13 January 2020
The European Banking Authority (EBA) launched today a consultation on draft Regulatory Technical Standards (RTS) on how institutions should calculate the own funds requirements for market risk for their non-trading book positions that are subject to foreign-exchange risk or commodity risk under the FRTB standardised and internal model approaches. The consultation runs until 10 June 2020.
The draft standards specify the value of non-trading book positions that institutions should use when computing the own funds requirements for market risk for those positions. In this respect, the standards require that institutions should use either the last available accounting value or the last available fair value for positions attracting foreign-exchange risk. In addition, institutions are not requested to perform a daily re-valuation of non-trading book positions attracting foreign-exchange risk. However, they are required to reflect on a daily basis the changes in the foreign-exchange component. For positions attracting commodity risk, a daily fair-valuation should be performed.
In addition, the draft standards lay down a prudential treatment for the calculation of the own funds requirements for market risk of non-monetary items held at historical cost that may be impaired due to changes in the foreign-exchange rate. In this respect, the standards identify a specific methodology that institutions should use when capitalising the foreign-exchange risk stemming from those items under the standardised approach. Furthermore, it requires institutions to model directly the risk of impairment due to changes in the relevant exchange rate in the case of an internal model approach being used.
Finally, the standards specify an ad-hoc treatment with respect to the calculation of the actual and hypothetical changes associated to non-trading book positions for the purpose of the backtesting and the profit and loss attribution requirements. This is to address the issue of jumps in the value of the portfolio that may lead to over-shootings in the backtesting that are not due to changes in the foreign-exchange risk component of the price.
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 that due to the current Covid-19 situation the deadline for the submission of comments has been extended to 10 June 2020.
A public hearing will then take place at the EBA premises in Paris on 11 February 2020 from 15:00 to 16:00 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 325(9) of REGULATION (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013.
Article 325(9) mandates the EBA to develop draft regulatory technical standards to specify how institutions are to calculate the own funds requirements for market risk for non-trading book positions that are subject to foreign-exchange risk or commodity risk in accordance with the approaches set out in points (a) and (b) of paragraph 3.