19 August 2014

ISDA and AFME issue recommendations on EBA’s final draft on the materiality of extensions

ISDA and AFME published their proposals on the final draft RTS on assessing the materiality of extensions and changes of internal approaches where the proposed text requires clarification to avoid unintended consequences from inconsistent implementation of the proposed regulation.

Both organisations believe that the technical suggestions outlined in this note are crucial to ensure that firms have the required clarity in order to implement the proposed rules. Inability to apply consistently the conditions for models changes in line with regulatory mandate would result in unnecessary operational burden both for the firms and the regulators as both parties would have to continuously interact to obtain the required regulatory approvals with the risk of the proposed regulation to outweigh the benefits and do not meet regulatory objectives.

With regards to parallel run post extension or change in the model, the organisations on behalf of the industry see the 15 days parallel run as too long and the marginal cost of these parallel runs to far outweigh the marginal benefit. Other validation methods may be superior to repeated parallel testing. The Association’s proposal is to reduce minimum requirement for parallel tests to 2-5 days including the day-1 test. Regulators may ask for more tests if they deem it is necessary or alternatively request other forms of impact analysis. The burden might also be relieved if tests did not have to be conducted on consecutive days which allows runs over the weekend. There should be scope for regulators to discuss appropriate testing with firms without such onerous minimum standards.

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