The European Banking Authority published a Consultation Paper on draft Regulatory Technical Standards.
The Paper describes how Institutions should calculate Capital Requirements for Market Risks on the Non-Trading Book positions that are subject to Foreign Exchange Risk or Commodity Risk, under the Fundamental Review of the Trading Book.
According to the draft ‘RTS’, Institutions should use either the Last Available Accounting Value, or the Last Available Fair Value for positions that attract ‘FX Risk’. Firms are not required to perform a daily re-evaluation of Non-Trading Book positions attracting ‘FX Risk’. However, in line with International Standards, Firms are required to reflect on changes in the ‘FX’ Component, daily. For positions attracting Commodity Risk, a daily Fair Valuation should be performed.
The EBA expects that the Risk Management of the ‘FX’ Risk stemming from Banking Book Positions is performed consistently with the values that are chosen for computing Capital Requirements.
Items in a Foreign Currency that are held at Historical Cost, are subject to Foreign-Exchange Risks as those items may be impaired due sharp movements in the Exchange Rate.
In general, Non-Monetary items that are booked at Historical Cost, do not change their Balance Sheet Value with the movements in Exchange Rates. However, in case of an Impairment Indication (due to a sharp move of the FX rate and/or due to other circumstances), the Carrying Amount of an Asset, is the lower of its Carrying Amount before considering possible Impairment Losses (with the ‘FX Rate’ of the date of the transaction) and its Recoverable Amount (with the ‘FX Rate’ of the Reporting Date). Thus, in certain instances, a movement of the ‘FX Rate’, may also lead to ‘FX-Related’ Losses with respect to Non-Monetary Items that are booked at historical cost.
Consultation responses will be accepted until 10 April 2020. Firms are advised to review and assess the Paper with input from Finance, Risk/Compliance, Treasury Teams, coordinated by Change Management. Focus should also be given to changes in Policies, Processes and Procedures, ensuring that Senior Management / Executive Teams, Board Members, Risk/Compliance, Audit Committees are appraised and maintain oversight in accordance with Internal Governance Standards.
Senior Management and identify the likely impact on their Capital Requirement calculations and Business Models, while also keeping their Board and Audit Committee appraised.
Firms are advised to review the Paper and submit their comments by the deadline ensuring that Senior Management, Risk and Compliance teams are overseeing it with Board Members, Finance and Audit Committees appraised for governance purposes.
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Please Note: This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.
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