The EBA Publishes Final Draft Technical Standards On Market Risk As Part Of Its Roadmap For The Implementation Of The Banking Package In The EU

The European Banking Authority (EBA) today published final amendments to its Regulatory Technical Standards (RTS) on the fundamental review of the trading book (FRTB). The revisions mostly aim to align these RTS with the Capital Requirements Regulation (CRR3) and ensure stability in the applicable regulatory framework. The RTS are part of the roadmap on the Banking Package.

The CRR3 introduced a number of changes to the FRTB and included mandates for the EBA to amend existing RTS for them to fit with the new Level 1 text. In particular, the EBA has been mandated to review the RTS on the treatment of foreign-exchange and commodity risk in the banking book, the RTS on profit and loss attribution test and the RTS on risk factor modellability assessment

As regards the details on the profit and loss attribution test, the RTS remove the aggregation formula for computing the total own funds requirements for market risk for an institution using the alternative internal model approach as this formula has been now introduced in the CRR3.

As regards the risk factors’ modellability assessment, the RTS ensure that institutions are able to identify how far they rely on a third-party vendor for the purpose of assessing the modellability of a risk factor.

Finally, as regards the treatment of foreign exchange and commodity risk in the non-trading book, the RTS ensure that translation risk is duly captured by institutions.

Legal basis and background

The draft RTS have been developed according to Article 325(9), 325be(3) and 325bg(4) of Regulation (EU) No 575/2013 (CRR), as amended by the CRR3, which mandates the EBA to specify:

• how institutions are to calculate the own funds requirements for market risk for non-trading book positions that are subject to foreign-exchange risk or commodity risk;
• how institutions are to assess the risk factors’ modellability;
• technical details relating to the profit and loss attribution tests.

The EBA roadmap also outlines the EBA’s intentions and plan of action to ensure a smooth implementation of the new approaches across the EU. In particular, it reflects the prioritisation of the EBA’s work in four phases, which is broadly in line with the deadlines included in the CRR3, starting with the implementation of the essential parts of the framework.

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