The EBF supports the proposed QIS, but stresses that sufficient time should be left for this exercise in order to understand the exact impact of the proposed framework that is a considerable change from the current framework. Furthermore, the QIS should be performed in stages. The EBF therefore welcomes the confirmation of the Trading Book Group to pursue a two-step process in which the QIS for actual bank portfolios will be the second step. Ideally the EBF would prefer a much more iterative approach to the framework definition and calibration. Even then, the EBF still would like to stress that for many banks it will be hard to do a full QIS on their actual portfolios as it will not be possible to have the necessary models ready within the required timeframe. 

 

As regards the calibration of the QIS, the EBF believes that any issues related to market risk capitalisation levels was appropriately addressed in Basel 2.5 and sees no need for the FRTB to further raise trading book capital requirements. Given the additive method of calculation, requirements determined on this basis are sufficiently conservative. Moreover, the calibration should ensure that there is a capital incentive to move from the revised SA to the revised IMA. 

 

The EBF welcomes the revised proposal for a boundary between the banking book and the trading book which seeks to take into account the intent to trade and to bring more clarity over the assignment of instruments. However, the EBF finds that it should be possible to assign the same instruments to both books. In order to ensure a consistent interpretation and implementation across banks, additional guidance will be required. 

 

Furthermore, as with the revised boundary the re-assignment of instruments will be substantial, the EBF supports an approach based on notification and not on approval. This means that any assignment of instruments would first be implemented and notified to the supervisor subject to a materiality threshold, and then without objection within a certain period of time be deemed approved by the supervisor. 

 

While the EBF agrees with the concept of introducing liquidity horizons, some of the proposed liquidity horizons are exaggerated when compared to actual experience, particularly for FX and interest rates. Furthermore, the direct use of returns over different liquidity horizons in the historical method will break the link between the capital charge and risk management at the desk level. In order to preserve the logical correlations the EBF favours using a common horizon for the ES calculation, combined with additional stress type add-ons or scaling factors for some of the less liquid activities/instruments. 

 

Whilst the EBF supports the desk-level approach in the revised IMA, the EBF cannot support the model independent risk tool. EBF fails to see how this new tool could identify desks with complex, potentially illiquid instruments that carry higher model risk, and believes that this tool would be the same as introducing a non-risk sensitive floor to the IMA Capital charge. The result could be that desks with low-risk profile would not be validated for IMA or they would be obliged to mis-hedge their book to increase the internal model capital. The EBF believes that there are sufficient other measures to ensure proper capitalisation. 

 

Furthermore, the EBF sees no reason why the current CRM approach should not be maintained for securitisations. Due to the very high modelling standards the EBF finds it should still be possible to use internal models to calculate capital charges for certain correlation trading activities as the CRM model envisages. 

 

For default risk, the EBF supports moving to a charge that doesn’t include migration risk, which will avoid double counting. However, the EBF proposes the use of a simpler method that is consistent with the banking book. Also the EBF advocates to use constant LGDs and a lower floor for sovereigns.

 

Full response

 

All responses

 

Original consultation, 31.10.13