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The European Banking Authority (EBA) today launched a public consultation on its draft Regulatory Technical Standards (RTS) on the method for identifying the main risk driver and determining whether a transaction represents a long or a short position. These RTS are part of the Phase 1 deliverables of the EBA roadmap on the implementation of the EU banking package in the area of market risk. The consultation runs until 24 July 2024.
The Capital Requirements Regulation (CRR) includes some derogations for the calculation of the capital requirements for market and counterparty credit risks, for small trading book business, derivative business or business subject to market risk. The CRR3 specifies that the size of the business shall be equal to the absolute value of the aggregated long position, summed with the absolute value of the aggregated short position. A position can be considered as long or short depending on how movements in its main risk driver affect the market value.
The proposed general method to identify the main risk driver hinges on sensitivities defined under the market risk standardised approach (FRTB-SA) or on add-ons defined under the standardised approach for counterparty credit risk (SA-CCR). For the determination of the direction of the positions, the methodology is aligned with the one set out in the RTS on SA-CCR.
Considering that small banks are, and have always been, exempted from using the FRTB SA or SA-CCR, a simplified method has also been included. The simplified method covers relatively simple instruments which are normally traded by small banks (fixed-rate bonds, floating-rate notes, stocks, forwards, futures, simple swaps and plain vanilla options).