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11 October 2016

EBA publishes final guidelines on corrections to modified duration for debt instruments


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The objective of these Guidelines is to establish what type of adjustments to the modified duration (MD) - as defined according to the formulas in the Capital Requirements Regulation (CRR) - have to be performed in order to appropriately reflect the effect of the prepayment risk.


The European Banking Authority‘s (EBA) Guidelines will contribute towards the successful implementation of the Commission's securitisation package under the Capital Markets Union reform, giving clarity on the matter to credit institutions.

The CRR establishes two standardised methods to compute capital requirements for general interest rate risk. One is the so-called maturity-based calculation for general interest risk, while the other one is the duration-based calculation of general risk.

These final Guidelines are relevant for institutions applying the duration-based calculation, and establish two approaches to correct the modified duration calculation. The first approach treats the instrument with embedded optionality as if it were a combination of a plain vanilla bond and an option whilst the second approach proposes to calculate directly the change in value of the whole instrument subject to prepayment risk. The Guidelines also require to compute additional adjustments to reflect the negative convexity as well as transaction costs and, where relevant, behavioural factors that may affect the modified duration of the instrument.

Press release

Final report



© EBA


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