This document provides instructions for reporting capital requirements for investment firms based on the K-factor and K-NPR. It outlines standardized approaches for assessing market risks, including position risks in debt instruments and equities. The instructions also include numbering and sign conventions for reporting own funds.
This document, titled "Annex XI - ITS on reporting and disclosure requirements for investment firms", is a standard published in 2024 by the European Banking Authority (EBA). It covers reporting and disclosure requirements related to capital requirements for investment firms, notably regarding market risks. The scope includes standardized approaches and internal models for calculating capital requirements linked to market risks, including risks on traded debt instruments, equities, foreign exchange, commodities, as well as correlation trading portfolios. The document is based on Regulation (EU) No 575/2013 and its specific articles, and is addressed to investment firms subject to these regulatory obligations (p. 1-23).
This document details the technical reporting instructions (ITS) for investment firms concerning capital requirements related to market risks, in accordance with Regulation (EU) No 575/2013. It specifies numbering and sign conventions to be used in reports, as well as the filling modalities of various templates related to market risks. These templates cover standardized approaches for risks linked to traded debt instruments, equities, foreign exchange risks, commodities, as well as specific requirements for correlation trading portfolios and internal models. Each template describes positions to be reported (long, short, net), methods for calculating capital requirements, risk categories (general, specific), and particular treatments (e.g., options, derivatives, positions deducted from own funds). The document emphasizes the necessity to report requirements by currency or market, according to predefined lists, and the strict application of the European regulation articles. The instructions also specify calculation and breakdown modalities of requirements, notably the distinction between specific and general risks, consideration of hedges, and particular treatments of complex positions (e.g., n-th-to-default credit derivatives, positions in correlation portfolios). Finally, the document provides guidance on declaring VaR and stress VaR measures within internal models, as well as on multipliers and complementary measures (default and migration risks, floors). These instructions aim to ensure increased harmonization and transparency in regulatory reporting of market risks for investment firms, thus facilitating prudential supervision (p. 1-23).
The document was developed to provide a precise technical framework to investment firms subject to capital requirements related to market risks, in accordance with Regulation (EU) No 575/2013. The objective is to harmonize reporting modalities of capital requirements by detailing conventions, formats, and specific instructions for each risk type and regulatory approach (standardized or internal model). This framework aims to guarantee consistency, comparability, and reliability of data transmitted to supervisory authorities. The scope covers market risks on various asset classes (debt, equities, foreign exchange, commodities) and specific portfolios (correlation), as well as requirements linked to internal models. The document excludes treatments outside the scope of Regulation (EU) No 575/2013 and does not address non-regulatory aspects or risk management strategies. It responds to a regulatory need for transparency and enhanced prudential control (p. 1-3).
General conventions:
- The document defines a numbering convention for templates, rows, and columns, used in validation rules (p. 3).
- The sign convention requires that any increase in own funds or requirements be reported as positive, and any decrease as negative (p. 3).
Market risks - Standardized approaches:
- Traded debt instruments (MKR SA TDI): reporting of gross and net positions, distinction between specific and general risk, breakdown by currency (EUR, USD, GBP, etc.) and maturity, treatment of derivatives and underlying positions, transfer of requirements from securitization templates (MKR SA SEC) and correlation portfolio (MKR SA CTP) to the main template (p. 4-7).
- Specific risk in securitizations (MKR SA SEC): reporting of long/short positions, possible deductions from own funds for positions with 1250% risk weighting, breakdown by role (originator, investor, sponsor), and by regulatory approach (SEC-IRBA, SEC-SA, etc.) (p. 7-9).
- Correlation trading portfolio (MKR SA CTP): reporting of specific positions (securitizations, n-th-to-default credit derivatives, other linked positions), own requirements, treatment of deductions, breakdown by role and approach (p. 9-12).
- Equity risk (MKR SA EQU): reporting by predefined national market, distinction between general risk (broad market) and specific risk (issuer-related), particular treatment of derivatives and futures on diversified indices, capital requirements calculated by market (p. 12-14).
- Foreign exchange risk (MKR SA FX): reporting by currency (including gold and CIUs treated as currencies), gross, net, covered positions excluded, calculation of requirements according to articles 351-354, specific treatment of CIUs depending on availability of investment management (p. 15-17).
- Commodity risk (MKR SA COM): reporting of long/short, net positions, broken down by commodity category, application of maturity approaches (maturity ladder, extended maturity ladder, simplified), capital requirements according to Part Three, Title IV, Chapter 4 of the regulation (p. 18-19).
Internal models (MKR IM):
- Reporting of VaR and stress VaR measures, breakdown by risk type (debt, equities, foreign exchange, commodities), possibility not to decompose if too burdensome.
- Inclusion of default and migration risk charges, and floor for correlation portfolio.
- Indication of applied multipliers, number of overshootings, and calculation of total requirements (p. 20-23).
Findings:
- The document establishes a detailed and standardized framework for reporting capital requirements related to market risks of investment firms, in accordance with Regulation (EU) No 575/2013 (p. 1-23).
- Each market risk type (debt, equities, foreign exchange, commodities) is covered by a specific template with precise instructions on positions to report, calculations to perform, and breakdowns to apply (p. 4-19).
- Internal models are integrated via a dedicated template, with VaR, stress VaR measures, and additional charges for default risks and floors (p. 20-23).
Assumptions:
- The document assumes investment firms have information systems capable of distinguishing and breaking down positions according to regulatory criteria (p. 3-23).
- It is assumed entities correctly apply cited regulation articles for calculating requirements (p. 4-23).
Author’s interpretations:
- Separation between specific and general risk is essential for precise calculation of capital requirements (p. 4-6, 12-14).
- Breakdown by currency, market, or asset category allows better granularity and risk supervision (p. 4-19).
- Treatment of positions deducted from own funds, notably those with 1250% risk weighting, is crucial for reporting consistency (p. 7-12).
Uncertainties:
- The document does not address practical IT implementation modalities nor potential difficulties firms may encounter in collecting and breaking down data (p. 1-23).
- The possibility for firms not to decompose certain VaR measures if too burdensome leaves interpretative leeway on data granularity reported (p. 20).
The EBA recommends rigorous application of the instructions detailed in this document to ensure regulatory compliance of investment firms regarding reporting of capital requirements related to market risks. Firms must:
- Respect numbering and sign conventions to guarantee consistency of reported data (p. 3).
- Use specific templates for each risk type and apply breakdown rules by currency, market, or asset category (p. 4-19).
- Report specific and general risks distinctly, as well as positions deducted from own funds according to regulation articles (p. 4-12).
- For internal models, provide VaR, stress VaR measures, additional charges, and multipliers in accordance with articles 364 to 366 of the regulation (p. 20-23).
- Ensure completeness and accuracy of data to facilitate prudential supervision and comparability between entities.
The document does not provide a specific action plan or deadlines but implies continuous implementation compliant with current regulatory requirements.
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