EBA欧洲银行-Public-hearingDraft-CP-RTS-Market-Risk-Assessment-Methodology25-January-2016_17页_1mb

Draft CP RTS – Market Risk Assessment Methodology and Significant Share Summary

Core Content

The document outlines the European Banking Authority's (EBA) draft regulatory technical standards (RTS) for market risk assessment, focusing on the methodology for evaluating the significance of positions covered by internal models and the conditions under which such models can be used. These standards are aligned with the Capital Requirements Regulation (CRR) and aim to ensure consistency, transparency, and sound governance in the application of internal models for market risk.

Main Requirements and Views

1. Significance Assessment of Positions

• The significance of positions covered by internal models is assessed per risk category and legal entity.
• Positions subject to general risk (equity and debt instruments, foreign exchange, commodities) are treated differently from those under specific risk (equity and debt instruments).
• Two calculation approaches are proposed:
  • High threshold (5–10% of positions, i.e., 90–95% of positions included) for positions intended to be included in the internal model.
  • Lower threshold (30–40% of positions, i.e., 60–70% of positions to be included) for positions excluded by competent authorities.
• The assessment is regular, at least annually, to ensure the significance requirement is continuously met.

2. Preparation Year for Model Approval

• A minimum one-year preparation period is required before model approval, during which the model must operate in a stable manner.
• 250 back-testing observations are necessary to determine VaR and SVaR multipliers.
• Institutions must calculate risk metrics for the latest EBA benchmarking portfolios and provide these results for review by competent authorities.

3. Model Application by Risk Category

• The RTS organizes model applications by risk category (general and specific risks of equity and debt instruments, foreign exchange, and commodities).
• For specific risk, a hierarchy is established, requiring general risk authorisation before specific risk can be modelled.

4. Governance and Independence

• The risk unit must be independent from the model development and implementation teams.
• A validation unit is proposed as the best option for full independence, though it is the most burdensome.
• The variable remuneration of risk control and internal audit staff must not be materially linked to trading performance.
• Outsourcing is restricted to areas permitted under the CRR, with sufficient in-house understanding and access to information.

5. Internal Validation and Limit Setting

• Initial validation covers all aspects of the internal model.
• Periodic validation is required at least annually, focusing on areas affected by changes in trading activities, methodologies, or instruments.
• A two-tier limit setting process is proposed:
  • Board-level limits for key VaR thresholds.
  • Internal committee-level limits for other VaR metrics.
• A formal limit breach approval process is required, with breaches resolved by the unit that established the limit.

6. Stress Testing and P&L Calculations

• The risk unit must establish and run stress testing scenarios annually, with monthly execution.
• Two types of P&L calculations are required for back-testing:
  • Hypothetical P&L: Based on model assumptions.
  • Actual P&L: Full P&L (excluding fees, commissions, and net interest income).
• The EBA is consulting on the scope of hypothetical P&L—whether to include only risk categories within the model or all risk categories.

7. Event Risk and Own Creditworthiness

• Event risk is captured in specific risk models for equity instruments, but not in VaR or SVaR for positions included in validated IRC models.
• The EBA is consulting on whether own creditworthiness should be included in internal models, considering the CRR’s silence on this issue and the potential operational challenges.

8. VaR and SVaR Multipliers and Reserves

• The VaR and SVaR multipliers must reflect model deficiencies or excessive exceptions.
• The SVaR multiplier cannot be lower than the VaR multiplier.
• The EBA is also considering the use of reserves to address model flaws.

9. IRC and Correlation Trading Models

• The IRC model is based on 2012 guidelines, with more prescriptive requirements on ratings, PDs, LGDs, transition matrices, and liquidity horizons.
• Correlation trading models require governance and segregation of instruments, with a building block approach allowed for complexity.

Key Information

• The EBA is consulting on the methodology for significance assessment and limit breach approval processes.
• The preparation year is essential for ensuring model stability and accuracy.
• The governance structure emphasizes independence, proportionality, and formal approval processes.
• Back-testing and stress testing are central to model validation and are subject to specific requirements.
• The treatment of event risk and own creditworthiness is a point of discussion, with the EBA seeking feedback on their inclusion in internal models.

Conclusion

The draft CP RTS provides a comprehensive framework for the assessment of market risk, emphasizing governance, validation, and model accuracy. It aims to align internal model usage with the CRR and international standards such as Basel 2.5, while also addressing operational and methodological challenges in the application of these models.