Consultation on draft RTS on the materiality of extensions and changes to the use of FRTB IMA and changes to the subset of MRF

The European Banking Authority (EBA) today launched a public consultation on its draft Regulatory Technical Standards (RTS) on the conditions for assessing the materiality of extensions and changes to the use of internal models as well as to the subset of the modellable risk factors applicable under the Fundamental Review of the Trading Book (FRTB) rules. These RTS are part of the Phase 4 deliverables of the EBA roadmap for the new market and counterparty credit risk approaches. The consultation runs until 29 February 2023.

These RTS follow the Capital Requirements Regulation (CRR) differentiation between material extensions and changes, to be approved by competent authorities, and non-material extensions and changes, to be notified to competent authorities. The RTS further divide the latter category into two sub-categories: notified extensions and changes requiring additional information and other extensions and changes.

For the categorisation of model extensions and changes to the relevant categories/sub-categories, the EBA is proposing a combination of qualitative and quantitative conditions. In particular, the quantitative conditions aim at assessing the effect of the extension or change on the IMA own funds requirements and on each component of the FRTB IMA (Expected Shortfall, Stress Scenario Risk Measure and Default Risk Charge), before and after the planned extension or change. In addition, for changes to the institution’s choice of the subset of modellable risk factors, the effect of the change on the ratio PEStRC/ PEStFC is also assessed.

Consultation process

Comments to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 29 February 2023.

The public hearing on these draft RTS will take place via conference call on 13 December 2023 from 15.00 to 16.30 CEST. The EBA invites interested stakeholders to register using this link by 11 December 2023 at 16:00 CEST.

Legal basis and background

These draft RTS have been developed according to Article 325az(8)(a) of Regulation (EU) No 575/2013 (Capital Requirements Regulation - CRR), which mandates the EBA to specify the conditions for assessing the materiality of extensions and changes to the use of alternative internal models and changes to the subset of the modellable risk factors.

The mandate in Art. 325az(8)(a) of the CRR is very similar to the mandate in Art. 363(4)(a), which constitutes the legal basis for the existing RTS on market risk model extension and changes. Therefore, the existing RTS on model extensions and changes is used as a starting point from which the new RTS is developed.

The CRR allows institutions to calculate their own funds requirements for market risk using the alternative internal model approach (IMA), provided that permission from competent authorities is granted. According to the CRR, material changes to the use of the IMA, the extension of the use of the IMA and material changes to the institution's choice of the subset of the modellable risk factors require separate permission from competent authorities. All other extensions and changes to the use of the IMA require notification to the competent authorities.