On 6 December 2024, the European Banking Authority (EBA) issued a final report containing draft regulatory technical standards (RTS) on the method for identifying the main risk driver and determining whether a transaction represents a long or a short position. The draft RTS have been developed according to Article 94(10) of the Capital Requirements Regulation (CRR), as amended by Regulation (EU) 2024/1623 (CRR3).

Proposed changes

The CRR includes some derogation for the calculation of the capital requirements for market and counterparty credit risks. The conditions for accessing such derogations depend on the size of the trading book business, the derivative business and the business subject to market risk, respectively. For calculating the size of the business, “the absolute value of long positions shall be summed with the absolute value of short positions”. However, no clarification is included around the notions of long and short positions or the aggregation mechanism in the calculation.

The amendments to the CRR introduced by the CRR3 include additional specifications around the calculation of the size of the business. To complement the additional specifications, the CRR3 mandates the EBA to develop draft RTS specifying the method for identifying the main risk driver of a position and for determining whether a transaction represents a long or a short position. The RTS propose both a general methodology which hinges on FRTB-SA sensitivities (for non-derivative and derivative positions) or SA-CCR add-ons (for derivative positions) and a simplified methodology which covers simple instruments such as fixed-rate bonds, floating-rate notes, stocks, forwards, futures, simple swaps and plain vanilla options, while more complex trades require a more advanced analysis to be performed under the general methodology

Following the EBA’s earlier consultation on the draft RTS, the simplified methodology has been further streamlined by allowing to disregard, under such a methodology, the FX risk drivers for non-FX trades (i.e. trades not considered as pure FX trades but only affected by translation risk). Also, the possibility to use the simplified methodology has been extended to all institutions, for the simple instruments included in its scope.

Next steps

The draft RTS are part of the Phase 1 deliverables of the EBA roadmap on the implementation of the EU banking package in the area of market risk.

The draft RTS will be submitted to the European Commission for endorsement following which they will be subject to scrutiny by the European Parliament and the Council before being published in the Official Journal of the European Union.