The EBA consults on draft technical standards on residual risk add-on hedges under the Fundamental Review of the Trading Book

The EBA consults on draft technical standards on residual risk add-on hedges under the Fundamental Review of the Trading Book 
The European Banking Authority (EBA) today launched a public consultation on its draft Regulatory Technical Standards (RTS) on the conditions for determining whether an instrument attracting residual risk acts as a hedge. These RTS are part of the Phase 1 deliverables of the EBA roadmap on the implementation of the EU banking package in the area of market risk. The consultation runs until 3 May 2024.

One of the pillars of the standardised approach (SA) under the new fundamental review of the trading book (FRTB) framework is the residual risk add-on (RRAO).

The Capital Requirements Regulation (CRR3) introduces a provision in the RRAO framework allowing the exemption from the RRAO charge for instruments bearing residual risks that are taken to hedge instruments bearing residual risks too. The CRR3 also includes a mandate for the EBA to develop RTS specifying when an instrument qualifies as a hedge for the purpose of the exemption and when not. 

The RTS proposed for consultation require institutions to identify whether the RRAO charge for which the institution seeks the exemption relates to a risk factor that is not shocked in the SbM (i.e. non-SbM risk factor), or if it is down to other reasons. 

When the RRAO relates exclusively to a non-SbM risk factor, the RTS envisage conditions to verify that, as a result of the hedge, the sensitivity towards the non-SbM risk factor is significantly reduced. 

On the other hand, where the RRAO charge is due to other reasons than the presence of a non-SbM risk factor, the RTS allow the hedging instrument to be recognised as hedge, and as such, exempted from the RRAO charge, only if it completely offsets the RRAO risk stemming from the hedged instruments.

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 3 May 2024.

The public hearing on these draft RTS will take place via conference call on 6 March 2024 from 15.00 to 16.00 CET. The EBA invites interested stakeholders to register using this link by 4 March 2024 at 16:00 CET.

Legal basis and background

The draft RTS on the FRTB have been developed according to Article 325(u)(6) of Regulation (EU) No 575/2013 (CRR), as amended by the CRR3, which mandates the EBA to specify criteria to identify positions attracting residual risk that act as a hedge.