19.02.2020

European Commission adopts Delegated Regulation on Alternative Standardised Approach for Market Risk Under Capital Requirements Regulation

Following a review of the Trading Book by the Basel Committee on Banking Supervision which significantly changed the approaches to be used by Banks for the calculation of Capital Requirements for Market Risk, a new Framework for Market Risk was published in January 2016.

To adjust the calibrations of these approaches, the ‘BCBS’ undertook a Second Review,which was finalised in January 2019. These Revised Standards were produced too late to be reflected in the Final Text of the CRR II Regulation. However, the Commission was mandated to adopt a Delegated Regulation by 31 December 2019, on Market Risk Requirements, relating to the ‘ASA’, to ensure that they are in alignment with the BCBS’ Final Standards.

The adoption of this Delegated Act, which contains the elements necessary to make the Reporting Requirement operational, represents the second step in the Implementation Process and covers the Sensitivities-Based Method of the Alternative Standardised Approach; the Default Risk Charge and the Residual Risk ‘Add-on’ are outside of scope. The Commission states that these amendments ensure that the ‘ASA’ Reporting Requirements, which apply to all Institutions with Large and Medium-Sized Trading Activities, will be fully operational. These new requirements will follow the Fundamental Review of the Trading Book for Market Risk-Related Capital Requirements.

‘FRTB’ Reporting will become effective once the revised elements of the Final Framework of the ‘FRTB’ are incorporated in Union Law, via a Delegated Act for the elements related to the Standardised Approach; and via Regulatory Technical Standards developed by the European Banking Authority for the elements related to the Internal Model Approach.

The Alternative Standardised Approach comprises:

The Sensitivities-Based Method
The Default Risk Charge
The Residual Risk ‘Add-On’

Within the 2019 Revision, the ‘SBM’ was changed and therefore was the only element to require alignment with the changes already made. These Risk Charges are split into ‘Delta’, ‘Vega’ and ‘Curvature’. ‘Delta’ Risk Measures the change in price resulting from a Small Price, or ‘Rate Shock’, to the value of each Relevant Risk Factor. ‘Vega’ Risk is the risk due to Variations in the Volatility for Options – Computed as the Product of the ‘Vega’ of a given option and its Implied Volatility; and ‘Curvature’ Risk captures the additional risk due to movement in the ‘Delta’ when the price changes.

The next step will be for the Council of the ‘EU’ and the European Parliament to consider the Delegated Regulation. If neither the Council, nor the Parliament objects to the Delegated Regulation, it will be published in the Official Journal of the EU (‘OJ’). Firms should monitor further updates and developments in this area.

All Institutions with Large and Medium-Sized Trading Activities will have to report the results of the calculations made using the Standardised Approach for Market Risk. However, Firms permitted by their Competent Authorities to use the Internal Models Approach will be forced to report the calculations made using those Approaches.

The Delegated Regulation will enter into force 20 days after publication in the ‘OJ; and will apply six months after that date.

Firms are advised to review the Regulation within the Risk and Compliance, Operations, Finance and Change Management Functions, identifying the impact on their Financial Models, Risk Frameworks and the Calculation of the Capital Requirements, ensuring that Executive / Senior Management Teams, Board Members, Risk and Compliance and Audit Committees are appraised and maintain oversight, as part of Internal Governance Arrangements.

The next step will be for the Council of the EU and the European Parliament to consider the Delegated Regulation. If neither the Council nor the Parliament object to the Delegated Regulation, it will be published in the Official Journal of the EU (‘OJ’). All institutions with large and medium-sized trading activities will have to report the results of the calculations made using the standardised approach for market risk. However, firms that have been permitted by their competent authorities to use the internal models approach are forced to report the calculations made using those approaches.

The Delegated Regulation will enter into force 20 days after publication in the OJ and will apply six months after that date.

Firms are advised to review the regulation within the Risk Management and Finance Functions, ensuring that Executive/Senior Management Teams and Board Members are appraised, identifying the impact of this regulation on their Financial Models Risk Frameworks.

Further information:
To read more, please follow this link:
https://ec.europa.eu/transparency/regdoc/rep/3/2019/EN/C-2019-9068-F1-EN-MAIN-PART-1.PDF