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Draft Regulatory Technical Standards In Relation To Credit Valuation Adjustment Risk

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The European Banking Authority (EBA) launched today a public consultation on draft amending Regulatory Technical Standards (RTS) on credit valuation adjustment (CVA) proxy spread. These RTS propose limited amendments to Commission's Delegated Regulation (EU) No 526/2014 based on two policy recommendations contained in the EBA's CVA report published on 25 February 2015. Through the proposed amendments the EBA expects to ensure a more adequate calculation of own funds requirements for CVA risk. The consultation runs until 06 July 2016.

On 20 December 2013, the EBA published the RTS on CVA risk to determine a proxy spread and specify a limited number of smaller portfolios the Capital Requirements Regulation (CRR).

In the CVA report published on 25 February 2015, the EBA re-assessed the relevance of the RTS provisions, in particular based on a CVA data collection exercise involving 32 banks from 11 jurisdictions. The CVA report showed persistent difficulties in determining appropriate proxy spreads and LGD MKT for a large number of counterparties. Against this backdrop, policy recommendations 7 and 8 of the CVA report concluded that the RTS should be amended to address the difficulties associated with the determination of proxy spreads for large numbers of counterparties, for which spreads may never be observed on markets, as well as issues linked with LGDMKT.

Therefore, the present amending RTS propose limited amendments to Delegated Regulation (EU) No 526/2014 that aim at further specifying cases where alternative approaches can be used for the purposes of identifying an appropriate proxy spread and LGD MKT . The proposed amendments are expected to lead to a more adequate calculation of own funds requirements for CVA risk, including in some cases a reduction of own funds requirements for CVA risk, thus partially remedying the over-estimation of current own funds requirements for counterparties in the scope of the CVA risk charge in the EU.

Responses to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 06 July 2016.

A public hearing will take place at the EBA premises on 23 May 2016 from 16.00 to 18.00 UK time.

The draft amending RTS have been developed according to Article 383(7) of Regulation (EU) No 575/2013 which mandates the EBA to develop draft RTS to specify how a proxy spread is to be determined for the purposes of identifying si and LGD MKT .

Note: A Public Hearing is related to this consultation but is not visible to public users since the date is past

Note: A Public Hearing is related to this consultation but is not visible to public users since the date is past

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Adopted and published on the Official Journal
These Regulatory Technical Standards (RTS) specify certain elements of the calculation of own funds requirements for credit valuation adjustment (CVA) risk. CVA is the risk of loss caused by changes in the credit spread of a counterparty on derivatives transactions due to changes in its credit quality. The Capital Requirements Regulation (CRR) introduces two methods for calculating CVA risk, respectively a standardised and an advanced method, and mandates the EBA to specify how a proxy spread should be determined for the purposes of identifying the LGDMKT (Loss given default of the counterparty) and to provide details on what constitutes a limited number of smaller portfolios under the advanced method for calculating CVA risk.

The European Banking Authority (EBA) published today a list of Q&As on the Credit Valuation Adjustment (CVA) data collection exercise, which was launched on 30 April 2014 with the aim of advising the European Commission on appropriate amendments to the CVA framework at EU level and inform discussions on the CVA risk charge in Basel.

To address some of the issues raised by the industry as well as to ensure consistency in the conduct of the exercise, the EBA also published a second template, which participating banks are asked to fill in and to submit, together with the main template, to their respective National Supervisory Authorities (NSAs) by 31 July 2014.

The EBA will perform data quality checks during the first week of August. Where necessary, banks will be asked to complete and resubmit templates by 29 August 2014. The EBA will then finalise the data analysis during the first week of September.

The European Banking Authority (EBA), following the launch of the data collection exercise on Credit Valuation Adjustment (CVA) on 30 April 2014, released today an updated version of the template that participating banks will be requested to fill in as well as a set of

The European Banking Authority (EBA) launches today a data collection exercise to advise the European Commission on appropriate amendments to the European Credit Valuation Adjustment (CVA) framework and inform discussions on the CVA risk charge in Basel. Banks with substantial portfolios of OTC derivatives are encouraged to participate in this data collection exercise on a voluntary basis.

The EBA will use the data collection exercise in order to inform the recommendations made in its report to the European Commission (EC) on CVA risk in accordance with CRR Article 456(2); the exercise will also be used to support the EBA review on the application of CVA charges to non-financial counterparties established in a third country in accordance with CRR Article 382(5). Where appropriate, the EBA will use the conclusions of its CVA report to inform international discussions on CVA risk.

This data collection exercise will be carried out on a voluntary basis. However, the EBA expects banks with relatively substantial portfolios of OTC derivatives to participate in the exercise, regardless of whether they use the advanced or the standardised method for CVA risk. In this respect, the EBA has prepared a standardised template that participating banks will be requested to fill in. In order to help banks fill in the template, instructions are also available on the website.

Participating banks are expected to submit the template of the data collection exercise to their respective National Supervisory Authority by 31 July 2014.

Throughout the exercise, participating banks can submit questions on the template or instructions, together with a suggested answer, by e-mail to CVA-report@eba.europa.eu .

Participating banks will be invited to a presentation of the main outcome of the data collection exercise in the EBA premises in September 2014.

The EBA intends to publish its CVA report in December 2014.

The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) on the definition of market and its final draft RTS on Credit Valuation Adjustment risk (CVA risk). The latter is supplemented by an Opinion on CVA risk which further elaborates on the approach taken by the EBA in determining a proxy spread. The standards will be part of the Single Rulebook aimed at enhancing regulatory harmonisation in the banking sector in the European Union (EU).

The final draft RTS on the definition of market relate to the definition of the term ‘market' to be applied for the calculation of the overall net position in equity instruments under the market risk standardised rules. The overall net position in equity instruments is used to calculate own funds requirements for equity general market risk according to Article 343 of the Regulation. The definition of market is based on a currency criterion, but solely for jurisdictions included in the Euro-zone. For the other jurisdictions, ‘market' is defined using a nationality criterion. The currency criterion applied for the Euro-zone recognises that the introduction of a single currency has addressed some important elements of segmentation among equity markets, such as the elimination of foreign exchange currency risk, the presence of a common currency in which company results are reported or the existence of an integrated market with common rules.

The final draft RTS on CVA risk for the determination of a proxy spread and the specification of a limited number of smaller portfolios specify the data quality requirements and the minimum granularity of the attributes of rating, industry and region that institutions should consider when estimating an appropriate proxy spread for the determination of the own funds requirements for CVA. The standards provides the necessary flexibility in the determination of a proxy spread, so as to ensure an operational framework that uses the approved internal model for the specific risk of debt instruments for market risk. The RTS also specify the number and size of portfolios that fulfil the criterion of a limited number of smaller portfolios and, therefore, are allowed into the CVA Advanced approach despite not forming part of the scope of the Internal Model Method (IMM) for counterparty credit risk. Thresholds are defined in terms of number and size, below which non-IMM netting sets are deemed to fulfil the criterion of a limited number of smaller portfolios and, subject to permission from competent authorities, are allowed into the advanced method for the calculation of their own funds requirements for CVA risk.

The EBA opinion on CVA risk for the determination of a proxy spread states the main reasons why the EBA adopted a flexible approach in the final draft RTS on the determination of a proxy spread. In particular, the EBA questions the appropriateness of a unified proxy methodology for both market and CVA risks against an alternative approach that would require a proxy methodology to be used for CVA purposes only. However, the EBA recognises that this issue is part of a broader issue related to the entire CVA framework and that any possible solution should be further evaluated in light of its consistency with the Basel framework. In accordance with Article 456(2), the EBA is mandated to produce a report, whereby, in light of the issues raised by the implementation of the CVA risk charge, the relevance of some of the features of the CVA framework, together with the relevance of the provisions of these RTS, may be reconsidered.

The EBA has developed these final draft RTS in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (colloquially known as Capital Requirements Regulation or CRR).

The final draft standards have been sent today to the European Commission for their adoption as EU Regulations that will be directly applicable throughout the EU.

The European Banking Authority (EBA) launches today a second consultation on Draft Regulatory Technical Standards (RTS) for credit valuation adjustment risk (CVA) to further specify how a proxy spread should be determined for the calculation of own funds requirements and to provide additional details on a limited number of smaller portfolios. These RTS will be part of the Single rulebook aimed at enhancing regulatory harmonisation in Europe. The consultation runs until 25 September 2013.

The proposed draft RTS do not deal directly with the Value at Risk (VaR) spread methodology but specify the criteria this methodology has to satisfy to allow for a proxy spread to be used in the calculation of the advanced CVA adjustment. In particular, they specify how the rating, industry and region criteria should be incorporated in a proxy spread.

The requirements contained in these draft RTS are mainly addressed directly to institutions and only in some cases to competent authorities.

Comments can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 25 September 2013

All contributions received will be published following the close of the consultation, unless requested otherwise.

A public hearing will take place at the EBA premises on 17 July 2013 from 14:00 to 16:00 hours UK time.

The proposed draft RTS have been developed on the basis of Regulation 575/2013 published in the Official Journal of the European Union on 28 June 2013. The EBA is expected to submit these draft RTS to the European Commission for endorsement by 1 January 2014. Before submission to the Commission, the EBA will review the draft RTS to include the feedback arising from the consultation process.

The European Banking Authority (EBA) launches today a consultation on Draft Regulatory Technical Standards (RTS) for credit valuation adjustment risk on the determination of a proxy spread and the specification of a limited number of smaller portfolios. These RTS will be part of the Single rulebook aimed at enhancing regulatory harmonisation in Europe. The consultation runs until 15 September.

Main features of the RTS

The proposed draft RTS elaborate on specific elements of the calculation of own funds requirements for credit valuation adjustment (‘CVA’) risk. In particular they specify:

The proposed consultation paper is based on the draft Capital Requirements Regulation (CRR) as proposed by the European Commission on 20th July 2011. As the text is still being discussed by the EU legislator (European Parliament and Council), some of the mandates for the EBA to develop Binding Technical Standards (BTS) may be modified, added or deleted in the adopted Regulation. Therefore, the proposed RTS may be amended after the consultation to take into account the final CRR text.

These RTS have to be submitted to the EU Commission by 1 January 2013.

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