Final draft adopted by the EBA and submitted to the European Commission
These Regulatory Technical Standards (RTS) specify key aspects of the SA-CCR and represent an important contribution to its smooth harmonised implementation in the EU. In particular, they specify methods for the mapping of derivative transactions to risk categories, a formula for the calculation of the supervisory delta of options mapped to the interest rate risk category and a method for determining whether derivative transactions are long or short in their risk drivers.
The European Banking Authority (EBA) launched today a consultation on four draft Regulatory Technical Standards (RTS) on the Standardised Approach for Counterparty Credit Risk (SA-CCR). These draft technical standards specify key aspects of the SA-CCR and represent an important contribution to its smooth harmonised implementation in the EU. The draft technical standards were developed based on the mandates included in the latest available version of proposed amended Capital Requirements Regulation (CRR2). The consultation runs until 2 August 2019.
The draft technical standards build on the proposals included in the Discussion Paper published on 18 December 2017 and industry feedback received as a result of the subsequent consultation. They specify methods for the mapping of derivative transactions to risk categories, a formula for the calculation of the supervisory delta of options mapped to the interest rate risk category and a method for determining whether derivative transactions are long or short in their risk drivers.
In particular, the EBA proposes a three-pronged methodology for the mapping of derivative transactions to risk categories. The first approach, purely qualitative and suitable for simple and standard derivative transactions, refers to certain criteria, which have to be satisfied. The second more detailed approach, hinges on a quantitative assessment of the sensitivities with respect to each possible risk driver, in order to identify the material ones. The third approach, intentionally simple and conservative, identifies all possible risk drivers of a transaction as material and allocates the transaction to all relevant risk-categories. This last approach is always available as a fallback to the second approach.
In addition, the EBA proposes to use, in line with Basel standards, a supervisory delta formula based on a shifted Black-Scholes model that allows dealing with situations of negative interest rates. The shift is intended to move interest rates back into positive territory in order to make the application of the Black-Scholes model feasible. The EBA proposes a methodology for determining the shift to be included in the formula and requests feedback with respect to the different options proposed, including on the possible level of application. Finally, the EBA tried to reduce the burden for institutions in the determination of the direction of the position in that particular risk driver (long or short) by leveraging on the same elements (i.e. cash flows and sensitivities) that institutions use for the mapping of derivatives to risk categories.
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 2 August 2019.
A public hearing will then take place at the EBA premises in Paris on 17 June 2019 from 15:00 to 17:00 CET time. All contributions received will be published following the close of the consultation, unless requested otherwise.
These draft RTS have been developed according to Article 277(5) and Article 279a(3) of proposed amended Capital Requirements Regulation (CRR2). As all the stages of the legislative procedure for the CRR2 text have not been completed, the version that was taken into account for drafting those draft RTS is the European Parliament legislative resolution of 16 April 2019. As a result, the proposed draft RTS may be amended after the consultation to take into account potential changes in the final CRR2 text.
According to the above version, the EBA is expected to develop: a) the method for identifying transactions with only one material risk driver, b) the method for identifying transactions with more than one material risk driver and for identifying the most material of those risk drivers, c) in accordance with international regulatory developments, the formula that institutions shall use to calculate the supervisory delta of call and put options mapped to the interest rate risk category compatible with market conditions in which interest rates may be negative as well as the supervisory volatility that is suitable for that formula, and d) the method for determining whether a transaction is a long or short position in the primary risk driver or in the most material risk driver in the given risk category.
The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) on the Standardised Approach for Counterparty Credit Risk (SA-CCR). These draft RTS specify key aspects of the SA-CCR and represent an important contribution to its smooth harmonised implementation in the EU. The RTS are part of the mandates assigned to the EBA within its important role in implementing the SA-CCR and Fundamental Review of the Trading Book (FRTB) frameworks in the EU.
The final draft RTS set out the method for identifying the material risk drivers of derivative transactions on the basis of which the mapping to one or more of the risk categories is to be done. In addition, these RTS set out the formula that institutions are to use to calculate the supervisory delta of options, when mapped to the interest rate risk category, which is compatible with negative interest rates. Finally, the final draft RTS introduce a method suitable for determining the direction of the position in a material risk driver.
On the mapping of derivatives into risk categories, the final draft RTS follow a three-pronged methodology for the identification of the material risk driver(s) of derivative transactions. The first approach, relies on purely qualitative information and is suitable for simple and standard derivative transactions (e.g. interest rate and cross currency swaps). The second approach is more detailed and hinges on a quantitative assessment of the sensitivities in order to classify possible risk drivers based on materiality considerations. The third approach is a conservative and simple backstop, which identifies all possible risk drivers of a transaction as material. This last approach will always be available as a fall back option and will allow a proportionate implementation of the framework when the second approach is too burdensome.
The formula for the supervisory delta of interest rate options, specified in the RTS, is an application of the Black-Scholes (BS) model, on which SA-CCR relies. Such an application is made feasible by shifting the interest rate curve to move interest rates back into positive territory. In addition, the RTS specify the parameters that are to be used in the supervisory delta formula.
Finally, for determining the direction of the position in a particular risk driver (long or short), the methodology introduced in these RTS leverages on the same elements (i.e. cash flows and sensitivities) used for the identification of the material risk driver(s) of derivative transactions, which are specifically envisaged for reducing the burden on institutions.
The final draft RTS have been developed according to Article 277(5) and Article 279a(3) of Regulation (EU) No 575/2013 (CRR), as amended by Regulation (EU) 2019/876. Article 277(5) mandates the EBA to develop draft regulatory technical standards to specify: (a) the method for identifying transactions with only one material risk driver, and (b) the method for identifying transactions with more than one material risk driver and for identifying the most material of those risk drivers for the purposes of Article 277(3). Article 279a(3) mandates the EBA to develop draft regulatory technical standards to specify: (a) in accordance with international regulatory developments, the formula that institutions shall use to calculate the supervisory delta of call and put options mapped to the interest rate risk category compatible with market conditions in which interest rates may be negative as well as the supervisory volatility that is suitable for that formula, and (b) the method for determining whether a transaction is a long or short position in the primary risk driver or in the most material risk driver in the given risk category for transactions referred to in Article 277(3).
The European Banking Authority (EBA) launched today a consultation on four draft Regulatory Technical Standards (RTS) on the Standardised Approach for Counterparty Credit Risk (SA-CCR). These draft technical standards specify key aspects of the SA-CCR and represent an important contribution to its smooth harmonised implementation in the EU. The draft technical standards were developed based on the mandates included in the latest available version of proposed amended Capital Requirements Regulation (CRR2). The consultation runs until 2 August 2019.
The draft technical standards build on the proposals included in the Discussion Paper published on 18 December 2017 and industry feedback received as a result of the subsequent consultation. They specify methods for the mapping of derivative transactions to risk categories, a formula for the calculation of the supervisory delta of options mapped to the interest rate risk category and a method for determining whether derivative transactions are long or short in their risk drivers.
In particular, the EBA proposes a three-pronged methodology for the mapping of derivative transactions to risk categories. The first approach, purely qualitative and suitable for simple and standard derivative transactions, refers to certain criteria, which have to be satisfied. The second more detailed approach, hinges on a quantitative assessment of the sensitivities with respect to each possible risk driver, in order to identify the material ones. The third approach, intentionally simple and conservative, identifies all possible risk drivers of a transaction as material and allocates the transaction to all relevant risk-categories. This last approach is always available as a fallback to the second approach.
In addition, the EBA proposes to use, in line with Basel standards, a supervisory delta formula based on a shifted Black-Scholes model that allows dealing with situations of negative interest rates. The shift is intended to move interest rates back into positive territory in order to make the application of the Black-Scholes model feasible. The EBA proposes a methodology for determining the shift to be included in the formula and requests feedback with respect to the different options proposed, including on the possible level of application. Finally, the EBA tried to reduce the burden for institutions in the determination of the direction of the position in that particular risk driver (long or short) by leveraging on the same elements (i.e. cash flows and sensitivities) that institutions use for the mapping of derivatives to risk categories.
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 2 August 2019.
A public hearing will then take place at the EBA premises in Paris on 17 June 2019 from 15:00 to 17:00 Paris time. All contributions received will be published following the close of the consultation, unless requested otherwise.
These draft RTS have been developed according to Article 277(5) and Article 279a(3) of proposed amended Capital Requirements Regulation (CRR2). As all the stages of the legislative procedure for the CRR2 text have not been completed, the version that was taken into account for drafting those draft RTS is the European Parliament legislative resolution of 16 April 2019. As a result, the proposed draft RTS may be amended after the consultation to take into account potential changes in the final CRR2 text.
According to the above version, the EBA is expected to develop: a) the method for identifying transactions with only one material risk driver, b) the method for identifying transactions with more than one material risk driver and for identifying the most material of those risk drivers, c) in accordance with international regulatory developments, the formula that institutions shall use to calculate the supervisory delta of call and put options mapped to the interest rate risk category compatible with market conditions in which interest rates may be negative as well as the supervisory volatility that is suitable for that formula, and d) the method for determining whether a transaction is a long or short position in the primary risk driver or in the most material risk driver in the given risk category.