The objective of these Regulatory Technical Standard (RTS) is to define the term market for the purpose of calculating the ‘general’ component of market risk for equities under the standardised rules.
Adopted and published on the Official Journal
The objective of these Regulatory Technical Standard (RTS) is to define the term market for the purpose of calculating the ‘general’ component of market risk for equities under the standardised rules.
The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) on the definition of market and its final draft RTS on Credit Valuation Adjustment risk (CVA risk). The latter is supplemented by an Opinion on CVA risk which further elaborates on the approach taken by the EBA in determining a proxy spread. The standards will be part of the Single Rulebook aimed at enhancing regulatory harmonisation in the banking sector in the European Union (EU).
The final draft RTS on the definition of market relate to the definition of the term ‘market' to be applied for the calculation of the overall net position in equity instruments under the market risk standardised rules. The overall net position in equity instruments is used to calculate own funds requirements for equity general market risk according to Article 343 of the Regulation. The definition of market is based on a currency criterion, but solely for jurisdictions included in the Euro-zone. For the other jurisdictions, ‘market' is defined using a nationality criterion. The currency criterion applied for the Euro-zone recognises that the introduction of a single currency has addressed some important elements of segmentation among equity markets, such as the elimination of foreign exchange currency risk, the presence of a common currency in which company results are reported or the existence of an integrated market with common rules.
The final draft RTS on CVA risk for the determination of a proxy spread and the specification of a limited number of smaller portfolios specify the data quality requirements and the minimum granularity of the attributes of rating, industry and region that institutions should consider when estimating an appropriate proxy spread for the determination of the own funds requirements for CVA. The standards provides the necessary flexibility in the determination of a proxy spread, so as to ensure an operational framework that uses the approved internal model for the specific risk of debt instruments for market risk. The RTS also specify the number and size of portfolios that fulfil the criterion of a limited number of smaller portfolios and, therefore, are allowed into the CVA Advanced approach despite not forming part of the scope of the Internal Model Method (IMM) for counterparty credit risk. Thresholds are defined in terms of number and size, below which non-IMM netting sets are deemed to fulfil the criterion of a limited number of smaller portfolios and, subject to permission from competent authorities, are allowed into the advanced method for the calculation of their own funds requirements for CVA risk.
The EBA opinion on CVA risk for the determination of a proxy spread states the main reasons why the EBA adopted a flexible approach in the final draft RTS on the determination of a proxy spread. In particular, the EBA questions the appropriateness of a unified proxy methodology for both market and CVA risks against an alternative approach that would require a proxy methodology to be used for CVA purposes only. However, the EBA recognises that this issue is part of a broader issue related to the entire CVA framework and that any possible solution should be further evaluated in light of its consistency with the Basel framework. In accordance with Article 456(2), the EBA is mandated to produce a report, whereby, in light of the issues raised by the implementation of the CVA risk charge, the relevance of some of the features of the CVA framework, together with the relevance of the provisions of these RTS, may be reconsidered.
The EBA has developed these final draft RTS 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.
The European Banking Authority launches today a consultation paper on draft Regulatory Technical Standards (RTS) to define the term market for the purpose of calculating the ‘general’ component of market risk for equities under the standardised rules. The consultation runs until 31 August 2013.
The term market has to be defined for the purpose of calculating the general market risk component for equities under the standardised rules, thus assuming that two equities in the same market are subject to the same general risk.
In these draft RTS, the EBA is consulting on two definitions of market based on the two following criteria: nationality and currency.
The nationality criterion is based on the assumption that the ‘general’ risk stems from country-specific drivers. The currency criterion would, on the other hand, recognise that the introduction of a single currency in an already substantially integrated EU Single Market has blurred these country-specific drivers within the Euro-zone.
Under the pre-existing CRDII, most jurisdictions have already implemented the nationality approach via national transposition of the Directive. This approach is more conservative than the currency criterion in terms of capital requirements. However, the currency approach takes account of the growing integration of financial markets.
The EBA is requested to submit these draft RTS to the European Commission by 31 January 2014.
Background
The final comprise on the Capital Requirements Regulation and Capital Requirements Directive (CRR/CRD) provides a mandate for the EBA to define the term market for the purpose of calculating the general component of market risk for equities under the standardised rules.
The final text of the CRR also provides a mandate for the EBA to define a range of methods to reflect, in the own funds requirements, all the risks other than the delta risks in a proportionate way to the scale and complexity of institutions’ activities in options and warrants.
Consultation process
Comments to the consultation paper on the definition of market can be sent to the EBA by e-mail to EBA-CP-2013-15@eba.europa.eu by 31 August 2013, indicating the reference EBA/CP/2013/15.
All contributions received will be published following the close of the consultation, unless requested otherwise.