On 22 October 2021, the European Banking Authority (EBA) published its final draft Regulatory Technical Standards (RTS) on gross jump-to-default (JTD) amounts and on residual risk add-on (RRAO). These final drafts provide specifications for implementing these two elements of the alternative standardised approach for market risk.
Institutions using this approach are required to compute, on top of their own funds requirements under the sensitivities-based method, own funds requirements for default risk and for residual risks.
The final draft RTS on gross JTD amounts – this has been developed according to Article 325w(8) of Regulation (EU) No 575/2013 (Capital Requirements Regulation) and amended by Regulation (EU) 2019/876. It implements in EU legislation, the revised framework to compute own funds requirements for market risk.
The draft RTS specify how gross JTD amounts are to be determined by institutions’ exposures in the trading book under the alternative standardised approach for market risk in scope for Default Risk Charge for non-securitisations.
Gross JTD amounts determined in accordance with these draft RTS should be consistent with those determined using international standards, while using the formulae and requirements set out in the CRR.
The draft RTS on RRAO – this has been developed according to Article 325u(5) of the Regulation, which mandates the EBA to specify what an exotic underlying is and which instruments are classed as instruments bearing residual risks for the purposes of Article 325u(2).
The final draft RTS has been finalised after a three-month public consultation. It clarifies the scope of RRAO and specifies a non-exhaustive list of instruments bearing residual risks and a list of risks that do not constitute residual risks. These draft RTS also clarify that longevity risk, weather natural disasters and future realised volatility should be considered as exotic underlyings.