The European Banking Authority (EBA) published today its final Regulatory Technical Standards (RTS) specifying the conditions for assessing the materiality of extensions and changes of the Internal Models Approach (IMA) for market risk. These RTS complement and amend the standards on the rules for credit and operational risk which were adopted and published in the EU Official Journal on 20 May 2014.

According to the Capital Requirements Regulation (CRR), all institutions shall apply for permission whenever they intend to implement any material extension or change to their internal approaches for credit, market and operational risk.

In this respect, the proposed RTS harmonise the assessment of the materiality of extensions and changes to internal approaches, and ensure that approved internal approaches comply with the regulatory requirements.

These final draft RTS follow the same approach as the ones on credit risk and operational risk and include key features such as the introduction of three categories of model extensions and changes (which require permission, ex-ante notification and ex-post notification); the introduction of an exhaustive list of qualitative conditions, which is linked to the minimum requirements for internal approaches; the design of quantitative thresholds as back-stop regime (5% of overall 'point-in-time' own funds requirements for market risk and 10% of the risk number corresponding to the relevant market risk internal model); and the inclusion of standardised documentation requirements, which enable competent authorities to assess compliance of institutions with the above rules.

In order to reduce the computational burden occurring from the calculation of the quantitative thresholds in the context of quickly changing markets and to ensure that the implementation of necessary non-material changes is not delayed, these RTS introduce a threshold that exempts from the calculation those extensions and changes that lead to a change of less than 1% of each of the relevant risk numbers.

Legal basis and next steps

These final RTS have been developed 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 standards have been sent today to the European Commission for their adoption as EU Regulations that will be directly applicable throughout the EU.