The Commission has launched a Consultation to seek the views of industry and other interested parties on the proposed future treatment of “trading activities related issues and the treatment of double default effects”.
To keep in pace with ongoing developments in the financial services sector the Commission decided to continue work on two main areas. These include finding a prudentially sound treatment for exposures to “double default”, and defining capital requirements for institutions’ exposures to certain trading-related activities. The Commission therefore published two consultation documents to improve the risk-sensitivity of the capital rules to the underlying economic risks associated with such exposures in a manner compatible with the Capital Requirements Directive.
The proposals cover the following five issues:
The treatment of counterparty credit risk for over-the-counter derivatives, repurchase
agreements and securities financing transactions (SFTs), and the treatment of crossproduct
netting arrangements;
The treatment of double-default effects for covered transactions, in relation to trading
book, but also banking book, exposures;
The short-term maturity adjustment in the Basel II internal ratings-based approach;
Improvements to the current trading book regime, in particular the treatment of specific
risk; and
The design of a specific capital treatment for unsettled and failed transactions.
It is intended to incorporate the proposed trading book review amendments into the Capital Requirements Directive ahead of its final adoption. It is planned to adopt the Capital Requirements Directive in the autumn of 2005.
Deadline for comments is 27 May 2005.
A similar consultation was launched by BIS/IOSCO on the Basel II framework.
Working document
Explanatory document
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