EBA refining RTS on trading book and counterparty credit risk amid EU’s Banking Package

Rick Steves

The changes pertain primarily to the handling of foreign-exchange and commodity risk in the banking book, alongside the profit and loss attribution test and the risk factor modellability assessment.

The European Banking Authority (EBA) has recently embarked on an important consultation process, focusing on refining the Regulatory Technical Standards (RTS) associated with the fundamental review of the trading book (FRTB), and the standardised approach for counterparty credit risk (SA-CCR).

This step is a critical component of the broader roadmap charting the course for the Banking Package, aimed at harmonizing these RTS with the updates introduced by the Capital Requirements Regulation (CRR3). Stakeholders are invited to contribute their insights and comments until the 14th of March, 2024.

Handling FX and commodity risk in the banking book

In the context of the CRR3, significant modifications have been made to the FRTB. These include mandates directing the EBA to revise the existing RTS to ensure compatibility with the new Level 1 text. The changes pertain primarily to the handling of foreign-exchange and commodity risk in the banking book, alongside the profit and loss attribution test and the risk factor modellability assessment. The primary goal of these revisions is to synchronize these standards with the CRR3, thereby fostering a stable regulatory environment.

A notable amendment under the CRR3 is the expansion of the EBA’s mandate. This involves specifying formulas for calculating the supervisory delta of interest rate options, now incorporating scenarios with negative interest rates, and extending this approach to cover commodity options in the context of negative commodity prices, a scenario witnessed during the COVID-19 period.

The consultation process is open and accessible. Interested parties can submit their comments directly through the EBA’s website, with separate submissions required for the RTS on FRTB and the amending RTS on SA-CCR. The EBA has also scheduled a public hearing via an online meeting on February 21, 2024, to further engage with stakeholders.

The legal basis for these draft RTS lies in specific articles of Regulation (EU) No 575/2013 (CRR), as amended by the CRR3. These mandates cover a range of technical details, from calculating own funds requirements for market risk in non-trading book positions to the technicalities involved in profit and loss attribution tests and the assessment of risk factors’ modellability.

The EBA’s roadmap not only provides a structured plan for implementing these new approaches across the EU but also mirrors the phasing outlined in the CRR3. This strategic approach ensures a seamless transition and implementation of these critical regulatory frameworks.

The upcoming rules, part of the Banking Package, introduces significant challenges for both buy-side and sell-side entities. For the buy-side, the primary challenge lies in adapting investment strategies and risk management processes to comply with the new regulatory requirements, particularly those related to market and counterparty credit risk. This adaptation requires substantial updates to internal models and systems, alongside a potential increase in capital requirements.

For the sell-side, the challenges are equally daunting. These institutions must navigate the complexities of the new regulatory landscape, which demands more rigorous risk assessment methodologies and enhanced reporting mechanisms. The sell-side must also grapple with the potential impact on trading strategies and the profitability of certain lines of business, as the new regulations could lead to higher operational costs and a reevaluation of risk-return profiles.

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