12 March 2021
The European Banking Authority (EBA) launched today two public consultations on its draft Regulatory Technical Standards (RTS) on gross jump-to-default (JTD) amounts and its draft RTS on residual risk add-on (RRAO). These draft RTS specify i) how gross JTD amounts are to be determined for the purposes of calculating the default risk charge for non-securitisation instruments, and ii) how to identify instruments exposed to residual risks for the purposes of the residual risk add on (RRAO) - under the alternative standardised approach for market risk. These draft RTS are part of the phase 3 deliverables of the EBA roadmap for the new market and counterparty credit risk approaches. Both consultations run until 12 June 2021.
Institutions using the alternative standardised approach (FRTB-SA) to determine own funds requirements for market risk are required to compute, on top of the own funds requirement under the sensitivities-based method, additional own funds requirements for default risk and for residual risks. The consultation papers published today provide technical specifications for the implementation of these two elements.
In particular, the draft RTS on gross JTD amounts specify the key inputs needed for computing own funds requirements for default risk under the FRTB-SA. Gross JTD amounts determined in accordance with the draft RTS are intended to be consistent with those determined in accordance with international standards, while employing the formulae and requirements set out in the Capital Requirements Regulation (CRR).
The draft RTS on RRAO clarify the scope of the RRAO, i.e. for which instruments the own funds capital requirements for residual risks should be determined. In particular, these RTS specify a non-exhaustive list of instruments bearing residual risks, and a list of risks that, in themselves, do not constitute residual risks. These RTS also clarify that longevity risk, weather, natural disasters and future realised volatility should all be considered as exotic underlyings.
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 12 June 2021. All contributions received will be published following the end of the consultation, unless requested otherwise.
A public hearing will take place on 29 April 2021 from 15.30 to 18.00 CET.
The draft RTS on gross JTD amounts have been developed according to Article 325w(8) of Regulation (EU) No 575/2013 (Capital Requirements Regulation – CRR), which mandates the EBA to “specify (a) how institutions are to determine the components P&Llong, P&Lshort, Adjustmentlong and Adjustmentshort when calculating the JTD amounts for different types of instruments in accordance with this Article; (b) which alternative methodologies institutions are to use for the purposes of the estimation of gross JTD amounts referred to Article 325w(7); (c) the notional amounts of instruments other than the ones referred to in points (a) and (b) of Article 325w(4)”.
The draft RTS on RRAO have been developed according to Article 325u(5) of Regulation (EU) No 575/2013 (CRR), which mandates the EBA to “specify what an exotic underlying is and which instruments are instruments bearing residual risks for the purposes of Article 325u(2)”.