EBA欧洲银行-EBA-RTS-2013-17-28Final-draft-RTS-on-CVA29_34页_739kb

EBA FINAL Draft Regulatory Technical Standards on CVA Risk

Core Content

These EBA Regulatory Technical Standards (RTS) are developed to support the implementation of Article 383(7) of Regulation (EU) No 575/2013 (CRR), which mandates the EBA to specify conditions for determining a proxy spread and the criteria for a limited number of smaller portfolios in the context of credit valuation adjustment (CVA) risk.

The RTS aim to ensure consistency and harmonisation across the EU in the calculation of CVA risk capital charges. They provide guidance on how institutions should determine proxy spreads for counterparties where direct CDS data is not available, and they define quantitative limits for the inclusion of non-IMM (Internal Model Method) netting sets in the advanced CVA calculation.

Main Points

1. Proxy Spread Determination

• Appropriateness Criteria: A proxy spread is considered appropriate if it reflects the credit quality of the counterparty in terms of rating, industry, and region.
• Rating Mapping: Ratings must be mapped to credit quality steps as defined in Article 384(2) of the CRR. In cases of multiple external ratings, a predetermined hierarchy is used.
• Industry Categories: At least three categories are defined: public sector, financials, and others.
• Region Categories: At least four categories are defined: Europe, North America, Asia, and Rest of World.
• Data Quality: Proxy spreads must be based on reliable data from a liquid two-way market and reflect market spreads and other liquid traded instruments.
• Flexibility: Institutions may consider additional attributes (e.g., currency, seniority) when determining proxy spreads, provided they meet data quality and relevance criteria.
• Special Cases: For counterparties with a close link to a sovereign (e.g., regional governments or local authorities), proxy spreads may be based on the sovereign’s credit spread if ratings are the same or not available for the subsovereign.

2. Market Implied Loss Given Default (LGDₘKT)

• Consistency with Market Practice: LGDₘKT should be consistent with fixed LGD values commonly used by market participants to derive implied probabilities of default (PDs) from CDS spreads.
• Application: Institutions must use this value when calculating the CVA capital charge for counterparties that require a proxy spread.

3. Quantitative Limits for Smaller Portfolios

• Thresholds: Institutions must ensure that:
  • No more than 15% of non-IMM transactions are included in the CVA calculation.
  • Each non-IMM netting set does not exceed 1% of the total netting set size.
  • The total size of non-IMM netting sets does not exceed 10% of the total netting set size.
• Calculation Basis: These limits are calculated quarterly using the arithmetic average of monthly observations.
• Compliance: If the thresholds are not met for two consecutive quarters, institutions must revert to the standardised method and notify competent authorities.
• Scope: The conditions may apply on an individual, sub-consolidated, or consolidated basis, depending on the institution’s permission under Article 283 of the CRR.

Key Information

• Purpose: The RTS support the implementation of the advanced CVA method by defining proxy spread criteria and setting limits on the use of smaller portfolios.
• Flexibility: The EBA introduced reduced granularity for industry (to three categories) to accommodate data availability issues.
• Data Requirements: Proxy spreads must be based on reliable, observable data from liquid markets, and assumptions (like interpolation and extrapolation) must be conceptually sound.
• Cliff Effects Mitigation: The use of the advanced CVA method for non-IMM portfolios should only stop when thresholds are breached for two consecutive quarters, to avoid abrupt changes in capital requirements.
• Supervisory Reporting: Institutions must notify competent authorities when thresholds are not met, to enable effective supervision.

Main Views and Considerations

• Feedback from Consultation: The EBA received feedback indicating that reliable CDS data is not always available, especially for certain rating, industry, and region combinations.
• Harmonisation: The EBA aims to ensure that the application of the CVA framework is harmonised across the EU.
• Cost-Benefit: The RTS are designed to reduce implementation burdens while maintaining the quality of the market risk VaR and ensuring a level playing field.
• Implementation: The RTS are based on the EBA’s draft standards and are intended to be adopted as a Commission Delegated Regulation.

Conclusion

The EBA draft RTS provide a structured and flexible approach for institutions to determine proxy spreads and manage the inclusion of smaller portfolios in the advanced CVA calculation. These standards aim to enhance risk management practices, ensure regulatory consistency, and maintain the integrity of market risk models while addressing practical challenges in data availability.