Own funds requirements for curvature risk
Article 1
Regulation (EU) No 575/2013 is amended as follows: (1) Article 325e is amended as follows: (a) in paragraph 2, points (a) and (b) are replaced by the following: ‘(a) all the positions of instruments with optionality shall be subject to the own funds requirements referred to in points (a), (b) and (c) of paragraph 1 for the risks other than exotic underlyings of the instruments as referred to in point (a) of Article 325u(2); (b) all the positions of instruments without optionality shall be subject to the own funds requirements referred to in point (a) of paragraph 1 for the risks other than exotic underlyings of the instruments as referred to in point (a) of Article 325u(2).’; (b) the following paragraph is added: ‘3. By way of derogation from point (b) of paragraph 2, an institution may choose to subject all the positions of instruments without optionality to the own funds requirements referred to in points (a) and (c) of paragraph 1. An institution that chooses to use the approach set out in the first subparagraph shall notify its competent authority thereof at least three months before the first use. After those three months have elapsed and provided that the competent authority has not objected, the institution may use that approach until the competent authority informs the institution that it is no longer permitted to do so. An institution that wishes to stop using the approach set out in the first subparagraph shall notify its competent authority thereof at least three months before stopping that use. The institution may stop applying that approach, unless the competent authority has objected within that three-month period.’; (2) Article 325g is replaced by the following: ‘Article 325g Own funds requirements for curvature risk 1. Institutions shall perform the calculations laid down in paragraph 2 for each risk factor of the instruments subject to the own funds requirement for curvature risk, except for the risk factors referred to in paragraph 3. For a given risk factor, institutions shall perform those calculations on a net basis across all the positions of the instruments subject to the own funds requirement for curvature risk that contain that risk factor. 2. For a given risk factor k included in one or more instruments referred to in paragraph 1, institutions shall calculate the upward net curvature risk position of that risk factor ( ) and the downward net curvature risk position of that risk factor ( ) as follows: where: i = the index that denotes all the positions of instruments referred to in paragraph 1 and including risk factor k; x k = the current value of risk factor k; V i ( x k ) = the value of instrument i as estimated by the pricing model of the institution based on the current value of risk factor k; = the value of instrument i as estimated by the pricing model of the institution based on an upward shift of the value of risk factor k; = the value of instrument i as estimated by the pricing model of the institution based on a downward shift of the value of risk factor k; = the risk weight applicable to risk factor k determined in accordance with Section 6; s ik = the delta sensitivity of instrument i with respect to risk factor k, calculated in accordance with Article 325r. 3. By way of derogation from paragraph 2, for curves of risk factors that belong to the general interest rate risk (GIRR), credit spread risk (CSR) and commodity risk classes, institutions shall perform the calculations laid down in paragraph 6 at the level of the entire curve instead of at the level of each risk factor that belongs to the curve. For the purposes of the calculation referred to in paragraph 2, where x k is a curve of risk factors allocated to the GIRR, CSR and commodity risk classes, s ik shall be the sum of the delta sensitivities to the risk factor of the curve across all tenors of the curve. 4. In order to determine a bucket-level own funds requirement for curvature risk, institutions shall aggregate, in accordance with the following formula the upward and downward net curvature risk positions, calculated in accordance with paragraph 2, of all the risk factors assigned to that bucket in accordance with Subsection 1 of Section 3: where: b = the index that denotes a bucket of a given risk class; K b = own funds requirements for curvature risk for bucket b; ; ; ; p kl = the intra-bucket correlations between risk factors k and l as prescribed in Section 6; k, l = the indices that denote all the risk factors of instruments referred to in paragraph 1 that are assigned to bucket b; ( ) = the upward net curvature risk position; ( ) = the downward net curvature risk position. 5. By way of derogation from paragraph 4, for the bucket-level own funds requirements for curvature risk of bucket 18 of Article 325ah, of bucket 18 of Article 325ak, of bucket 25 of Article 325am and of bucket 11 of Article 325ap the following formula shall be used: 6. Institutions shall calculate the risk-class own funds requirements for curvature risk ( RCCR) by aggregating all the bucket-level own funds requirements for curvature risk within a given risk class as follows: where: b, c = the indices that denote all the buckets of a given risk class that corresponds to instruments referred to in paragraph 1; K b = own funds requirements for curvature risk for bucket b; ; ; γ bc = the inter-bucket correlations between buckets b and c as set out in Section 6. 7. The own funds requirement for curvature risk shall be the sum of the risk class own funds requirements for curvature risk calculated in accordance with paragraph 6 across all risk classes to which at least one risk factor of the instruments referred to in paragraph 1 belongs.’; (3) in Article 325h(2), point (c) is replaced by the following: ‘(c) the “low correlations” scenario, whereby the correlation parameters ρ kl and γ bc that are specified in Section 6 shall be replaced by and , respectively.’; (4) Articles 325i and 325j are replaced by the following: ‘Article 325i Treatment of index instruments and other multi-underlying instruments 1. Institutions shall use a look-through approach for index and other multi-underlying instruments in accordance with the following: (a) for the purposes of calculating the own funds requirements for delta and curvature risk, institutions shall consider that they hold individual positions directly in the underlying constituents of the index or other multi-underlying instruments, except for a position in an index included in the ACTP for which they shall calculate a single sensitivity to the index; (b) institutions are allowed to net the sensitivities to a risk factor of a given constituent of an index instrument or other multi-underlying instrument with the sensitivities to the same risk factor of the same constituent of single name instruments, except for positions included in the ACTP; (c) for the purposes of calculating the own funds requirements for vega risk, institutions may either consider that they directly hold individual positions in the underlying constituents of the index or other multi-underlying instrument, or calculate a single sensitivity to the underlying of that instrument. In the latter case, institutions shall assign the single sensitivity to the relevant bucket as set out in Subsection 1 of Section 6 as follows: (i) where, taking into account the weightings of that index, more than 75 % of constituents in that index would be mapped to the same bucket, institutions shall assign the sensitivity to that bucket and treat it as a single-name sensitivity in that bucket; (ii) in all other cases, institutions shall assign the sensitivity to the relevant index bucket. 2. By way of derogation from point (a) of paragraph 1, institutions may calculate a single sensitivity to a position in a listed equity or credit index for the purposes of calculating the own funds requirements for delta and curvature risks provided the listed equity or credit index meets the conditions set out in paragraph 3. In that case, institutions shall assign the single sensitivity to the relevant bucket as set out in Subsection 1 of Section 6 as follows: (a) where, taking into account the weightings of that listed index, more than 75 % of constituents in that listed index would be mapped to the same bucket, that sensitivity shall be assigned to that bucket and treated as a single-name sensitivity in that bucket; (b) in all other cases, institutions shall assign the sensitivity to the relevant listed index bucket. 3. Institutions may use the approach set out in paragraph 2 for instruments referencing a listed equity or credit index where all of the following conditions are met: (a) the constituents of the listed index and their respective weightings in that index are known; (b) the listed index contains at least 20 constituents; (c) no single constituent contained within the listed index represents more than 25 % of the total market capitalisation of that index; (d) no set comprising one tenth of the total number of constituents of the listed index, rounded up to the next integer, represents more than 60 % of the total market capitalisation of that index; (e) the total market capitalisation of all the constituents of the listed index is no less than EUR 40 billion. 4. An institution shall use, consistently over time, only the approach set out in paragraph 1 or the approach set out in paragraph 2 for all the instruments that reference a listed equity or credit index that meets the conditions set out in paragraph 3. An institution shall require prior permission from the competent authority before switching from one approach to another. 5. For an index or other multi-underlying instrument, the sensitivity inputs for the calculation of delta and curvature risks shall be consistent, irrespective of the approaches used for that instrument. 6. Index or multi-underlying instruments which bear other residual risks as referred to in Article 325u(5) shall be subject to the residual risk add-on referred to in Section 4. Article 325j Treatment of collective investment undertakings 1. An institution shall calculate the own funds requirements for market risk of a position in a CIU using one of the following approaches: (a) where an institution is able to obtain sufficient information about the individual underlying exposures of the CIU, the institution shall calculate the own funds requirements for market risk of that CIU position by looking through to the underlying positions of the CIU as if those positions were directly held by the institution; (b) where the institution is not able to obtain sufficient information about the individual underlying exposures of the CIU, but the institution has knowledge of the content the mandate of the CIU and daily price quotes for the CIU can be obtained, the institution shall calculate the own funds requirements for market risk of that CIU position by using one of the following approaches: (i) the institution may consider the position in the CIU as a single equity position allocated to the bucket “other sector” in Table 8 of Article 325ap(1); (ii) upon permission from its competent authority, an institution may calculate the own funds requirements for market risk of the CIU in accordance with the limits set in the CIU’s mandate and relevant law; (c) where the institution meets neither the conditions in point (a) nor (b), the institution shall allocate the CIU to the non-trading book. An institution that uses one of the approaches set out in point (b) shall apply the own funds requirement for the default risk set out in Section 5 of this Chapter and the residual risk add-on set out in Section 4 of this Chapter where the mandate of the CIU implies that some exposures in the CIU shall be subject to those own funds requirements. An institution that uses the approach set out in point (ii) of point (b) may calculate the own funds requirements for counterparty credit risk and own funds requirements for credit valuation adjustment risk of derivative positions of the CIU, using the simplified approach set out in paragraph 3 of Article 132a. 2. By way of derogation from paragraph 1, where an institution has a position in a CIU that tracks an index benchmark so that the annualised return difference between the CIU and the tracked index benchmark over the last 12 months is below 1 % in absolute terms, ignoring fees and commissions, the institution may treat that position as a position in the tracked index benchmark. An institution shall verify compliance with that condition when the institution enters into the position and, after that, at least annually. However, where data for the last 12 months are not fully available, an institution may, subject to permission from the institution’s competent authority, use an annualised return difference from a period shorter than 12 months. 3. An institution may use a combination of the approaches referred to in points (a), (b) and (c) of paragraph 1 for its positions in CIUs. However, an institution shall use only one of those approaches for all the positions in the same CIU. 4. For the purposes of point (b) of paragraph 1, an institution shall carry out the calculations under the following provisions: (a) for the purposes of calculating the own funds requirement under the sensitivities-based method set out in Section 2 of this Chapter, the CIU shall first take position to the maximum extent allowed under its mandate or relevant law in the exposures attracting the highest own funds requirements set out under that Section and shall then continue taking positions in descending order until the maximum total loss limit is reached; (b) for the purposes of the own fund requirements for the default risk set out in Section 5 of this Chapter, the CIU shall first take position to the maximum extent allowed under its mandate or relevant law in the exposures attracting the highest own funds requirements set out under that Section and shall then continue taking positions in descending order until the maximum total loss limit is reached; (c) the CIU shall apply leverage to the maximum extent allowed under its mandate or relevant law, where applicable. The own funds requirements for all positions in the same CIU for which the calculations referred to in the first subparagraph are used shall be calculated on a stand-alone basis as a separate portfolio using the approach set out in this Chapter. 5. An institution may use the approaches referred to in point (a) or (b) of paragraph 1 only where the CIU meets all the conditions set out in Article 132(3) and point (a) of Article 132(4).’; (5) Article 325q is amended as follows: (a) paragraph 1 is replaced by the following: ‘1. The foreign exchange delta risk factors to be applied by institutions to foreign exchange sensitive instruments shall be all the spot exchange rates between the currency in which an instrument is denominated and the institution’s reporting currency or the institution’s base currency where the institution is using a base currency in accordance with paragraph 7. There shall be one bucket per currency pair, containing a single risk factor and a single net sensitivity.’; (b) paragraph 3 is replaced by the following: ‘3. The foreign exchange curvature risk factors to be applied by institutions to instruments with underlyings that are sensitive to foreign exchange shall be the foreign exchange delta risk factors referred to in paragraph 1.’; (c) the following paragraphs 5, 6 and 7 are added: ‘5. Where a foreign exchange rate that is the underlying of an instrument i that is subject to own funds requirements for curvature risks neither refers to the institution’s reporting currency nor the institution’s base currency, the institution may divide by 1,5 the corresponding components and set out in paragraph 2 of Article 325g for which x k is the foreign exchange risk factor between one of the two currencies of the underlying and the institution’s reporting currency or the institution’s base currency, as applicable. 6. Subject to permission from its competent authority, an institution may divide by 1,5 the components and set out in Article 325g(2) consistently for all the foreign exchange risk factors of instruments concerning foreign exchange and subject to own funds requirement for curvature risk, provided that any foreign exchange risk factors based on the institution’s reporting currency or the institution’s base currency, as applicable, that are included in the calculation of those components are shifted simultaneously. 7. By way of derogation from paragraphs 1 and 3, an institution may replace, subject to permission from its competent authority, its reporting currency by another currency (“the base currency”) in all the spot exchange rates to express the delta and curvature foreign exchange risk factors where all of the following conditions are met: (a) the institution uses only one base currency; (b) the institution applies the base currency consistently to all its trading book and non-trading book positions; (c) the institution has demonstrated to the satisfaction of its competent authority that: (i) using the chosen base currency provides an appropriate risk representation for the institution’s positions subject to foreign exchange risks; (ii) the choice of base currency is compatible with the manner in which the institution manages those foreign exchange risks internally; (iii) the choice of base currency is not driven primarily by the desire to reduce the institution’s own funds requirements; (d) the institution takes into account the translation risk between the reporting currency and the base currency. An institution that has been permitted to use a base currency as set out in the first subparagraph shall convert the resulting own funds requirements for foreign exchange risk into the reporting currency using the prevailing spot exchange rate between the base currency and the reporting currency.’; (6) in Article 325ae, paragraphs 1 and 2 are replaced by the following: ‘1. For currencies not included in the most liquid currency sub-category as referred to in point (b) Article 325bd(7), the risk weights of the sensitivities to the risk-free rate risk factors shall be the following: Table 3 Bucket Maturity Risk Weight 1 0,25 years 1,7 % 2 0,5 years 1,7 % 3 1 year 1,6 % 4 2 years 1,3 % 5 3 years 1,2 % 6 5 years 1,1 % 7 10 years 1,1 % 8 15 years 1,1 % 9 20 years 1,1 % 10 30 years 1,1 % 2. Institutions shall apply a risk weight of 1,6 % to all sensitivities of inflation and to cross currency basis risk factors.’; (7) in paragraph 1 of Article 325ah, Table 4 is replaced by the following: ‘Table 4 Bucket number Credit quality Sector Risk weight 1 All Central government, including central banks, of Member States 0,5 % 2 Credit quality step 1 to 3 Central government, including central banks, of a third country, multilateral development banks and international organisations referred to in Article 117(2) or Article 118 0,5 % 3 Regional or local authority and public sector entities 1,0 % 4 Financial sector entities including credit institutions incorporated or established by a central government, a regional government or a local authority and promotional lenders 5,0 % 5 Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying 3,0 % 6 Consumer goods and services, transportation and storage, administrative and support service activities 3,0 % 7 Technology, telecommunications 2,0 % 8 Health care, utilities, professional and technical activities 1,5 % 9 Covered bonds issued by credit institutions established in Member States 1,0 % 10 Credit quality step 1 Covered bonds issued by credit institutions in third countries 1,5 % Credit quality steps 2 to 3 2,5 % 11 Credit quality step 4 to 6 and unrated Central government, including central banks, of a third country, multilateral development banks and international organisations referred to in Article 117(2) or Article 118 2 % 12 Regional or local authority and public sector entities 4,0 % 13 Financial sector entities including credit institutions incorporated or established by a central government, a regional government or a local authority and promotional lenders 12,0 % 14 Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying 7,0 % 15 Consumer goods and services, transportation and storage, administrative and support service activities 8,5 % 16 Technology, telecommunications 5,5 % 17 Health care, utilities, professional and technical activities 5,0 % 18 Other sector 12,0 % 19 Listed credit indices with a majority of its individual constituents being investment grade 1,5 % 20 Listed credit indices with a majority of its individual constituents being non-investment grade or unrated 5 %’ (8) in Article 325aj, Table 5 is replaced by the following: ‘Table 5 Bucket 1, 2 and 11 3 and 12 4 and 13 5 and 14 6 and 15 7 and 16 8 and 17 9 and 10 18 19 20 1, 2 and 11 75 % 10 % 20 % 25 % 20 % 15 % 10 % 0 % 45 % 45 % 3 and 12 5 % 15 % 20 % 15 % 10 % 10 % 0 % 45 % 45 % 4 and 13 5 % 15 % 20 % 5 % 20 % 0 % 45 % 45 % 5 and 14 20 % 25 % 5 % 5 % 0 % 45 % 45 % 6 and 15 25 % 5 % 15 % 0 % 45 % 45 % 7 and 16 5 % 20 % 0 % 45 % 45 % 8 and 17 5 % 0 % 45 % 45 % 9 and 10 0 % 45 % 45 % 18 0 % 0 % 19 75 % 20’ (9) in Article 325ak, Table 6 is replaced by the following: ‘Table 6 Bucket number Credit quality Sector Risk weight 1 All Central government, including central banks, of Member States 4,0 % 2 Credit quality step 1 to 3 Central government, including central banks, of a third country, multilateral development banks and international organisations referred to in Article 117(2) or Article 118 4,0 % 3 Regional or local authority and public sector entities 4,0 % 4 Financial sector entities including credit institutions incorporated or established by a central government, a regional government or a local authority and promotional lenders 8,0 % 5 Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying 5,0 % 6 Consumer goods and services, transportation and storage, administrative and support service activities 4,0 % 7 Technology, telecommunications 3,0 % 8 Health care, utilities, professional and technical activities 2,0 % 9 Covered bonds issued by credit institutions established in Member States 3,0 % 10 Covered bonds issued by credit institutions in third countries 6,0 % 11 Credit quality step 4 to 6 and unrated Central government, including central banks, of a third country, multilateral development banks and international organisations referred to in Article 117(2) or Article 118 13,0 % 12 Regional or local authority and public sector entities 13,0 % 13 Financial sector entities including credit institutions incorporated or established by a central government, a regional government or a local authority and promotional lenders 16,0 % 14 Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying 10,0 % 15 Consumer goods and services, transportation and storage, administrative and support service activities 12,0 % 16 Technology, telecommunications 12,0 % 17 Health care, utilities, professional and technical activities 12,0 % 18 Other sector 13,0 %’ (10) in paragraph 1 of Article 325am, Table 7 is replaced by the following: ‘Table 7 Bucket number Credit quality Sector Risk weight 1 Senior and Credit quality step 1 to 3 RMBS — Prime 0,9 % 2 RMBS — Mid-Prime 1,5 % 3 RMBS — Sub-Prime 2,0 % 4 CMBS 2,0 % 5 Asset backed securities (ABS) — Student loans 0,8 % 6 ABS — Credit cards 1,2 % 7 ABS — Auto 1,2 % 8 Collateralised loan obligations (CLO) non-ACTP 1,4 % 9 Non-senior and credit quality step 1 to 3 RMBS — Prime 1,125 % 10 RMBS — Mid-Prime 1,875 % 11 RMBS — Sub-Prime 2,5 % 12 CMBS 2,5 % 13 ABS — Student loans 1 % 14 ABS — Credit cards 1,5 % 15 ABS — Auto 1,5 % 16 CLO non-ACTP 1,75 % 17 Credit quality step 4 to 6 and unrated RMBS — Prime 1,575 % 18 RMBS — Mid-Prime 2,625 % 19 RMBS — Sub-Prime 3,5 % 20 CMBS 3,5 % 21 ABS — Student loans 1,4 % 22 ABS — Credit cards 2,1 % 23 ABS — Auto 2,1 % 24 CLO non-ACTP 2,45 % 25 Other sector 3,5 %’ (11) in paragraph 1 of Article 325ap, Table 8 is replaced by the following: ‘Table 8 Bucket number Market capitali-sation Economy Sector Risk weight for equity spot price Risk weight for equity repo rate 1 Large Emerging market economy Consumer goods and services, transportation and storage, administrative and support service activities, healthcare, utilities 55 % 0,55 % 2 Telecommunications, industrials 60 % 0,60 % 3 Basic materials, energy, agriculture, manufacturing, mining and quarrying 45 % 0,45 % 4 Financials including government-backed financials, real estate activities, technology 55 % 0,55 % 5 Advanced economy Consumer goods and services, transportation and storage, administrative and support service activities, healthcare, utilities 30 % 0,30 % 6 Telecommunications, industrials 35 % 0,35 % 7 Basic materials, energy, agriculture, manufacturing, mining and quarrying 40 % 0,40 % 8 Financials including government-backed financials, real estate activities, technology 50 % 0,50 % 9 Small Emerging market economy All sectors described under bucket numbers 1, 2, 3 and 4 70 % 0,70 % 10 Advanced economy All sectors described under bucket numbers 5, 6, 7 and 8 50 % 0,50 % 11 Other sector 70 % 0,70 % 12 Large market cap, advanced economy indices 15 % 0,15 % 13 Other indices 25 % 0,25 %’ (12) Article 325aq is amended as follows (a) paragraph 1 is replaced by the following: ‘1. The delta risk correlation parameter ρ kl between two sensitivities W S k and W S l within the same bucket shall be set at 99,90 % where one is a sensitivity to an equity spot price and the other is a sensitivity to an equity repo rate and where both sensitivities are related to the same equity issuer name.’; (b) in paragraph 2, the following point (e) is added: ‘(e) 80 % between two sensitivities within the same bucket that fall under either index bucket (bucket number 12 or 13).’; (c) paragraph 3 is replaced by the following: ‘3. The correlation parameter ρ kl between two sensitivities WS k and WS l to equity repo rates within the same bucket shall be set in accordance with points (a) to (d) of paragraph 2.’; (13) Articles 325ar and 325as are replaced by the following: ‘Article 325ar Correlations across buckets for equity risk The correlation parameter γ bc shall apply to the aggregation of sensitivities between different buckets. It shall be set in relation to the buckets of Table 8 in Article 325ap as follows: (a) 15 % where the two buckets fall within bucket numbers 1 to 10; (b) 0 % where either of the two buckets fall within bucket number 11; (c) 75 % where the two buckets fall within bucket number 12 and 13; (d) 45 % otherwise. Article 325as Risk weights for commodity risk Risk weights for sensitivities to commodity risk factors shall be the following: Table 9 Bucket number Bucket name Risk weight 1 Energy — solid combustibles 30 % 2 Energy — liquid combustibles 35 % 3 Energy — electricity and carbon trading 60 % 4 Freight 80 % 5 Metals — non-precious 40 % 6 Gaseous combustibles 45 % 7 Precious metals (including gold) 20 % 8 Grains and oilseed 35 % 9 Livestock and dairy 25 % 10 Softs and other agricultural commodities 35 % 11 Other commodities 50 %’ (14) in Article 325av, paragraph 1 is replaced by the following: ‘1. A risk weight of 15 % shall be applied to all sensitivities of foreign exchange risk factors.’; (15) in paragraph 3 of Article 325ax, Table 11 is replaced by the following: ‘Table 11 Risk class LH risk class Risk weights GIRR 60 100 % CSR non-securitisations 120 100 % CSR securitisations (ACTP) 120 100 % CSR securitisations (non-ACTP) 120 100 % Equity (large cap and indices) 20 77,78 % Equity (small cap and other sector) 60 100 % Commodity 120 100 % Foreign exchange 40 100 %’