On 27 March 2020, the European Banking Authority (EBA) published final draft regulatory technical standards (RTS) on the new Internal Model Approach (IMA) under the Fundamental Review of the Trading Book (FRTB).

These final draft RTS have been developed according to Articles 325bd(7), 325be(3), 325bf(9), 325bg(4) of the Capital Requirements Regulation as amended by the Capital Requirements Regulation II (CRR II).

The final draft RTS have been grouped in three different documents:

  • final draft RTS on liquidity horizons for the IMA clarify how institutions are to map the risk factors to the relevant category and subcategory, along with specifications with respect to the list of currencies and currency pairs that can be mapped to a 10-day liquidity horizon under the interest rate and the foreign-exchange risk category. They also provide a definition of large and small capitalisation reflecting the specificities of the EU equity market;
  • final draft RTS on back-testing and profit and loss attribution (PLA) requirements specify the elements to be included for the purpose of those tests in the hypothetical, actual, and risk-theoretical profit and loss (HPL, APL and RTPL respectively). Furthermore, they set all key-elements characterising the PLA requirements: the tests ensuring that HPL and RTPL are sufficiently close, the consequences for institutions with desks where those changes are not close, the frequency at which the assessment of the PLA requirement has to be performed. Finally, they also set the aggregation formula that institutions are to use for aggregating the own funds requirements; and
  • final draft RTS on criteria for assessing the modellability of risk factors under the IMA set out the criteria for identifying the risk factors that are modellable and that institutions are, therefore, allowed to include in their expected shortfall calculations. The modellability assessment is intended to ensure that only risk factors, which are sufficiently liquid and observable, are included into expected shortfall calculations so that reliable risk measures are calculated. The technical standards also set the frequency under which the modellability assessment should be performed by institutions.

The final draft RTS will now be submitted to the European Commission for adoption. Their adoption is expected, under the CRR II, to trigger a three year period after which institutions with the permission to use the FRTB internal models are required, for reporting purposes only, to calculate their own funds requirements for market risk with those internal models.