Changes from plenary report to adopted text

Removed(i) the institution shall split the netting set into two hypothetical netting sets, and allocate all the transactions subject to the approach referred to in paragraph 1, point (a), to the same hypothetical netting set and all the transactions subject to the approach referred to in paragraph 1, point (b) to the other hypothetical netting set to calculate to the own funds requirements for CVA risk;

Removed(ii) the split referred to in point (a) shall be consistent with the manner in which the institution determines the legal netting of the CVA calculated for accounting purposes;

Removed(iii) the permission granted by competent authorities to use the approach referred to in paragraph 1, point (a), shall be limited to the hypothetical netting set for which the institution uses the approach referred to in paragraph 1, point (a), to calculate to the own funds requirements for CVA risk.

RemovedInstitutions shall establish policies to explain how they use a combination of the approaches referred to in paragraph 1, points (a) and (b), and as set out in this paragraph, to calculate the own funds requirements for CVA risk on a permanent basis.’;

Removed(168) Article 383 is replaced by the following:

Removed‘Article 383 Standardised approach

Removed1. Competent authorities shall grant an institution permission to calculate its own funds requirements for CVA risk for a portfolio of transactions with one or more counterparties by using the standardised approach in accordance with paragraph 3, after having assessed whether the institution complies with the following requirements:

Removed(a) the institution has established a distinct unit which is responsible for the institution’s overall risk management and hedging of CVA risk;

Removed(b) for each counterparty concerned, the institution has developed a regulatory CVA model to calculate the CVA of that counterparty in accordance with Article 383a;

Removed(c) for each counterparty concerned, the institution is able to calculate, at least on a monthly basis, the sensitivities of its CVA to the risk factors concerned as determined in accordance with Article 383b;

Removed(d) for all positions in eligible hedges recognised in accordance with Article 386 for the purposes of calculating the institution’s own funds requirements for CVA risk using the standardised approach, the institution is able to calculate, and at least on a monthly basis, thee sensitivities of those positions to the relevant risk factors determined in accordance with Article 383b.

RemovedFor the purposes of point (c), the sensitivity of a counterparty’s CVA to a risk factor means the relative change in the value of that CVA, as a result of a change in the value of one of the relevant risk factors of that CVA, calculated using the institution's regulatory CVA model in accordance with Articles 383i to 383j.

RemovedFor the purposes of point (d), the sensitivity of a positions in an eligible hedge to a risk factor means the relative change in the value of that position, as a result of a change in the value of one of the relevant risk factors of that position, calculated using the institution's pricing model in accordance with Articles 383i to 383j.

Removed2. For the purposes of calculating the own funds requirements for CVA risk, the following definitions shall apply:

Removed(a) ‘risk class’ means any of the following categories:

Removed(i) interest rate risk;

Removed(ii) counterparty credit spread risk;

Removed(iii) reference credit spread risk;

Removed(iv) equity risk;

Removed(v) commodity risk;

Removed(vi) foreign exchange risk;

Removed(b) ‘CVA portfolio’ means the portfolio composed of the aggregate CVA and all the eligible hedges referred to in paragraph 1, point (d);

Removed(c) ‘aggregate CVA’ means the sum of the CVAs calculated using the regulatory CVA model for all counterparties referred to in paragraph 1, first subparagraph.

Removed3. Institutions shall determine the own funds requirements for CVA risk using the standardised approach as the sum of the following two own funds requirements calculated in accordance with Article 383b:

Removed(a) the own funds requirements for delta risk which capture the risk of changes in the institution’s CVA portfolio due to movements in the relevant non-volatility related risk factors;

Removed(b) the own funds requirements for vega risk which capture the risk of changes in the institution’s CVA portfolio due to movements in the relevant volatility related risk factors.’;

Removed(169) the following Articles 383a to 383w are inserted:

Removed‘Article 383a Regulatory CVA model

Removed1. A regulatory CVA model used for the calculation of the own funds requirements for CVA risk in accordance with Article 383 shall be conceptually sound, shall be implemented with integrity, and shall comply with all of the following requirements:

Removed(a) the regulatory CVA model shall be capable of modelling the CVA of a given counterparty, recognising netting and margin agreement at netting set level, where relevant, in accordance with this Article;

Removed(b) the institution estimates the counterparty’s probabilities of default referred to in point (a) from the counterparty’s credit spreads and market-consensus expected loss-given-default for that counterparty.

Removed(c) the expected loss-given-default referred to in point (a) shall be the same as the market-consensus expected loss-given-default referred to in point (b), unless the institution can justify that the seniority of the portfolio of transactions with that counterparty differs from the seniority of senior unsecured bonds issued by that counterparty;

Removed(d) at each future time point, the simulated discounted future exposure of the portfolio of transactions with a counterparty is calculated with an exposure model by repricing all the transactions in that portfolio, based on the simulated joint changes of the market risk factors that are material to those transactions using an appropriate number of scenarios, and discounting the prices to the date of calculation using risk-free interest rates;

Removed(e) the regulatory CVA model is capable of modelling significant dependency between the simulated discounted future exposure of the portfolio of transactions with the counterparty's credit spreads;

Removed(f) where the transactions of the portfolio are included in a netting set subject to a margin agreement and daily mark-to-market valuation, the collateral posted and received as part of that agreement is recognised as a risk mitigant in the simulated discounted future exposure, where all of the following conditions are met:

Removed(i) the institution determines the ▌margin period of risk relevant for that netting set in accordance with the requirements set out in Article 285, paragraphs 2 and 5, and reflects that margin period in the calculation of the simulated discounted future exposure;

Removed(ii) all the applicable features of the margin agreement, including the frequency of margin calls, the type of contractually eligible collateral, the threshold amounts, the minimum transfer amounts, the independent amounts and the initial margins for both the institution and the counterparty are appropriately reflected in the calculation of the simulated discounted future exposure;

Removed(iii) the institution has established a collateral management unit that complies with the Article 287 for all the collateral recognised for the calculation of the own funds requirements for CVA risk using the standardised approach.

RemovedFor the purposes of point (a), CVA shall have a positive sign and shall be calculated as a function of the counterparty’s expected loss-given-default, an appropriate set of the counterparty’s probabilities of default at future time points and an appropriate set of simulated discounted future exposures of the portfolio of transactions with that counterparty at future time points until the maturity of the longest transaction in that portfolio.

RemovedFor the purposes of point (b), where the credit default swap spreads of the counterparty are observable in the market, an institution shall use those spreads. Where such credit default swap spreads are not available, an institution shall use one of the following approaches:

Removed(i) credit spreads from other instruments issued by the counterparty reflecting current market conditions;

Removed(ii) proxy spreads that are appropriate considering to the rating, industry and region of the counterparty.

RemovedFor the purposes of the justification referred to point (d), collateral received from the counterparty shall not change the seniority of the exposure.

RemovedFor the purposes of point (f)(iii), where the institution has already established such unit for using the internal model method referred to in Article 283, the institution shall not be required to establish an additional collateral management unit where that institution demonstrates to its competent authorities that such unit complies with the requirements set out in Article 287 for all the collateral recognised for calculating the own funds requirements for CVA risks using the standardised approach.

Removed2. An institution using a regulatory CVA model shall comply with all the following qualitative requirements:

Removed(a) the exposure model referred to in paragraph 1, point (d), is part of the institution’s internal CVA risk management system that includes the identification, measurement, management, approval and internal reporting of CVA and CVA risk for accounting purposes;

Removed(b) the institution shall have a process in place for ensuring compliance with a documented set of internal policies, controls, assessment of model performance and procedures concerning the exposure model referred to in paragraph 1, point (d);

Removed(c) the institution shall have an independent control unit that is responsible for the effective initial and ongoing validation of the exposure model referred to in paragraph 1, point (d). This unit shall be independent from business credit and from trading units, including the unit referred to in Article 383(1), point (a), and shall report directly to senior management; it shall have a sufficient number of staff with a level of skills that is appropriate to fulfil this purpose;

Removed(d) the institution’s senior management shall be actively involved in the risk control process and shall regard CVA risk control as an essential aspect of the business, to which appropriate resources need to be devoted;

Removed(e) the institution shall document the process for initial and ongoing validation of its exposure model referred to in paragraph 1, point (d), to a level of detail that would enable a third party to understand how the models operate, their limitations, and their key assumptions, and recreate the analysis. This documentation shall set out the minimum frequency with which ongoing validation will be conducted, as well as other circumstances (such as a sudden change in market behaviour) under which additional validation shall be conducted; it shall describe how the validation is conducted with respect to data flows and portfolios, what analyses are used and how representative counterparty portfolios are constructed;

Removed(f) the pricing models used in the exposure model referred to in paragraph 1, point (a), for a given scenario of simulated market risk factors shall be tested against appropriate independent benchmarks for a wide range of market states as part of the initial and ongoing model validation process. Pricing models for options shall account for the non-linearity of option value with respect to market risk factors;

Removed(g) an independent review of the institution’s internal CVA risk management system referred to in point (a) of this paragraph shall be carried out by the institution’s internal auditing process on a regular basis. This review should include both the activities of the unit referred to in Article 383(1), point (a), and of the independent risk control unit referred to in point (c) of this paragraph;

Removed(h) the model used by the institution for calculating the simulated discounted future exposure referred to in paragraph 1, point (a), shall reflect transaction terms and specifications and margin arrangements in a timely, complete, and conservative fashion. The terms and specifications shall reside in a secure database subject to formal and periodic audit. The transmission of transaction terms and specifications data and margin arrangements to the exposure model shall also be subject to internal audit, and formal reconciliation processes shall be in place between the internal model and source data systems to verify on an ongoing basis that transaction terms, specifications and margin arrangements are being reflected in the exposure system correctly or, at least, conservatively;

Removed(i) the current and historical market data inputs used in the model used by the institution for calculating the simulated discounted future exposure referred to in paragraph 1, point (a), shall be acquired independently of the ▌business lines. They shall be fed into the model used by the institution for calculating the simulated discounted future exposure referred to in paragraph 1, point (a), in a timely and complete fashion, and maintained in a secure database subject to formal and periodic audit. An institution shall have a well-developed data integrity process to handle inappropriate data observations. In the case where the model relies on proxy market data, an institution shall design internal policies to identify suitable proxies and shall demonstrate empirically on an ongoing basis that the proxies provide a conservative representation of the underlying risk;

Removed(j) the exposure model shall capture the transaction specific and contractual information necessary to be able to aggregate exposures at the level of the netting set. An institution shall verify that transactions are assigned to the appropriate netting set within the model.

RemovedFor the purposes of the calculation of the own funds requirement for CVA risks referred to in point (a), the exposure model may have different specifications and assumptions in order to meet all the requirements set out in Article 383a, except that its market input data and netting recognition shall remain the same as the ones used for accounting purposes.

Removed3. EBA shall develop draft regulatory technical standards to specify how proxy spreads referred to in paragraph 1, point (b)(ii), are to be determined by the institution for the purposes of calculating default probabilities.

Removed4. EBA shall develop draft regulatory technical standards to specify:

Removed(a) further technical elements that institution shall take into account when calculating the counterparty’s expected loss-given-default, the counterparty’s probabilities of default and the simulated discounted future exposure of the portfolio of transactions with that counterparty and CVA, as referred to in paragraph 1, point (a);

Removed(b) which other instruments referred to in paragraph 1, point (b)(i), are appropriate to estimate the counterparty’s probabilities of default and how institutions shall perform this estimation.