On 2 May 2019, the European Banking Authority (EBA) published a consultation on the draft Regulatory Technical Standards (RTS) on the mapping of derivative transactions to risk categories, on supervisory delta formula for interest rate options and on determination of long or short positions in the standardised approach for counterparty credit risk under Article 277(5) and Article 279a(3) of the proposed Capital Requirements Regulation II (CRR2).

The new standardised approach for counterparty credit risk (SA-CCR) was adopted by the Basel Committee on Banking Supervision in 2014 and is intended to replace all non-internal model approaches (i.e. the Current Exposure Method (CEM) and the Standardised Method) for measuring the exposure at default (EAD) for counterparty credit risk in the Basel framework.

One of the measures introduced by the CRR2 is the implementation in EU legislation of the SA-CRR. The CRR2 has not yet been formally adopted by the Council of Ministers.

The draft RTS build on the proposals included in the EBA’s Discussion Paper published on 18 December 2017 and industry feedback received as a result of the subsequent consultation. They specify methods for the mapping of derivative transactions to risk categories, a formula for the calculation of the supervisory delta of options mapped to the interest rate risk category and a method for determining whether derivative transactions are long or short in their risk drivers.

The EBA is proposing, amongst other things, a three-pronged approach for the assignment of a derivative transaction to a risk category:

  • a qualitative approach identifying derivative transactions that have clearly only one material risk driver;
  • a qualitative and quantitative approach requiring a more detailed assessment of, and applicable to, those derivative transactions for which the mapping cannot immediately be done on the basis of the first approach. Under this approach, after the qualitative identification of all the risk drivers of the derivative transaction and an assessment of their materiality to identify material risk drivers, institutions have to use quantitative inputs, typically sensitivities; and
  • a fall-back approach, in case the assessment performed in accordance with the second approach does not allow to determine which of the risk drivers are material, institutions are required to simply allocate the derivative transaction to all the risk categories corresponding to all the risk drivers (material or not) of the transaction.

The deadline for responses to the consultation is 2 August 2019.