20 December 2013

EBA publishes final draft TS on definition of market and CVA risk

The EBA published its final draft RTS on the definition of market, and its final draft RTS on 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 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.

Press release

Final draft RTS on the definition of market

Final draft RTS on credit valuation adjustment

Final Opinion on credit valuation adjustment

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