparing and validating the required information.

It needs to be highlighted in this context, moreover, that the date of application of these revised reporting requirements is March 2018 (reporting reference date 31/03/2018) whereas the Fundamental Review of the Trading Book (FRTB) and the market risk frameworks will entry into force in 2020. This poses a certain degree of inconsistency in the timing. It would be preferable to wait until the FRTB and the market risk frameworks are in place before applying the revised reporting requirements. A possible alternative solution would be to only require the reporting of the credit risk exposure from the moment at which the outcomes of the Fundamental Review of the Trading Book (FRTB) and the market risk frameworks will enter into force.

Finally, it would be important to assess how the proposed reporting requirements interact with other rules and, in particular, with the FRTB framework and the new IFRS9 rules.

3. One of the objectives pursued by the draft ITS is to ensure comparability. The comparability of the information is, however, not ensured if institutions fail to apply uniform criteria, as some may report the information based on first accounting data and others on first detection data.

4. The proposals on Sovereign Exposures add an unnecessary burden to the current reporting requirements, as the very granular information which is being required for the exposures seem to go above and beyond what is needed to assess the counterparty risk. The granularity requested is much higher than in the other parts of the COREP templates. Because of its level of detail, much development work will be needed to implement it.

In addition, one single reporting template covers all types of risk within the same kind of exposure, which makes the process technically complex, without adding any significant value.

Moreover, the templates contain definitions which are not consistent with other templates included in the COREP package for credit, market and operation risk (example derivative exposure split carrying amount and notional amount for items with positive and negative fair value). Hence, if the template is to be included in the COREP package proposal, the definitions must be aligned to those used in other COREP templates.

5. The Consultation paper explains that the proposed changes to operational risk reporting are expected to be beneficial on the ground that “(a) clear allocation of impacts to root events could be established and the development of losses from previous years could be monitored”. We consider, however, that this objetive cannot be achieved because the adjustments to the events and the recoveries of the events that occured in previous periods, have not been clearly identified in any template.


ANSWERS TO THE QUESTIONS OF THE CONSULTATION

Question 1

Could you please quantify both the implementation costs and recurring production costs (expressed in man days) that would arise when implementing the changed reporting requirements on OpRisk as part the regular reporting framework? How would these recurring production costs compare to a situation in which institutions were required to comply with ad-hoc data requests that are required to comply with current competent authorities’ requests on institutions’ OpRisk losses (e.g. SSM short-term exercise)?

Our time estimation is about 3 to 4 weeks to prepare the new reporting process and one week more (for each report) to validate all the data. This will imply a significant increase in recurring costs regarding those additional reports.

Question 2: Could you please quantify the implementation costs (expressed in man days) that would arise when implementing the new reporting requirements on sovereign exposures as part the regular reporting framework? How would these implementation costs compare to a situation in which institutions were required to comply with ad-hoc data requests that are required (i) to comply with the EBA’s transparency exercises and (ii) to comply with competent authorities’ requests on institutions’ sovereign exposures (e.g. SSM short-term exercise)? [see page 17]

Time has been lacking to duly respond to this question.

Question 3: The threshold defined in Article 5 (b) 3 (a) exempts institutions that fall short of the threshold from the new requirements. Do you think that this threshold is appropriate so that (i) institutions with material sovereign exposures are required to report (and hence supervisors will have the relevant information for their assessments) while (ii) smaller and less complex institutions are more likely to be exempt from the new reporting requirements? [see page 17]

Time has been lacking to duly respond to this question.

Question 4: Is there a noteworthy difference in terms of costs between point (b) which requires a full country breakdown and point (c) which limits the breakdown to a total and domestic country? If there is a noteworthy difference, please try to quantify the cost difference and put it into context with the overall implementation costs that you expect with the new reporting requirements on sovereign exposures. [see page 17]

Time has been lacking to duly respond to this question.

Question 5: Are the reporting templates related to sovereign exposures (C 33.01 and C 33.02) as set out in Annex I and related instructions in Annex II sufficiently clear? In case of uncertainties on what needs to be reported, please provide clear references to the respective columns/rows of a given template as well as specific examples that highlight the need for further clarifications. [see page 18]

Time has been lacking to duly respond to this question.

Question 6: Are the reporting templates related to OpRisk losses (C 17.01 and C 17.02) as set out in Annex I and the related instructions in Annex II sufficiently clear? In case of uncertainties on what needs to be reported, please provide clear references to the respective columns/rows of a given template as well as specific examples that highlight the need for further clarifications. [see page 19]

- For template C 17.01 it is not clear which should be the amount of: Sum of the five largest losses (rows 060-160-260-...-860,960). Annex instruction nº 129 indicates that “It shall be calculated as the sum of the largest gross loss amounts for events reported for the first time within the reporting period and the largest positive loss adjustment for events reported for the first time within a previous reporting period”.

It is not clear if an institution must report loss adjustment for events reported for the first time within a previous reporting period, in addition to the five largest gross loss amounts for events reported for the first time within the reporting period.

- Could the EBA confirm that “late bookings” have to be considered as part of the gross loss and not a loss adjustment?

- Clarification would be welcome about the operating rules of the number of events and buckets of loss adjustments, especially when the event falls below the 10,000 € threshold or when the event is cancelled.

- It would be useful to clarify whether c.17.2. includes loss adjustments or covers only completely new events and, furthermore, if late bookings are included or not.

Question 7: Are the rules for the assignment of loss adjustments to ranges as defined for rows 940 to 944 sufficiently clear? In case of uncertainties, please provide suggestions to improve the clarity and/or effectiveness of the reporting instructions for loss adjustments. [see Annex II, page 7]

It would be very useful if examples are included in the final document, in order to clarify the criteria for lines 930-934 and 940-944 concerning the value to be filled in (gross loss amount or adjustment) and the procedures to be followed when an adjustment to an event leads to its reclassification into a different bucket.

Question 8: Are the new rules for the determination of the number of loss events subject to loss adjustments for certain ranges of gross loss amounts as defined for rows 931 – 934 and the rules for the assignment of loss adjustments to ranges as defined for rows 940 to 944 appropriate in terms of cost/benefit? Please try to quantify the cost impact and put it into context with the overall implementation costs that you expect with the changed reporting requirements on OpRisk. [see Annex II, page 7]

Time has been lacking to duly respond to this question.

Question 9: Which option as regards the threshold for OpRisk loss events is the least complex or least costly in terms of implementation? [see Annex II, page 8]

A combined threshold in template C 17.02 would be the least costly. However, for large institutions, the amount of 100.000€ is too low. It would be more appropriate to introduce a threshold of 1.000.000€ with the following criteria: the largest incident for each risk type, plus the five largest incidents of the institution > 1.000.000€ and any event if the gross loss amount is above 10.000.000€, in a total of 17 incidents.

We believe furthermore that it would also be appropriate to apply the same threshold of 1 million where the reporting of loss impacts relating to older events in the C17.01 OPR DETAILS 1 template is concerned.

Name of organisation

European Banking Federation