EBA欧洲银行-EBA-RTS-2014-10-28Final-draft-RTS-on-mkt-risk-model-extensions-and-changes29_65页_1mb

EBA Final Draft Regulatory Technical Standards on Materiality of Extensions and Changes for Market Risk

Executive Summary

The European Banking Authority (EBA) has developed final draft Regulatory Technical Standards (RTS) under Article 363(4) of the Capital Requirements Regulation (CRR) to specify the conditions for assessing the materiality of extensions and changes to internal approaches used in calculating own funds requirements for market risk. These standards apply from 1 January 2014 and are part of the broader prudential requirements set out in the CRR and CRD.

The draft RTS complement the existing standards for credit and operational risk, adding specific rules for market risk. They introduce a classification system for extensions and changes into three levels of materiality: material changes requiring approval, changes requiring notification before implementation, and changes requiring notification after implementation. The EBA also proposes quantitative thresholds (5% for overall own funds requirements, 10% for individual risk numbers) as a back-stop measure to assess materiality.

To reduce computational burden, an additional threshold of 1% is introduced, which allows certain minor changes to be considered non-material and only notified annually, unless they fall under specific categories in Annex III. The time window for assessing materiality is reduced to a maximum of 15 business days, with institutions continuing to monitor for 14 days after the initial testing period if the thresholds are not met.

These standards are an amendment to Regulation (EU) No 529/2014 and incorporate its general provisions, particularly regarding documentation requirements.

Main Features of the Draft RTS

• Classification of Changes: Extensions and changes are categorized into three levels of materiality:

  • Material extensions and changes: Require approval from competent authorities.
  • Extensions and changes requiring notification before implementation: Ex-ante notification.
  • Extensions and changes requiring notification after implementation: Ex-post notification, with annual frequency for minor changes.

• Qualitative Criteria: The EBA provides lists of qualitative criteria in the annexes to classify extensions and changes into the above categories.

• Quantitative Thresholds (Back-stop Measures):

  • A 5% threshold applies to the overall change in own funds requirements for market risk.
  • A 10% threshold applies to individual risk numbers (e.g., VaR, Stressed VaR, IRC, correlation trading models).

• 1% Exemption Threshold:

  • Changes resulting in a less than 1% impact on the relevant risk numbers may be considered non-material.
  • These changes need to be notified annually unless they fall under specific categories in Annex III.

• Time Window for Assessment:

  • The assessment period is limited to a maximum of 15 business days.
  • Institutions must monitor the impact for 14 days after the initial testing day if the 1% threshold is not met.

• Documentation Requirements:

  • Institutions must provide detailed documentation for changes requiring approval, including rationale, implementation date, scope of application, and validation reports.
  • The standards also incorporate documentation rules from Regulation (EU) No 529/2014.

Key Changes and Rationale

• The EBA aims to reduce the administrative burden on financial institutions by introducing a 1% exemption threshold for minor changes.
• The 15-day assessment window is shorter than the previous 60-day period, allowing for quicker implementation in rapidly changing markets.
• The combination of qualitative and quantitative criteria ensures a balanced and comprehensive approach to assessing materiality.
• The ex-ante and ex-post notification system helps in maintaining regulatory oversight without unnecessary delays.
• The standards are aligned with the existing framework for credit and operational risk, ensuring consistency across risk categories.

Key Components of the Draft RTS

1. Material Extensions and Changes (Requiring Approval)

• Extensions to the market risk model to new jurisdictions or time zones.
• Integration of product classes with VaR numbers exceeding 5% of the total portfolio VaR.
• Reversing internal models to the standardized method.

2. Extensions Requiring Ex-ante Notification

• Integration of product classes requiring different risk modeling techniques (e.g., path-dependent products, multi-underlying positions).

3. Changes Requiring Approval (Material)

• Changes between VaR methodologies (historical simulation, parametric, Monte Carlo).
• Changes in aggregation schemes.
• Modifications to statistical methods or assumptions about risk factor distributions.

4. Changes Requiring Ex-ante Notification

• Changes in the historical observation period or weighting schemes.
• Modifications to the methodology for identifying the stressed period.
• Changes in the definition of market risk factors (e.g., OIS discounting, zero rates, par rates, swap rates).
• Adjustments to how market risk factors are translated into portfolio value changes.
• Changes in proxy methodologies, rating source hierarchies, and LGD or liquidity horizon assumptions.

Implementation and Supervision

• Competent Authorities may take supervisory actions based on ongoing reviews of internal model permissions.
• The standards ensure that supervisory requirements are met without interfering with internal model review processes or administrative procedures.
• Ex-post notification is required for changes that do not meet the 1% threshold, unless they fall under specific categories in Annex III, which require ex-ante notification.

Conclusion

The EBA Final Draft RTS provide a structured and efficient framework for assessing the materiality of extensions and changes to internal models for market risk. They aim to balance regulatory oversight with the operational needs of financial institutions, reducing unnecessary burdens while maintaining prudential standards. The use of both qualitative and quantitative criteria, along with the introduction of a 1% exemption threshold and a 15-day assessment window, reflects a pragmatic and responsive approach to evolving market conditions.