17 December 2013
The European Banking Authority (EBA) published today final draft Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) related to market risk. In particular, the EBA published (i) RTS on the definition of materiality thresholds for specific risk in the trading book; (ii) ITS on closely correlated currencies; (iii) RTS on non-delta risk of options in the standardised market risk approach; and (iv) ITS on appropriately diversified indices. The standards will be part of the Single Rulebook aimed at enhancing regulatory harmonisation in the banking sector in the European Union (EU).
In particular, the final draft RTS on the definition of materiality thresholds for specific risk in the trading book set out criteria for assessing when the specific risk of debt instruments in the trading book – both at a solo and consolidated level - is ‘material' enough to trigger an evaluation by the competent authority. After this evaluation, competent authorities will be able to determine whether they shall encourage banks to enhance their internal assessment capacity and increase the use of internal models for capital calculations.
The final draft ITS on closely correlated currencies identify a list of relevant closely correlated currencies for the purposes of calculating the capital requirements for foreign-exchange risk according to the standardised rules. Currencies are considered to be closely correlated if they meet the specific criteria set out in Article 354 of the Capital Requirements Regulation (CRR). Positions in currency pairs that are deemed to be closely correlated are subject to lower capital requirements. The EBA will update this list on a yearly basis incorporating any additional relevant currencies as well as the latest available market data.
The final draft RTS on non-delta risk of options in the standardised market risk approach define a range of methods to reflect, in the own funds requirements, all the risks, other than delta risk, in a manner proportionate to the scale and complexity of institutions' activities in options and warrants. The EBA's proposal implements the Basel II framework which provides for the following methods: (i) a simplified approach to be applied only by institutions that buy options; (ii) the delta-plus method that can be also applied by institutions that sell options; and (iii) the scenario approach that is more sophisticated and addressed to institutions dealing with a considerable trading activity in options. In addition, for certain non-standard options, a new conservative treatment is introduced.
The final draft ITS on appropriately diversified indices list relevant exchange traded and appropriately diversified indices for which specific risk can be ignored on the basis of the following criteria: (i) the index must comprise a minimum number of equities; (ii) none of the equities or concentration of equities must significantly influence the volatility of the index; the index must comprise equities that are diversified both from (iii) a geographical and (iv) economic perspective.
Legal basis and next steps
The EBA has developed these final draft RTS and ITS in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (colloquially known as Capital Requirements Regulation or CRR).
The final draft standards have been sent today to the European Commission for their adoption as EU Regulations that will be directly applicable throughout the EU.