   
CRD IV (Capital
Requirements Directive IV)
Capital
Requirements Directive IV - Part 1
Capital Requirements Directive IV - Part 2
Capital Requirements Directive IV - Part 3
Article
1
Directive 2006/48/EC is amended as follows:
(1) In
Article 4, the following points (40a) and (40b) are
inserted:
"(40a)
're-securitisation' means a securitisation where
one or more of the underlying exposures meet the definition of a
securitisation position;
(40b) 're-securitisation position' means
an exposure to a re-securitisation;"
(2) Article 22 is amended
as follows:
(a) Paragraph 1 is replaced by the
following:
"1.
Home Member State competent authorities shall
require that every credit institution have robust governance
arrangements, which include a clear organisational structure with
well-defined, transparent and consistent lines of responsibility,
effective processes to identify, manage, monitor and report the
risks it is or might be exposed to, adequate internal control
mechanisms, including sound administration and accounting
procedures, and remuneration policies and practices that are
consistent with and promote sound and effective risk
management."
(b) The following paragraph 3 is added:
"3.
The Committee of European Banking Supervisors shall ensure the
existence of guidelines on sound remuneration policies which comply
with the principles set out in point 22 of Annex V. The Committee of
European Securities Regulators shall cooperate closely with the
Committee of European Banking Supervisors in ensuring the existence
of guidelines on remuneration policies for categories of staff
involved in the provision of investment services and activities
meaning of Directive 2004/39/EC of the European Parliament and of
the Council of 21 April 2004 on markets in financial
instruments.
(3) In Article 54, the following
paragraph is added:
"Member States shall ensure that, for the
purposes of the first paragraph, their respective competent
authorities have the power to impose financial and non-financial
penalties or measures. Those penalties or measures must be
effective, proportionate and dissuasive."
(4) Article 57 is
amended as follows:
(a) In the first paragraph, point (r) is
replaced by the following:
"(r) the exposure amount of
securitisation positions which receive a risk weight of 1 250 %
under Annex IX, Part 4 and the exposure amount of securitisation
positions in the trading book that would receive a 1 250% risk
weight in the same credit institutions non-trading
book.
(b) The following paragraph is added:
For the
purposes of point (r), exposure amounts shall be calculated in the
manner specified in Annex IX, Part 4."
(5) In Article 64, the
following paragraph 5 is added:
"5. Credit institutions shall
apply the requirements of Part B of Annex VII to Directive
2006/49/EC to all their assets measured at fair value when
calculating the amount of own funds and shall not include in the
amount of own funds any amounts necessary as adjustments under those
requirements."
(6) Article 66(2) is replaced by the
following:
"2. The total of the items in points (l) to (r) of
Article 57 shall be deducted half from the total of the items in
points (a) to (c) minus (i) to (k) of that Article, and half from
the total of the items in points (d) to (h) of that Article, after
application of the limits laid down in paragraph 1 of this Article.
To the extent that half of the total of the items in points (l) to
(r) exceeds the total of the items in points (d) to (h) of Article
57, the excess shall be deducted from the total of the items in
points (a) to (c) minus (i) to (k) of that Article.
Items in
point (r) of Article 57 shall not be deducted if they have been
included for the purposes of Article 75 in the calculation of
risk-weighted exposure amounts as specified in Annex IX, Part 4 or
in the calculation of capital requirements as specified in Annex I
to Directive 2006/49/EC."
(7) In Article 75, point (c) is
replaced by the following:
"(c) in respect of all their business
activities, for foreign exchange risk, for settlement risk and for
commodities risk, the capital requirements determined according to
Article 18 of Directive 2006/49/EC;"
(8) Article 101(1) is
replaced by the following:
"1.
The following shall not, with a
view to reducing potential or actual losses to investors, provide
support to the securitisation beyond its contractual
obligations:
(a) any originator credit institution which, in
respect of a securitisation, has done any of the following:
(i)
made use of Article 95 in the calculation of risk-weighted exposure
amounts;
(ii) sold instruments from its trading book
to an SSPE to the effect that it does not hold capital for the
specific risk of these instruments anymore;
(b) a sponsor credit
institution."
(9) The following Article 122b is inserted after
Article 122a:
"Article 122b
1.
Notwithstanding the risk
weights for general re-securitisation positions in Annex IX, Part 4,
the competent authorities shall require that credit institutions
apply a 1250 % risk weight to positions in highly complex
re-securitisations, unless the credit institution has demonstrated
to the competent authority for each such re-securitisation position
concerned that it has complied with the requirements set out in
Article 122a(4) and (5).
2. Paragraph 1 shall apply in respect of
positions in new re-securitisations issued after 31 December 2010.
In respect of positions in existing re-securitisations, paragraph 1
shall apply from 31 December 2014 where new underlying exposures are
added or substituted after that date."
In Article 136(2), the
following paragraph is added:
"For the purposes of determining
the appropriate level of own funds in the supervisory review process
carried out in accordance with Article 124, the competent
authorities shall assess whether any imposition of a specific own
funds requirement in excess of the minimum level is required to
capture risks to which a credit institution might be exposed, taking
into account the following:
(a) the quantitative and qualitative
aspects of credit institutions' internal capital assessment referred
to in Article 123;
(b) the credit institutions' arrangements,
processes and mechanisms referred to in Article 22;
(c) the
outcome of the supervisory review process carried out in accordance
with Article 124."
(10) Article 145(3) is replaced by the
following:
"3.
Credit institutions shall adopt a formal policy to
comply with the disclosure requirements laid down in paragraphs 1
and 2, and have policies for assessing the appropriateness of their
disclosures, including their verification and frequency. Credit
institutions shall also have policies for assessing whether their
disclosures convey their risk profile comprehensively to market
participants.
Where those disclosures do not convey the risk profile
comprehensively to market participants, credit institutions shall
publicly disclose the information necessary in addition to that
required according to paragraph 1. However, they shall only be
required to disclose information which is material and not
proprietary or confidential according to the technical criteria set
out in Annex XII, Part 1."
(11) The Annexes are amended as set
out in Annex I to this Directive
Article
2
Directive 2006/49/EC is amended as follows:
(1) In the first
subparagraph of Article 3(1), the following point (t) is
added:
"(t) 'securitisation position' and 're-securitisation
position' mean securitisation position and re-securitisation
position as defined in Directive 2006/48/EC."
(2) In Article
17(1), the introductory phrase is replaced by the
following:
"Where an institution calculates risk-weighted
exposure amounts for the purposes of Annex II to this Directive in
accordance with Articles 84 to 89 of Directive 2006/48/EC, then for
the purposes of the calculation provided for in point 36 of Part 1
of Annex VII to Directive 2006/48/EC, the following shall
apply:"
(3) In Article 18(1), point (a) is replaced by the
following:
"(a) the capital requirements, calculated in
accordance with the methods and options laid down in Articles 28 to
32 and Annexes I, II, and VI and, as appropriate, Annex V, for their
trading book business, and points 1 to 4 of Annex II for their non
trading book business."
(4) The Annexes are amended as set out in
Annex II to this Directive
Article 3
Transposition
1. Member
States shall bring into force the laws, regulations and
administrative provisions necessary to comply with this Directive by
31 December 2010 at the latest.
They shall forthwith communicate to
the Commission the text of those provisions and a correlation table
between those provisions and this Directive.
When Member States
adopt those provisions, they shall contain a reference to this
Directive or be accompanied by such a reference on the occasion of
their official publication. Member States shall determine how such
reference is to be made.
2. Member States shall communicate to
the Commission the text of the main provisions of national law which
they adopt in the field covered by this Directive.
Article 4
Entry into force
This Directive shall enter into force on the
twentieth day following that of its publication in the Official
Journal of the European Union.
Article 5
Addressees
This Directive is addressed to the Member
States.
Done at Brussels,
For the European Parliament For the
Council
ANNEX
I
Annexes V, VI, IX and XII to Directive 2006/48/EC are amended
as follows:
(1) In Annex V, the following Section 11 is
added:
"11. REMUNERATION POLICIES
22. When establishing and
applying the remuneration policies for those categories of staff
whose professional activities have a material impact on their risk
profile, credit institutions shall comply with the following
principles in a way that is appropriate to their size, internal
organisation and the nature, the scope and the complexity of their
activities:
(a) the remuneration policy is consistent with and
promotes sound and effective risk management and does not encourage
risk-taking that exceeds the level of tolerated risk of the credit
institution;
(b) the remuneration policy is in line with the
business strategy, objectives, values and long-term interests of the
credit institution;
(c) the management body (supervisory
function) of the credit institution establishes the general
principles of the remuneration policy and is responsible for its
implementation;
(d) the implementation of the remuneration policy
is, at least annually, subject to central and independent internal
review for compliance with policies and procedures for remuneration
defined by the management body (supervisory function);
(e) Where
remuneration is performance related, the total amount of
remuneration is based on a combination of the assessment of the
performance of the individual and of the business unit concerned and
of the overall results of the credit institution;
(f) Fixed and
variable components of total remuneration are appropriately
balanced; the fixed component represents a sufficiently high
proportion of the total remuneration to allow the operation of a
fully flexible bonus policy, including the possibility to pay no
bonus;
(g) payments related to the early termination of a
contract reflect performance achieved over time and are designed in
a way that does not reward failure;
(h) the measurement of
performance used to calculate bonuses or bonus pools includes an
adjustment for current and future risks and takes into account the
cost of the capital and the liquidity required;
(i) payment of
the major part of a significant bonus is deferred for an appropriate
period and is linked to the future performance of the firm.
(2)
Annex VI, Part 1 is amended as follows:
(a) Point 8 is
replaced by the following:
"8. Without prejudice to points 9, 10
and 11, exposures to regional governments and local authorities
shall be risk weighted as exposures to institutions , subject to
point 11a. This treatment is independent of the exercise of discretion as specified in Article 80(3). The preferential
treatment for short-term exposures specified in points 31, 32 and 37
shall not be applied."
(b) The following point 11a is
inserted:
"11a. Without prejudice to points 9, 10 and 11,
exposures to regional governments and local authorities of the
Member States denominated and funded in the domestic currency of
that regional government and local authority shall be assigned a
risk weight of 20%."
(3) Annex IX is amended as
follows:
(a) In Part 3, point 1, the following point (c) is
added:
"(c) The credit assessment shall not be based or partly
based on unfunded support provided by the credit institution
itself."
(b) Part 4 is amended as follows:
(i) In point 5,
the following sentence is added:
"Where no credit assessment of a
nominated ECAI can be used for a position in asset backed commercial
paper because of the requirement set out in point 1(c) of Part 3,
the credit institution may use the risk-weight assigned to a
liquidity facility in order to calculate the risk-weighted exposure
amount for the commercial paper if the commercial paper of an
ABCP-program and the liquidity facility form overlapping
positions."
(ii) Point 6 is replaced by the following:
"6.
Subject to point 8, the risk-weighted exposure amount of a rated
securitisation or re-securitisation position shall be calculated by
applying to the exposure value the risk weight associated with the
credit quality step with which the credit assessment has been
determined to be associated by the competent authorities in
accordance with Article 98 as laid down in Table 1."
(iii) Table
1 is replaced by the following:
(iv) Table 2 is
deleted.
(v) Point 46 is replaced by the
following:
"46. Under the Ratings Based Method, the risk-weighted
exposure amount of a rated securitisation position or
re-securitisation shall be calculated by applying to the exposure
value the risk weight associated with the credit quality step with
which the credit assessment has been determined to be associated by
the competent authorities in accordance with Article 98, as set out
in the Table 4, multiplied by 1,06."
(vi) Table 4 is replaced by
the following:
(vii) Point 47 is replaced by the
following:
"47. The weightings in column C of table 4 shall be
applied where the securitisation position is not a re-securitisation
position and where the effective number of exposures securitised is
less than six.
For the remainder of the securitisation positions
that are not re-securitisation positions, the weightings in column B
shall be applied unless the position is in the most senior tranche
of a securitisation, in which case the weightings in column A
shall be applied.
For re-securitisation positions the weightings in
column E shall be applied unless the re-securitisation position is
in the most senior tranche of the re-securitisation and none of the
underlying exposures were themselves re-securitisation exposures, in
which case column D shall be applied.
When determining whether a
tranche is the most senior, it is not required to take into
consideration amounts due under interest rate or currency derivative
contracts, fees due, or other similar payments."
(viii) Point 48
is deleted:
(ix) Point 49 is replaced by the following:
"49.
In calculating the effective
number of exposures securitised multiple exposures to one
obligor must be treated as one exposure. The effective number of
exposures is calculated as:
where EADi represents the sum of the exposure
values of all exposures to the ith obligor. If the portfolio share
associated with the largest exposure, C1, is available, the credit
institution may compute N as 1/C1."
(x) Point 50 is
deleted.
(xi) Point 52 is replaced by the following:
"52.
Subject to points 58 and 59, under the Supervisory Formula Method,
the risk weight for a securitisation position shall be the risk
weight to be applied in accordance with point 53. However, the risk
weight shall be no less than 20% for re-securitisation positions and
no less than 7% for all other securitisation positions."
(xii) In
point 53, the sixth paragraph is replaced by the following:
"N is
the effective number of exposures calculated in accordance with
point 49. In the case of re-securitisations, the credit institution
must look at the number of securitisation exposures in the pool and
not the number of underlying exposures in the original pools from
which the underlying securitisation exposures stem."
(12)
(4)
Annex XII, Part 2 is amended as follows:
(a) Points 9 and 10 are
replaced by the following:
"9. The credit institutions
calculating their capital requirements in accordance with points (b)
and (c) of Article 75 shall disclose those requirements separately
for each risk referred to in those provisions. In addition, the
capital requirement for specific interest rate risk of
securitisation positions shall be disclosed separately.
10. The
following information shall be disclosed by each credit institution
which calculates its capital requirements in accordance with Annex V
to Directive 2006/49/EC:
(a) for each sub-portfolio
covered:
(i) the characteristics of the
models used;
(ii) for the incremental risk capital charge the
methodologies used and the risks measured through the use of an
internal model including a description of the approach used by the
credit institution to determine liquidity horizons, the
methodologies used to achieve a capital assessment that is
consistent with the required soundness standard and the approaches
used in the validation of the model;
(iii) a description of
stress testing applied to the sub-portfolio;
(iv) a description
of the approaches used for back-testing and validating the accuracy
and consistency of the internal models and modelling
processes;
(b) the scope of acceptance by the competent
authority;
(c) a description of the extent and methodologies for
compliance with the requirements set out in Annex VII, Part B to
Directive 2006/49/EC;
(d) the highest, the lowest and the mean of
the following:
(i) the daily value-at-risk measures over the
reporting period and as per the period end;
(ii) the stressed
value-at-risk measures over the reporting period and as per the
period end;
(iii) the incremental risk capital charge over the
reporting period and as per the period-end;
(e) the amount of
capital for incremental risk, together with the weighted average
liquidity horizon for each sub-portfolio covered;
(f) a
comparison of the daily end-of-day value-at-risk measures to the
one-day changes of the portfolio's value by the end of the
subsequent business day together with an analysis of any important
overshooting during the reporting period."
(b) Point 14 is
replaced by the following:
"14.
Credit institutions calculating
risk weighted exposure amounts in accordance with Articles 94 to 101
or capital requirements according to point 16a of Annex I to
Directive 2006/49/EC shall disclose the following information, where
relevant separately for their trading and non-trading book:
(a) a
description of the credit institution's objectives in relation to
securitisation activity;
(b) the nature of other risks including
liquidity risk inherent in securitised assets;
(c) the type of
risks in terms of seniority of underlying securitisation positions
and in terms of assets underlying these latter securitisation
positions assumed and retained with re-securitisation
activity;
(d) the different roles played by the credit
institution in the securitisation process;
(e) an indication of
the extent of the credit institution's involvement in each of
them;
(f) a description of the processes in place to
monitor changes in the credit and market risk of securitisation
exposures including, how the behaviour of the underlying assets
impacts securitisation exposures and a description of how those
processes differ for re-securitisation exposures;
(g) a
description of the credit institution's policy governing the use of
hedging and unfunded protection to mitigate the risks of retained
securitisation and re-securitisation exposures, including
identification of material hedge counterparties by relevant type of
risk exposure;
(h) the approaches to calculating risk weighted
exposure amounts that the credit institution follows for its
securitisation activities including the types of securitisation
exposures to which each approach applies;
(i) the types of SSPEs
that the credit institution, as sponsor, uses to securitise
third-party exposures including whether and in what form and to what
extent the credit institution has exposures to these SSPEs, both on-
and off-balance sheet exposure;
(j) a summary of the credit
institution's accounting policies for securitisation activities,
including:
(i) whether the transactions are treated as sales or
financings;
(ii) the recognition of gains on sales;
(iii) the
methods and key assumptions and inputs for valuing securitisation
positions;
(iv) the treatment of synthetic securitisations if
this is not covered by other accounting policies;
(v) how assets
awaiting securitisation are valued and whether they are recorded in
the credit institutions non-trading book or the trading
book;
(vi) policies for recognising liabilities on the balance
sheet for arrangements that could require the credit institution to
provide financial support for securitised assets;
(k) the names
of the ECAIs used for securitisations and the types of exposure for
which each agency is used;
(l) where applicable, a description of
the Internal Assessment Approach as set out in Annex IX, Part 4
including the structure of the internal assessment process and
relation between internal assessment and external ratings, the use
of internal assessment other than for IAA capital purposes, the
control mechanisms for the internal assessment process including
discussion of independence, accountability, and internal assessment
process review; the exposure types to which the internal assessment
process is applied and the stress factors used for determining
credit enhancement levels, by exposure type;
(m) an explanation
of significant changes to any of the quantitative disclosures in
points (i) to (l) since the last reporting period;
(n) separately
for the trading and the non-trading book, the following information
broken down by exposure type:
(i) the total amount of
outstanding exposures securitised by the credit institution,
separately for traditional and synthetic securitisations and
securitisations for which the credit institution acts only as
sponsor;
(ii) the aggregate amount of on-balance sheet
securitisation exposures retained or purchased and off-balance sheet
securitisation exposures;
(iii) the aggregate amount of assets
awaiting securitisation;
(iv) for securitised facilities subject
to the early amortisation treatment, the aggregate drawn exposures
attributed to the seller’s and investors’ interests respectively,
the aggregate capital requirements incurred by the credit
institution against its retained (the seller’s) shares of the drawn
balances and undrawn lines and the aggregate capital requirements
incurred by the credit institution against the investor’s shares of
drawn balances and undrawn lines;
(v) the amount of
securitisation exposures that are deducted from own funds or
risk-weighted at 1 250%;
(vi) a summary of current year’s
securitisation activity, including the amount of exposures
securitised and recognised gain or loss on sale;
(o) separately
for the trading and the non-trading book, the following
information:
(i) the aggregate amount of securitisation exposures
retained or purchased and the associated capital requirements,
broken down between securitisation and re-securitisation exposures
and further broken down into a meaningful number of risk-weight or
capital requirement bands, for each capital requirements approach
used;
(ii) the aggregate amount of re-securitisation exposures
retained or purchased broken down according to the exposure before
and after hedging/insurance and the exposure to financial
guarantors, broken down according to guarantor credit worthiness
categories or guarantor name;
(p) for the non-trading book and
regarding exposures securitised by the credit institution, the
amount of impaired/past due assets securitised and the losses
recognised by the credit institution during the current period, both
broken down by exposure type;
(q) for the trading book, the total
outstanding exposures securitised by the credit institution and
subject to a capital requirement for market risk, broken down into
traditional/synthetic and by exposure type."
(c) The following
point 15 is added:
"15. The following information shall be
disclosed regarding the remuneration policy and practices of the
credit institution for those categories of staff whose professional
activities have a material impact on their risk profile:
(a) information concerning the decision-making process used
for determining the remuneration policy, including if applicable,
information about the composition and the mandate of a remuneration
committee, the name of the external consultant whose services have
been used for the determination of the remuneration policy and the
role of the relevant stakeholders;
(b) information on link
between pay and performance;
(c) information on the criteria used
for performance measurement and the risk adjustment;
(d)
information on the performance criteria on which the entitlement to
shares, options or variable components of remuneration is
based;
(e) the main parameters and rationale for any bonus scheme
and any other non-cash benefits."
ANNEX II
Annexes I,
II, V and VII to Directive 2006/49/EC are amended as follows:
(1)
Annex I is amended as follows:
(a) Point 14 is amended as
follows:
(i) The first paragraph is replaced by the
following:
"14. The institution shall assign its net positions in
the trading book in instruments that are not securitisation
positions as calculated in accordance with point 1 to the
appropriate categories in Table 1 on the basis of their
issuer/obligor, external or internal credit assessment, and residual
maturity, and then multiply them by the weightings shown in that
table. It shall sum its weighted positions resulting from the
application of this point and of point 16a (regardless of whether
they are long or short) in order to calculate its capital
requirement against specific risk."
(ii) The fourth paragraph is
deleted.
(b) The following point 16a is inserted:
"16a. The
institution shall calculate the capital requirement for its net
positions in the trading book in instruments that are securitisation
positions as follows:
(a) for securitisation positions that would
be subject to the Standardised Approach for credit risk in the same
institution's non-trading book, 8% of the risk-weighted exposure
amounts under the Standardised Approach as set out in Part 4 of
Annex IX to Directive 2006/48/EC;
(b) for securitisation
positions that would be subject to the Internal Ratings Based
Approach in the same institution's non-trading book, 8% of the
risk-weighted exposure amounts under the Internal Ratings Based
Approach as set out in Part 4 of Annex IX to Directive 2006/48/EC.
The Supervisory Formula Method may only be used with supervisory
approval by institutions other than an originator institution that
may apply it for the same securitisation position in its non-trading
book.
Where relevant, estimates of PD and LGD as inputs to the
Supervisory Formula Method shall be determined in accordance with
Articles 84 to 89 of directive 2006/48/EC or alternatively and
subject to separate supervisory approval, based on an approach as
set out in point 5a of Annex V;
(c) Paragraphs (a) and (b)
notwithstanding, for re-securitisation positions that would be
subject to a 1 250 % risk weight according to Article 122b(1) of
Directive 2006/48/EC if they were in the same institutions
non-trading book, 8% of the risk-weighted exposure amount according
to that Article."
(c) Point 34 is replaced by the
following:
"34. The institution shall sum all its net long
positions and all its net short positions in accordance with point
1. It shall multiply its overall gross position by 8% in order to
calculate its capital requirement against specific risk."
(d) Point 35 is deleted.
(2) In Annex II, point 7, the
second paragraph is replaced by the following:
"However, in the
case of a credit default swap, an institution the exposure of which
arising from the swap represents a long position in the underlying
shall be permitted to use a figure of 0% for potential future credit
exposure, unless the credit default swap is subject to closeout upon
insolvency of the entity the exposure of which arising from the swap
represents a short position in the underlying, even though the
underlying has not defaulted, in which case the figure for potential
future credit exposure of the institution shall be limited to the
amount of premia which are not yet paid by the entity to the
institution."
(3) Annex V is amended as follows:
(a) Point 1
is replaced by the following:
"1.
The competent authorities
shall, subject to the conditions laid down in this Annex, allow
institutions to calculate their capital requirements for position
risk, foreign-exchange risk and/or commodities risk using their own
internal risk-management models instead of or in combination with
the methods described in Annexes I, III and IV. Explicit recognition
by the competent authorities of the use of models for supervisory
capital purposes shall be required in each case."
(b) In point 4,
the second paragraph is replaced by the following:
"Competent
authorities shall examine the institution's capability to perform
back-testing on both actual and hypothetical changes in the
portfolio's value. Back-testing on hypothetical changes in the
portfolio's value is based on a comparison between the portfolio's
end-of-day value and, assuming unchanged positions, its value at the
end of the subsequent day.
Competent authorities shall require
institutions to take appropriate measures to improve their
back-testing programme if deemed deficient.
At a minimum, competent
authorities shall require institutions to perform back-testing on
hypothetical (using changes in portfolio value that would occur were
end-of-day positions to remain unchanged) outcomes."
(c) Point 5
is replaced by the following:
"5. For the purpose of calculating
capital requirements for specific risk associated with traded debt
and equity positions, the competent authorities shall recognise the
use of an institution's internal model if, in addition to compliance
with the conditions in the remainder of this Annex, the internal
model meets the following conditions:
(a) it explains the
historical price variation in the portfolio;
(b) it captures
concentration in terms of magnitude and changes of composition of
the portfolio;
(c) it is robust to an adverse environment;
(d)
it is validated through back-testing aimed at assessing whether
specific risk is being accurately captured. If competent authorities
allow this back-testing to be performed on the basis of relevant
sub-portfolios, these must be chosen in a consistent manner;
(e) it captures name-related basis risk. This means that
institutions shall demonstrate that the internal model is sensitive
to material idiosyncratic differences between similar but not
identical positions;
(f) it captures event risk.
The
institution's internal model shall conservatively assess the risk
arising from less liquid positions and positions with limited price
transparency under realistic market scenarios. In addition, the
internal model shall meet minimum data standards.
Proxies shall be
appropriately conservative and may be used only where available data
is insufficient or is not reflective of the true volatility of a
position or portfolio.
The institution may choose to exclude from
the calculation of its specific risk capital requirement using an
internal model those positions for which it meets a capital
requirement for position risks according to point 16a of Annex
I.
As techniques and best practices evolve, institutions shall
avail themselves of these new techniques and practices."
(d) The
following points 5a to 5k are inserted:
"5a. Institutions subject
to point 5 for traded debt instruments shall have an approach in
place to capture, in the calculation of their capital requirements,
the default and migration risks of its trading book positions that
are incremental to the risks captured by the value-at-risk measure
as specified in point 5.
An institution shall demonstrate that its
approach meets soundness standards comparable to the approach set
out in Articles 84 to 89 of Directive 2006/48/EC, under the
assumption of a constant level of risk, and adjusted where
appropriate to reflect the impact of liquidity, concentrations,
hedging and optionality.
Scope
5b. The approach to capture the
incremental default and migration risks shall cover all positions
subject to a capital charge for specific interest rate risk but
shall not cover those subject to the specific treatment of point 16a
of Annex I.
Subject to supervisory approval, the institution may
choose to consistently include all listed equity positions and
derivatives positions based on listed equities for which such
inclusion is consistent with how the bank internally measures and
manages risk.
The approach must reflect the impact of correlations
between default and migration events. It must not reflect the impact
of diversification between default and migration events on the one
hand and other market risk factors on the other
hand.
Parameters
5c.
The approach to capture the incremental
risks must measure losses due to default and internal or external
ratings migration at the 99,9 % confidence interval over a capital
horizon of one year.
Correlation assumptions shall be supported
by analysis of objective data in a conceptually sound framework. The
approach to capture the incremental risks shall appropriately
reflect issuer concentrations.
Concentrations that can arise within and across product classes under stressed conditions
shall also be reflected.
The approach shall be based on the
assumption of a constant level of risk over the one-year capital
horizon, implying that given individual trading book positions or
sets of positions that have experienced default or migration over
their liquidity horizon are re-balanced at the end of their
liquidity horizon to attain the initial level of risk.
Alternatively, an institution may chose to consistently use a
one-year constant position assumption.
5d. The liquidity horizons
shall be set according to the time required to sell the position or
to hedge all material relevant price risks in a stressed market,
having particular regard to the size of the position.
Liquidity
horizons shall reflect actual practice and experience during periods
of both systematic and idiosyncratic stresses.
The liquidity horizon
shall be measured under conservative assumptions and shall be
sufficiently long that the act of selling or hedging, in itself,
would not materially affect the price at which the selling or
hedging would be executed.
The determination of the appropriate
liquidity horizon for a position or set of positions is subject to a
floor of three months.
The determination of the appropriate
liquidity horizon for a position or set of positions shall take into
account an institution’s internal policies relating to valuation
adjustments and the management of stale positions.
When an
institution determines liquidity horizons for sets of positions
rather than for individual positions, the criteria for defining sets
of positions shall be defined in a way that meaningfully reflects
differences in liquidity.
The liquidity horizons shall be greater
for positions that are concentrated, reflecting the longer period
needed to liquidate such positions.
The liquidity horizon for a
securitisation warehouse shall reflect the time to build, sell and
securitise the assets, or to hedge the material risk factors, under
stressed market conditions.
5e.
Hedges may be incorporated into
an institution’s approach to capture the incremental default and
migration risks. Positions may be netted when long and short
positions refer to the same financial instrument.
Hedging or
diversification effects associated with long and short positions
involving different instruments or different securities of the same
obligor, as well as long and short positions in different issuers,
may only be recognised by explicitly modelling gross long and short
positions in the different instruments.
Institutions shall reflect
the impact of material risks that could occur during the interval
between the hedge’s maturity and the liquidity horizon as well as
the potential for significant basis risks in hedging strategies by
product, seniority in the capital structure, internal or external
rating, maturity, vintage and other differences in the instruments.
An institution shall reflect a hedge only to the extent that it can
be maintained even as the obligor approaches a credit or other
event.
For trading book positions that are hedged via dynamic
hedging strategies, a rebalancing of the hedge within the liquidity
horizon of the hedged position may be recognised provided that the
institution
(i) chooses to model rebalancing of the hedge
consistently over the relevant set of trading book positions,
(ii)
demonstrates that the inclusion of rebalancing results in a better
risk measurement, and
(iii) demonstrates that the markets for the
instruments serving as hedges are liquid enough to
allow for this rebalancing even during periods of stress. Any
residual risks resulting from dynamic hedging strategies must be
reflected in the capital charge.
5f. The approach to capture the
incremental default and migration risks must reflect the nonlinear
impact of options, structured credit derivatives and other positions
with material nonlinear behaviour with respect to price changes. The
institution shall also have due regard to the amount of model risk
inherent in the valuation and estimation of price risks associated
with such products.
5g. The approach to capture the incremental
default and migration risks shall be based on objective
data.
Validation
5h. As part of the independent review of
their risk measurement system and the validation of their internal
models as required in this annex, institutions shall, with a view to
the approach to capture incremental default and migration risks, in
particular:
(i)
validate that its modelling approach for
correlations and price changes is appropriate for its portfolio,
including the choice and weights of its systematic risk
factors;
(ii) perform a variety of stress tests, including
sensitivity analysis and scenario analysis, to assess the
qualitative and quantitative reasonableness of the approach,
particularly with regard to the treatment of concentrations. Such
tests shall not be limited to the range of events experienced
historically;
(iii) apply appropriate quantitative validation
including relevant internal modelling benchmarks.
The approach to
capture the incremental risks must be consistent with the
institution’s internal risk management methodologies for
identifying, measuring, and managing trading
risks.
Documentation
5i. An institution shall document its
approach to capturing incremental default and migration risks so
that its correlation and other modelling assumptions are transparent
to competent authorities.
Internal approaches based on different
parameters
5j. If the institution uses an approach to capturing
incremental default and migration risks that does not comply with
all requirements of this point but that is consistent with the
institution’s internal methodologies for identifying, measuring, and
managing risks it shall be able to demonstrate that its approach
results in a capital requirement that is at least as high as if it
was based on an approach in full compliance with the requirements of
this point.
Competent authorities shall review compliance with the
previous sentence at least yearly. The Committee of European Banking
Supervisors shall monitor the range of practices in this area and
draw up guidelines in order to secure a level playing field.
Frequency of calculation
5k. An institution shall
calculate the approach to capture the incremental risks at least
weekly.
(e) Point 7 is replaced by the following:
"7. For the
purposes of points 10b(a) and 10b(b), the results of the
institution's own calculation shall be scaled up by a multiplication
factor (m+) of at least 3."
(f) In Point 8, the first paragraph
is replaced by the following:
"For the purposes of point 10b(a)
and 10b(b), the multiplication factor (m+) shall be increased by a
plus-factor of between 0 and 1 in accordance with Table 1, depending
on the number of overshootings for the most recent 250 business days
as evidenced by the institution's back-testing of the value-at-risk
measure as set out in point 10.
Competent authorities shall require
the institutions to calculate overshootings consistently on the
basis of back-testing on hypothetical changes in the portfolio's
value.
An overshooting is a one-day change in the portfolio's value
that exceeds the related one-day value-at-risk measure generated by
the institution's model. For the purpose of determining the
plus-factor the number of overshootings shall be assessed at least
quarterly."
(g) Point 9 is deleted.
(h) Point 10 is amended as
follows:
(i) Point (c) is replaced by the following:
"(c) a
10-day holding period;"
(ii) Point (e) is replaced by the
following:
"(e) monthly data set updates."
(i) The following
points 10a and 10b are inserted:
"10a.
In addition, each
institution shall calculate a ‘stressed value-at-risk’ based on the
10-day, 99th percentile, one-tailed confidence interval
value-at-risk measure of the current portfolio, with value-at-risk
model inputs calibrated to historical data from periods of
significant financial stress relevant to the firm’s portfolio.
The
choice of such historical data shall be subject to yearly review and
approval by competent authorities. The Committee of European Banking
Supervisors shall monitor the range of practices in this area and
draw up guidelines in order to ensure convergence. Institutions
shall calculate the stressed value-at-risk at least weekly.
10b.
Each institution must meet, on a daily basis, a capital requirement
expressed as the sum of:
(a) The higher of (1) its previous day’s
value-at-risk number measured according to point 10 (VaRt-1); and
(2) an average of the daily value-at-risk measures according to
point 10 on each of the preceding sixty business days (VaRavg),
multiplied by the multiplication factor (m+);
plus
(b) The higher of (1) its latest available
stressed-value-at-risk number according to point 10a (sVaRt-1); and
(2) an average of the stressed value-at-risk numbers calculated in
the manner and frequency specified in point 10a during the preceding
sixty business days (sVaRavg), multiplied the multiplication factor
(m+);
plus
(c) The sum of its weighted positions(regardless of
whether they are long or short) resulting from the application of
point 16a of Annex I;
plus
(d) The higher of the institution's
most recent and the institution's 12 weeks average measure of
incremental default and migration risk according to point
5a."
(j) In Point 12, the first paragraph is replaced by the
following:
"The risk-measurement model shall capture a sufficient
number of risk factors, depending on the level of activity of the
institution in the respective markets.
Where a risk factor is
incorporated in the institution's pricing model but not in the
risk-measurement model, the institution must be able to justify this
omission to the satisfaction of the competent authority.
In
addition, the risk-measurement model shall capture nonlinearities
for options and other products as well as correlation risk and basis
risk.
Where proxies for risk factors are used they shall show a good
track record for the actual position held. In addition, the
following shall apply for individual risk types:"
(4) Annex VII,
Part B is amended as follows:
(a) In point 2, point (a) is
replaced by the following:
"(a) documented policies and
procedures for the process of valuation.
This includes clearly
defined responsibilities of the various areas involved in the
determination of the valuation, sources of market information and
review of their appropriateness, guidelines for the use of
unobservable inputs reflecting the institution’s assumptions of what
market participants would use in pricing the position, frequency of
independent valuation, timing of closing prices, procedures for
adjusting valuations, month end and ad-hoc verification
procedures;"
(b) Point 3 is replaced by the following:
"3.
Institutions shall mark their positions to market whenever possible.
Marking to market is the at least daily valuation of positions at
readily available close out prices that are sourced independently.
Examples include exchange prices, screen prices, or quotes from
several independent reputable brokers."
(c) Point 5 is replaced
by the following:
"5. Where marking to market is not possible,
institutions must conservatively mark to model their
positions/portfolios before applying trading book capital treatment.
Marking to model is defined as any valuation which has to be
benchmarked, extrapolated or otherwise calculated from a market
input."
(d) In point 6, point (a) is replaced by the
following:
"(a) senior management shall be aware of the elements
of the trading book or of other fair-valued positions which are
subject to mark to model and shall understand the materiality of the
uncertainty this creates in the reporting of the risk/performance of
the business;"
(e) Points 8 and 9 are replaced by the
following:
"Valuation adjustments
8. Institutions shall
establish and maintain procedures for considering valuation
adjustments.
General standards
9. The competent authorities
shall require the following valuation adjustments to be formally
considered: unearned credit spreads, close-out costs, operational
risks, early termination, investing and funding costs, future
administrative costs and, where relevant, model risk."
(f) Points
11 to 15 are replaced by the following:
"11. Institutions shall
establish and maintain procedures for calculating an adjustment to
the current valuation of less liquid positions.
Such adjustments
shall where necessary be in addition to any changes to the value of
the position required for financial reporting purposes and shall be
designed to reflect the illiquidity of the position.
Under those
procedures, institutions shall consider several factors when
determining whether a valuation adjustment is necessary for less
liquid positions.
Those factors include the amount of time it would
take to hedge out the position/risks within the position, the
volatility and average of bid/offer spreads, the availability of
market quotes (number and identity of market makers) and the
volatility and average of trading volumes including trading volumes
during periods of market stress, market concentrations, the aging of
positions, the extent to which valuation relies on marking-to-model,
and the impact of other model risks.
12. When using third party
valuations or marking to model, institutions shall consider whether
to apply a valuation adjustment.
In addition, institutions shall
consider the need for establishing adjustments for less liquid
positions and on an ongoing basis review their continued
suitability.
13. When valuation adjustments
give rise to material
losses of the current financial year, these shall be deducted from
an institution's original own funds according to point (k) of
Article 57 of Directive 2006/48/EC.
14. Other profits/losses
originating from valuation adjustments shall be included in the
calculation of ‘net trading book profits’ mentioned in point (b) of
Article 13(2) and be added to/deducted from the additional own funds
eligible to cover market risk requirements according to such
provisions.
15. Valuation adjustments which exceed those made
under the accounting framework to which the institution is subject
shall be treated in accordance with point 13 if they give rise to
material losses, or point 14
otherwise."
Capital
Requirements Directive IV - Part 1
Capital Requirements Directive IV - Part 2
Capital Requirements Directive IV - Part 3
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