Section 1 — Technical elements to be included in the actual changes in a portfolio’s value
Technical elements to be included in the actual changes in a trading desk portfolio’s value for the back-testing requirements performed at trading desk level
1. For the purposes of the trading desk back-testing referred to in Article 325bf(3) of Regulation (EU) No 575/2013, institutions shall calculate the actual changes in a trading desk portfolio’s value by using the same techniques, including the same pricing methods, model parametrisations and market data, as those used in the process used to calculate the end-of-day values (‘end-of-day valuation process’), including the results of the independent price verification referred to in Article 105(8) of Regulation (EU) No 575/2013.
2. When calculating the actual changes in a trading desk portfolio’s value, institutions shall reflect the changes in the value of that portfolio that are due to the passage of time.
3. When calculating the actual changes in a trading desk portfolio’s value, institutions shall include in that value all those adjustments that have been considered in the end-of-day valuation process referred to in paragraph 1 and that are market risk related, with the exception of all of the following adjustments:
(a)
credit valuation adjustments reflecting the current market value of the credit risk of counterparties to the institution;
(b)
adjustments attributed to the institution’s own credit risk that have been excluded from own funds in accordance with Article 33(1), point (b) or (c), of Regulation (EU) No 575/2013;
(c)
additional value adjustments deducted from Common Equity Tier 1 capital in accordance with Article 34 of Regulation (EU) No 575/2013.
4. Institutions shall calculate the value of an adjustment as referred to in paragraph 3 on the basis of all positions that are assigned to the same trading desk. Institutions shall include changes in the adjustment’s value only on the date on which the adjustment is calculated.
5. In addition to the exclusions laid down in paragraph 3, points (a), (b), and (c), institutions may exclude from the calculation of the actual changes in a trading desk portfolio’s value an adjustment that is calculated in the end-of-day valuation process across sets of positions assigned to more than one trading desk on a net basis, where all of the following conditions are met:
(a)
that adjustment is, due to its nature, calculated on a net basis across sets of positions that are assigned to more than one trading desk;
(b)
the internal risk management of that adjustment is consistent with the level at which the adjustment is calculated;
(c)
the institution concerned documents all of the following:
(i)
the sets of positions across which the adjustment is calculated;
(ii)
the reasoning underpinning the calculation of the adjustment across the sets of positions referred to in point (i);
(iii)
the justification for not calculating the adjustment on the basis of positions assigned to that trading desk only.
Technical elements to be included in the actual changes in the portfolio’s value for the back-testing requirements performed at institution level
1. For the purposes of the back-testing referred to in Article 325bf(6) of Regulation (EU) No 575/2013, institutions shall calculate the actual changes in a portfolio’s value by using the same techniques, including the same pricing methods, model parametrisations and market data, as those used in the end-of-day valuation process, including the results of the independent price verification referred to in Article 105(8) of Regulation (EU) No 575/2013.
2. When calculating the actual changes in a portfolio’s value, institutions shall reflect the change in the value of that portfolio that are due to the passage of time.
3. When calculating the actual changes in a portfolio’s value, institutions shall include in that value all the adjustments that have been considered in the end-of-day valuation process referred to in paragraph 1 and that are market risk related, with the exception of all of the following adjustments:
(a)
credit valuation adjustments reflecting the current market value of the credit risk of counterparties to the institution;
(b)
adjustments attributed to the institution’s own credit risk that have been excluded from own funds in accordance with Article 33(1), point (b) or (c), of Regulation (EU) No 575/2013;
(c)
additional value adjustments deducted from Common Equity Tier 1 capital in accordance with Article 34 of Regulation (EU) No 575/2013.
4. Institutions shall calculate the change in the value of the adjustments referred to in paragraph 3 on the basis of either of the following:
(a)
all positions that are assigned to trading desks for which institutions calculate the own funds requirements for market risk in accordance with the alternative internal model approach set out in Part Three, Title IV, Chapter 1b of Regulation (EU) No 575/2013;
(b)
all positions subject to the own funds requirements for market risk.
5. Institutions shall include changes in the adjustment’s value only on the date on which the adjustment is calculated.
Section 2 — Technical elements to be included in the hypothetical changes in a portfolio’s value requirements
Technical elements to be included in the hypothetical changes in a trading desk portfolio’s value for the back-testing requirements performed at trading desk level
1. For the purposes of the trading desk back-testing referred to in Article 325bf(3) of Regulation (EU) No 575/2013, institutions shall calculate the hypothetical changes in a trading desk portfolio’s value by using the same techniques, including the same pricing methods, model parametrisations and market data, as those used in the end-of-day valuation process, without considering any fees and commissions.
2. When calculating the hypothetical changes in the trading desk portfolio’s value, institutions shall reflect the changes in the value of the trading desk portfolio that are due to the passage of time in the same way they reflect such changes in the calculation of:
(a)
the expected shortfall risk measure referred to in Article 325ba(1), point (a), of Regulation (EU) No 575/2013;
(b)
the stress scenario risk measure referred to in Article 325bk of Regulation (EU) No 575/2013.
3. When calculating the hypothetical changes in a trading desk portfolio’s value, institutions shall include in that value all those adjustments that have been considered in the end-of-day valuation process referred to in paragraph 1 and that are market risk related, that are calculated on a daily basis, and that are included in the institution’s risk-measurement model, with the exception of all of the following adjustments:
(a)
credit valuation adjustments reflecting the current market value of the credit risk of counterparties to the institution;
(b)
adjustments attributed to the institution’s own credit risk that have been excluded from own funds in accordance with Article 33(1), point (b) or (c), of Regulation (EU) No 575/2013;
(c)
additional value adjustments deducted from Common Equity Tier 1 capital in accordance with Article 34 of Regulation (EU) No 575/2013.
4. Institutions shall calculate the value of an adjustment as referred to in paragraph 3 on the basis of all the positions assigned to that trading desk. Institutions shall include changes in an adjustment’s value based on a comparison between the end-of-day adjustment’s value and, assuming unchanged positions in the trading desk portfolio, the adjustment’s value at the end of the subsequent day.
5. In addition to the exclusions laid down in paragraph 3, points (a), (b), and (c), institutions may also exclude from the calculation of the hypothetical changes to a trading’s desk portfolio’s value an adjustment that is calculated on a net basis in the end-of-day valuation process across sets of positions assigned to more than one trading desk, where all of the following conditions are met:
(a)
that adjustment is, due to its nature, calculated on a net basis across sets of positions that are assigned to more than one trading desk;
(b)
the internal risk management of that adjustment is consistent with the level at which the adjustment is calculated;
(c)
the institution documents all of the following:
(i)
the sets of positions across which the adjustment is calculated;
(ii)
the reasoning underpinning the calculation of the adjustment across the sets of positions referred to in point (i);
(iii)
the justification for not calculating the adjustment on the basis of positions assigned to that trading desk only.
Technical elements to be included in the hypothetical changes in the portfolio’s value for the back-testing requirements performed at institution level
1. For the purposes of the back-testing referred to in Article 325bf(6) of Regulation (EU) No 575/2013, institutions shall calculate the hypothetical changes in the portfolio’s value by using the same techniques, including the same pricing methods, model parametrisations and market data, as those used in the end-of-day valuation process, without considering any fees and commissions.
2. When calculating the hypothetical changes in the portfolio’s value, institutions shall reflect the changes in the value of the portfolio that are due to the passage of time in the same way they reflect such changes in the calculation of:
(a)
the expected shortfall risk measure referred to in Article 325ba(1), point (a), of Regulation (EU) No 575/2013;
(b)
the stress scenario risk measure referred to in Article 325bk of Regulation (EU) No 575/2013.
3. When calculating hypothetical changes in a portfolio’s value, institutions shall include in that value all those adjustments that have been considered in the end-of-day valuation process referred to in paragraph 1 and that are market risk related, that are calculated on a daily basis and that are included in the institution’s risk-measurement model, with the exception of all of the following adjustments:
(a)
credit valuation adjustments reflecting the current market value of the credit risk of counterparties to the institution;
(b)
adjustments attributed to the institution’s own credit risk that have been excluded from own funds in accordance with Article 33(1), point (b) or (c), of Regulation (EU) No 575/2013;
(c)
additional valuation adjustments deducted from Common Equity Tier 1 capital in accordance with Article 34 of Regulation (EU) No 575/2013.
4. Institutions shall calculate the changes in the value of the adjustments referred to in paragraph 3 on the basis of either of the following:
(a)
all those positions that are assigned to trading desks for which institutions calculate the own funds requirements for market risk in accordance with the alternative internal model approach set out in Part Three, Title IV, Chapter 1b of Regulation (EU) No 575/2013.
(b)
all positions subject to own funds requirements for market risk.
Documentation requirements
Institutions shall have policies and procedures in place setting out how they calculate the actual and hypothetical changes in a trading desk portfolio’s value or in a portfolio’s value in accordance with Articles 1 to 4 of this Regulation. Those policies and procedures shall contain all of the following elements:
(a)
when describing how the actual changes in value of the portfolio concerned are calculated, an outline of the differences between the changes in the end-of-day portfolio values produced by the end-of-day valuation process and the actual changes in the value of the portfolio concerned;
(b)
the fees and commissions and how the exclusion referred to in Article 325bf(4), point (b), of Regulation (EU) No 575/2013 is applied;
(c)
a list of all adjustments, specifying for each adjustment all of the following:
(i)
a description and purpose of the adjustment;
(ii)
the methodology and process used for the calculation of the adjustment;
(iii)
the frequency of the calculation of the adjustment and, where the frequency is less than daily, the reasoning for such frequency;
(iv)
whether the adjustment is sensitive to market risk;
(v)
the sets of positions across which the adjustment is calculated and the reasons for performing the calculation across such sets;
(vi)
whether and how the risk stemming from changes in the adjustment is actively hedged and which trading desk or desks are responsible for such hedging;
(vii)
whether and how the adjustment is taken into account in the actual changes in the value of the portfolio concerned for the purposes of the back-testing referred to in Article 325bf(3) of Regulation (EU) No 575/2013 and the back-testing referred to in Article 325bf(6) of that Regulation;
(viii)
whether and how the adjustment is taken into account in the hypothetical changes in the value of the portfolio concerned for the purposes of Articles 325bf and 325bg of Regulation (EU) No 575/2013, and an outline of how the change in the adjustment is calculated if unchanged positions in the portfolio are assumed.
Source: EUR-Lex (Publications Office of the EU), © European Union, reuse permitted under Commission Decision 2011/833/EU.
