The European Commission (the Commission) has adopted a Delegated Regulation on regulatory technical standards for prudent valuation under Article 105(14) of the Capital Requirements Regulation.
The Delegated Regulation specifies how, for the purposes of paragraph 1 of Article 105, additional valuation adjustments (AVAs) should be applied to fair-valued positions in order to determine a prudent value that achieves an appropriate degree of certainty having regard to the dynamic nature of trading book positions, the demands of prudential soundness and the mode of operation and purpose of capital requirements in respect of trading book positions. The Commission notes, however, that all fair-valued positions, regardless of whether they are held in the trading book or non-trading book, shall be subject to the requirements for prudent valuation.
Specifically, the Delegated Regulation specifies two approaches for calculating AVAs for the purpose of determining the prudent value of fair-valued positions:
- a simplified approach, which can be used by institutions provided their absolute value of on- and off-balance sheet fair valued assets and liabilities is below EUR 15 billion and provided they are not part of a group that exceeds this threshold; and
- a core approach, which is intended to provide a consistent framework for determining AVAs under a target level of certainty of 90%, using either a data based or expert based approach and including diversification benefits.
Following the Commission’s adoption, the European Parliament and Council of the EU will now consider the Delegated Regulation, and if they do not object, it will be published in the Official Journal of the EU and enter into force 20 days after publication.
