On 12 March 2021, the European Banking Authority (EBA) published consultation papers regarding draft regulatory technical standards (RTS) on:

  • Residual risk add-on (RRAO). Article 430b of the Capital Requirements Regulation (CRR) provides that from the date of application of Commission Delegated Regulation 2021/424 institutions that do not meet the conditions set out in Article 94(1) or in Article 325a(1) of the CRR shall report, for all their trading book positions and all their non-trading book positions that are subject to foreign exchange (FX) or commodity risks, the results of the calculations based on using the alternative standardised approach. The alternative standardised approach comprises three parts: (i) sensitivities-based method (SbM); (ii) residual risk add-on (RRAO); and (iii) own funds requirements for default risk (DRC). Article 325u of the CRR transposes into EU legislation the RRAO, which is intended to provide a simple and conservative capital treatment for any other risks not covered by the SbM or the DRC. Under the RRAO, own funds requirements for residual risks should be calculated in addition to other own funds requirements computed under either the SbM or the DRC, for instruments exposed to residual risks. Instruments are considered exposed to residual risks where they are either instruments referencing an exotic underlying or instruments bearing other residual risks.  According to Article 325u(3) of the CRR, the additional own funds requirements amount to 1% or 0.1% of the gross notional amount of the instrument, depending on whether the instrument is an instrument referencing an exotic underlying or an instrument bearing other residual risks, respectively. Article 325u(5) of the CRR includes a mandate for the EBA to draft RTS for the purposes of establishing a common specification of what an exotic underlying is and which instruments are instruments bearing residual risks. In this way, the RTS aim to ensure a consistent implementation of the RRAO across EU institutions.
  • Gross jump-to-default (JTD). The CRR (as amended) implements in EU legislation the revised framework to compute own funds requirements for market risk. One component of these requirements is the DRC, which is a capital requirement intended to capitalise default risks in the trading book. To determine the DRC under the alternative standardised approach for market risk, the gross JTD amounts of exposures are to be calculated. In this regard, Article 325w of the CRR sets out requirements specifying how gross JTD amounts shall be determined for the purposes of the DRC for non-securitisations. Article 323w(1), (2) and (5) outline formulae for calculating gross JTD amounts of exposures to debt and equity instruments, together with requirements for the identification of the components of the formulae. The EBA is mandated, in Article 325w(8) of the CRR, to develop draft RTS which establish a common specification for calculating gross JTD amounts for non-securitisations. In this way, the RTS contribute to ensure a consistent implementation of the DRC framework under the alternative standardised approach across EU institutions.

The deadline for comments on both consultations is 12 June 2021. A public hearing will take place on 29 April 2021 from 15.30 to 18.00 CET.