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  • European Commission Consults on Alternative Standardized Approach for Market Risk

    10/22/2019
    The European Commission has invited responses to its consultation on proposed changes to the standardized approach for market risk. The changes follow the Basel Committee on Banking Supervision’s revisions to the Basel III market risk capital framework, which were published in January 2019. The European Union has committed to implement the new market risk framework in legislation. This has been done in part through amendments to the Capital Requirements Directive and Capital Requirements Regulation that were published in June 2019. However, technical changes to the standardized approach could not be incorporated into the CRR, and the Commission is therefore responsible for implementing delegated legislation on this subject. The Commission must also submit a proposal by June 2020 to introduce an own funds requirement for market risk into the CRR.

    The consultation paper sets out the proposed Commission Delegated Regulation amending the own funds requirements of the CRR. The Commission’s proposals include:
     
    • Amendments to the calculation of  “curvature risk”, one of the metrics used to calculate the sensitivities-based method which forms one element of the alternative standardized approach that contributes to the calculation of own funds requirements;
    • Allowing institutions to subject all instruments to the own funds requirements for curvature risk, including those without optionality; currently, instruments without optionality are only subject to the “delta risk” own funds requirements;
    • Incorporating two alternative approaches for institutions that are unable to use the “look through” approach when allocating equity investments in funds to the trading book; institutions could either establish a hypothetical portfolio to compute the own funds requirements of the position or could consider the fund as a single equity assigned to the equity bucket “other sectors”;
    • Allowing institutions to treat a position in a fund that tracks an index as a direct position in that index, provided that the annualized return difference between the fund and the index remains below 1% over 12 months; and
    • Allowing institutions to choose a currency other than their reporting currency to express the foreign exchange risk factors, subject to certain conditions related to the institution’s management of foreign exchange risk.

    Responses to the consultation paper are requested by November 11, 2019.

    View the European Commission's consultation paper.

    View the European Commission's draft Commission Delegated Regulation

    View details of the Basel Committee's revisions to the Basel III market risk capital framework.

    View details of the Capital Requirements Directive IV and Capital Requirements Regulation II.

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