The draft technical standards build on the proposals included in the Discussion Paper published on 18 December 2017 and industry feedback received as a result of the subsequent consultation. They specify methods for the mapping of derivative transactions to risk categories, a formula for the calculation of the supervisory delta of options mapped to the interest rate risk category and a method for determining whether derivative transactions are long or short in their risk drivers.
In particular, the EBA proposes a three-pronged methodology for the mapping of derivative transactions to risk categories. The first approach, purely qualitative and suitable for simple and standard derivative transactions, refers to certain criteria, which have to be satisfied. The second more detailed approach, hinges on a quantitative assessment of the sensitivities with respect to each possible risk driver, in order to identify the material ones. The third approach, intentionally simple and conservative, identifies all possible risk drivers of a transaction as material and allocates the transaction to all relevant risk-categories. This last approach is always available as a fallback to the second approach.
In addition, the EBA proposes to use, in line with Basel standards, a supervisory delta formula based on a shifted Black-Scholes model that allows dealing with situations of negative interest rates. The shift is intended to move interest rates back into positive territory in order to make the application of the Black-Scholes model feasible. The EBA proposes a methodology for determining the shift to be included in the formula and requests feedback with respect to the different options proposed, including on the possible level of application.
Finally, the EBA tried to reduce the burden for institutions in the determination of the direction of the position in that particular risk driver (long or short) by leveraging on the same elements (i.e. cash flows and sensitivities) that institutions use for the mapping of derivatives to risk categories.
Comments to this consultation can be sent to the EBA by 2 August 2019. A public hearing will then take place at the EBA premises in Paris on 17 June 2019 from 15:00 to 17:00 CET time.
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