Focuses on own funds calculation requirements for market risk on non-trading book positions.
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BRUSSELS, 18 June 2020 – ESBG replied last week to the EBA consultation on its draft Regulatory Technical Standards (RTS) on how institutions should calculate the own funds requirements for market risk for their non-trading book positions subject to foreign-exchange risk or commodity risk under the Fundamental Review of the Trading Book (FRTB) standardised and internal model approaches.
First, ESBG agrees with the approach in relation to the use of the accounting value and alternatively the fair value as a basis for computing the own funds requirements for foreign exchange risk. Even If some of our members prefer using the accounting value. We are also fine with institutions being requested to update on a daily basis only the foreign-exchange risk component of banking book instruments.
Regarding the proposed methodology for capturing the foreign-exchange risk stemming from non-monetary items at historical cost under the standardised approach, the association thinks that the inclusion of items at historic costs as a Delta 1 positions is, in general, overly conservative. As these positions do not revalue with foreign exchange(FX)-movements, an efficient hedge for risk weighted assets (RWAs) generated from historic costs item is impossible. We would therefore recommend allowing the full exclusion of items at historic costs or to establish criteria for reduced risk weights depending on probability for FX induced impairment.
With respect to the valuation of foreign-exchange and commodity positions held in the banking book, it is fine if the provisions applicable in the context of the alternative standardised approach also apply in the context of the alternative internal model approach.
A risk adjusted treatment for historic cost items in the internal model approach is a suitable framework for fostering management of the risk that non-monetary items at historical cost are impaired due to changes in the relevant exchange rate.
Finally, ESBG agrees with the definitions of hypothetical and actual changes in the portfolio's value deriving from non-trading book positions that have been included in the proposed draft RTS.
About the consultation
The draft standards specify the value of non-trading book positions that institutions should use when computing the own funds requirements for market risk for those positions. In this respect, the standards require that institutions should use either the last available accounting value or the last available fair value for positions attracting foreign-exchange risk. In addition, institutions are not requested to perform a daily re-valuation of non-trading book positions attracting foreign-exchange risk. However, they are required to reflect on a daily basis the changes in the foreign-exchange component. For positions attracting commodity risk, a daily fair-valuation should be performed.
In addition, the draft standards lay down a prudential treatment for the calculation of the own funds requirements for market risk of non-monetary items held at historical cost that may be impaired due to changes in the foreign-exchange rate. In this respect, the standards identify a specific methodology that institutions should use when capitalising the foreign-exchange risk stemming from those items under the standardised approach. Furthermore, it requires institutions to model directly the risk of impairment due to changes in the relevant exchange rate in the case of an internal model approach being used.
Finally, the standards specify an ad-hoc treatment with respect to the calculation of the actual and hypothetical changes associated to non-trading book positions for the purpose of the backtesting and the profit and loss attribution requirements. This is to address the issue of jumps in the value of the portfolio that may lead to over-shootings in the backtesting that are not due to changes in the foreign-exchange risk component of the price.