Changes from report parliamentary committee draft to plenary report

Added(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;

Added(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.

AddedFor 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.

AddedFor 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:

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

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

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

AddedFor 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.

Added2. An institution using a regulatory CVA model shall comply with all the following qualitative requirements:

Added(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;

Added(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);

Added(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;

Added(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;

Added(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;

Added(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;

Added(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;

Added(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;

Added(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;

Added(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.

AddedFor 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.

Added3. 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.

Added4. EBA shall develop draft regulatory technical standards to specify:

Added(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);

Added(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.

AddedEBA shall submit those draft regulatory technical standards referred to in paragraphs 3 and 4 to the Commission by [OP please insert date = 24 months after the date of entry into force of that Regulation].

AddedPower is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

Added4. EBA shall develop draft regulatory technical standards to specify:

Added(a) the conditions for assessing the materiality of extensions and changes to the use of the standardised approach as referred to in Article 383(3);

Added(b) the assessment methodology under which competent authorities shall verify an institution's compliance with the requirements set out in Articles 383 and 383a.

AddedEBA shall submit those draft regulatory technical standards to the Commission 36 months [after the entry into force of that Regulation].

AddedPower is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

Added1. Institutions shall apply the delta and vega risk factors described in Articles 383c to 383h, and the process set out in paragraphs 2 to 8, to calculate the own funds requirements for delta and vega risks.

Added2. For each risk class referred to in Article 383(2), the sensitivity of the aggregate CVAs and the sensitivity of all the positions in eligible hedges falling within the scope of the own funds requirements for delta or vega risks to each of the applicable delta or vega risk factors included in that risk class shall be calculated by using the corresponding formulas laid down in Articles 383i and 383j. Where the value of an instrument depends on several risk factors, the sensitivity shall be determined separately for each risk factor.

AddedFor the calculation of the vega risk sensitivities of the aggregate CVAs, sensitivities both to volatilities used in the exposure model to simulate risk factors and to volatilities used to reprice option transactions in the portfolio with the counterparty shall be included.

AddedBy way of derogation from paragraph 1, subject to the permission of the competent authorities, an institution may use alternative definitions of delta and vega risk sensitivities in the calculation of the own funds requirements of a trading book position under this Chapter, provided that the institution meets all the following conditions:

Added(a) those alternative definitions are used for internal risk management purposes and for the reporting of profits and losses to senior management by an independent risk control unit within the institution;

Added(b) the institution demonstrates that those alternative definitions are more appropriate for capturing the sensitivities of the position than the formulas set out in Articles 383i and 383j, and that the resulting sensitivities do not materially differ from those formulas.

Added3. Where an eligible hedge is an index instrument, institutions shall calculate the sensitivities of that eligible hedge to all the relevant risk factors by applying the shift of one of the relevant risk factor to each of the index constituents.

Added4. An institution may introduce additional risk classes to the ones referred to in Article 383(2) that correspond to qualified index instruments. For the purposes of delta risks, an index instrument shall be considered to be qualified where it meets the conditions set out in Article 325i▌. For vega risks, all index instruments shall be considered qualified.

AddedAn institution shall calculate delta and vega sensitivities to a qualified index risk factor as a single sensitivity to the underlying qualified index. Where 75% of the constituents of a qualified index are mapped to the same sector as set out in Articles 383o, 383r and 383t, the institution shall map the qualified index to that same sector. Otherwise, the institution shall map the sensitivity to the applicable qualified index bucket.

Added5. The weighted sensitivities of the aggregate CVA and of the market value of all eligible hedges to each risk factor shall be calculated by multiplying the respective net sensitivities by the corresponding risk weight, in accordance with the following formulae:

Addedwhere:

Added= the index that denotes the risk factor k;

Added= the risk weight applicable to the risk factor k;

Added= the weighted sensitivity of the aggregate CVA to risk factor k;

Added= the net sensitivity of the aggregate CVA to risk factor k;

Added= the weighted sensitivity of the market value of all the eligible hedges in the CVA portfolio to risk factor k;

Added= the net sensitivity of the market value of all the eligible hedges in the CVA portfolio to risk factor k.

Added6. Institutions shall calculated the net weighted sensitivity of the CVA portfolio to risk factor k in accordance with the following formula:

Added7. The net weighted sensitivities within the same bucket shall be aggregated in accordance with the following formula, using the corresponding correlations for weighted sensitivities within the same bucket set out in Articles 383l, 383s and 383p giving rise to the bucket-specific sensitivity :

Addedwhere:

Added= the bucket-specific sensitivity of bucket b;

Added= the corresponding intra-bucket correlation parameters;

Added= the hedging disallowance parameter equal to 0.01;

Added= the net weighted sensitivities.

Added8. The bucket-specific sensitivity shall be calculated in accordance with paragraphs 5, 6 and 7 for each bucket within a risk class. Once the bucket-specific sensitivity has been calculated for all buckets, weighted sensitivities to all risk factors across buckets shall be aggregated in accordance with the following formula, using the corresponding correlations for weighted sensitivities in different buckets set out in Articles 383l, 383n, 383q, 383s, 383u and 383w giving rise to the risk-class specific own funds requirements for delta or vega risk:

Addedwhere:

Added= a multiplier factor which is equal to 1; competent authorities may increase the value of where the institution’s regulatory CVA model shows deficiencies to appropriately measure the own funds requirements for CVA risk;

Added= the bucket-specific sensitivity of bucket b;

Added= the correlation parameter between buckets b and c;