Austrian Economic Chamber, Division Bank and Insurance

In general we agree to the argument brought forward by ISDA/IFF that a further narrowing
definition of “legally obliged” would reduce liquidity and usage of quotes for main instruments
Furthermore we think that the requirements for the RFET should be set in a way that they
can be fulfilled not only for the most liquid risk factors. Especially for volatility surfaces a
proof of the modellability based on the current proposal would be simple not possible or in
the best case very time consuming and/or expensive dependent on the availability of the
data providers. In the current proposal the requirements are set independent of the
significance of the overall position in a certain risk factor. We see these strict requirements
as an entry barrier for the implementation of an Internal Model, especially for smaller and
medium size institutions.
We think that for certain markets/instruments one firm side could be sufficient e.g.
available firm bids for corporate bonds would prove existing market liquidity – which is the
overall purpose of RFET.
Since we have not contracted specific vendor service we cannot provide an answer. No
impact analysis was done so far.
All 3 restrictions (Intragroup, Volume, Bid/Ask) are overly (and unnecessarily) complex in our
view. It should be possible to use all quotes provided that banks show that the quotes reflect
normal market conditions.
All 3 restrictions (Intragroup, Volume, Bid/Ask) are overly (and unnecessarily) complex in our
view. It should be possible to use all quotes provided that banks show that the quotes reflect
normal market conditions.
Yes, potentially. The question must therefore also be discussed with the data providers.
Since it can be assumed that a significant amount of information would be required of them,
it must be ensured that the requirements can be fulfilled with reasonable efforts by them.
Otherwise the information needed for the model would not be available or be very expensive.
We have no additional proposals.
This topic is of high relevance. We use parametric functions for all important volatility
surfaces (Interest rates, Equity and FX volatilities) as e.g. SABR model, SVI model.
However although pricing is based on the parametric representation, these parameters are
not risk factors. The risk factors are still the volatility quotations themselves (which are shifted
in each scenario and afterwards new SABR parameters are derived in the scenario
calculation).
No do not have a strong preference for either. In fact, we share the opinion of ISDA/IIF that
both options have significant practical limitations.
If option 1 requires a historic recalibration it would not be possible from an operation point of
view.
Option 2 can be based on all input factors – including non-modellable – a parametric model
is to deliver calibration parameters as well as output risk factors. On this output level the
exclusion of risk factors from non modellable buckets would take place. In case where pricing
functions are setup on model parameters it would require to establish new pricing functions
(e.g. SVI). In cases where the pricing functions is setup to use the output risk factors we see
open questions with respect to use of a non modellable basis in contrast to a full exclusion of
the bucket.
We support the ISDA/IIF proposal.
We intend to rely on the services of data providers to be established and avoid building up
own tracking routines of original maturities vs. actual maturities. Notwithstanding, we are in
favor of any possibility which helps to improve the diminishing demand for bonds with
remaining short term maturities 0-1,5years (which were often highly liquid when issued at
e.g. 5Y original maturity).
Since we will not have sufficient own trades, we will need to rely on data service provider.
As soon as a liquid markets new reference rate is established, we do not expect additional
problems.
We believe that the RFET is primarily a stand-alone test. Daily marked-to-market prices are
available shortly following the close of trading. Vendor service data will most likely not be
available during this time but only later with a considerable time delay.
Dr. Franz Rudorfer
A