This final report presents the regulatory technical standards (RTS) for calculating long and short positions in the context of market and counterparty credit risks. It clarifies the definitions of these positions and the required aggregation method for calculating capital requirements under the CRR regulation. A simplified methodology is also proposed for small institutions to facilitate risk assessment without…
This document is the final report of the Regulatory Technical Standards (RTS) developed by the European Banking Authority (EBA) in 2024. It specifies the method to identify the main risk factor of a position and determine whether a transaction represents a long or short position, in accordance with Articles 94(3), 273a(3) and 325a(2) of Regulation (EU) No 575/2013 (CRR), amended by CRR3. The scope covers positions in trading and off-balance sheet portfolios, including derivative and non-derivative instruments, on market and counterparty credit risks, for all financial institutions subject to the CRR in the European Union.
The report addresses the need for a harmonized method to calculate the size of trading and derivative activities of financial institutions, conditioning access to simplified methods for calculating capital requirements for market and counterparty credit risks (CRR, Articles 94, 273a, 325a). CRR3 clarified that the size is calculated by summing the absolute value of aggregated long and short positions, defining a long position as one whose value increases with its main risk factor, and conversely for a short position. The EBA developed RTS specifying the method to identify the main risk factor and the determination of the direction (long/short) of a transaction. The general method relies on weighted sensitivities from the FRTB-SA standard for non-derivative and derivative positions, or on SA-CCR add-ons for derivatives. A simplified method is proposed for simple instruments (bonds, equities, forwards, plain swaps, vanilla options), accessible to all institutions, including small banks exempt from FRTB-SA or SA-CCR calculations, thus reducing operational burden and ensuring competitive fairness. The simplified method notably allows ignoring foreign exchange risk for non-FX instruments affected only by translation risk. The report also includes detailed tables to determine the main risk factor of bonds according to their maturity, credit quality and sector, as well as precise rules for classifying long or short positions according to the main risk factor. These RTS aim to standardize calculations, reduce interpretation divergences between institutions, and facilitate the application of access thresholds to simplified methods, while preserving proportionality according to institution complexity. The report will be submitted to the European Commission for adoption and official publication.
The initial CRR did not specify the definition nor the aggregation method of long and short positions to calculate the size of trading and derivative activities, which caused divergent interpretations among institutions. With CRR3, clarifications were made on the definition of long/short positions and their aggregation, but the method to identify the main risk factor remained to be defined. The EBA was mandated to develop RTS to harmonize this method, ensuring consistent application of access thresholds to simplified methods for calculating capital requirements on market and counterparty credit risks. The objective is to ensure a proportionate approach, adapted to the complexity and size of institutions, while limiting operational burden, notably for small banks. The scope covers positions in trading portfolios, derivatives, as well as certain off-balance sheet positions exposed to foreign exchange and commodity risks, with specific exclusions (e.g. internal credit derivatives).
Definition of long and short positions: A long position is defined as a position whose market value increases with its main risk factor, and conversely for a short position. Aggregation of long and short positions is done by summing the absolute values of the respective aggregated positions (p. 3-5).
Identification of the main risk factor: The general method relies on calculating delta sensitivities weighted by risks according to the FRTB-SA standard for non-derivative and derivative positions, or on SA-CCR add-ons for derivatives. Institutions must identify all relevant risk factors (as defined in the CRR, Articles 325l to 325q) and calculate weighted sensitivities, then select the factor with the greatest absolute sensitivity as the main risk factor (p. 6-7, 16-18).
Determination of the position direction: The direction (long or short) is determined by the sign of the weighted delta sensitivity to the main risk factor. In the absence of calculation capacity, the assessment may be based on the transaction's purpose (trading or hedging) and its exposure to the risk factor (p. 7, 17-18).
Simplified method: Intended for simple instruments and accessible to all institutions, this method notably covers fixed or floating rate bonds, equities, forwards, futures, plain swaps, vanilla options, CDS, funds, ETFs, repos, and simple derivatives. It allows ignoring foreign exchange risk for non-FX instruments affected only by translation risk. The simplified method relies on predefined rules and tables associating maturity, credit quality and sector with a main risk factor (p. 7-13, 18-21, 22-23).
Specific treatment of bonds: Bonds are analyzed according to their maturity, credit quality and sector to determine whether the main factor is the risk-free interest rate, the issuer credit spread or the inflation rate (for indexed bonds). The position direction depends on the main factor: for example, a purchased bond is short in interest rate and credit spread, but long in inflation (p. 8-11, 17-18, 22-23).
Treatment of other instruments: Equities have as main factor the spot price of the equity, FX spot positions the spot exchange rate, funds and ETFs a specific sector risk factor, repos the interest or repo rate, and simple derivatives follow analogous rules based on their underlying (p. 11-14, 19-21).
Impact and scope: The RTS aim to standardize calculations to avoid interpretation divergences, facilitate access to simplified methods, and reduce operational burden, notably for small banks without access to FRTB-SA or SA-CCR calculations. The simplified method is extended to all institutions to improve competitive fairness (p. 3-4, 7, 24-28).
Established facts:
- CRR3 specifies that the size of trading and derivative activities is calculated by summing the absolute value of aggregated long and short positions, defined by their sensitivity to the main risk factor (p. 3-5).
- The general method proposed by the EBA uses weighted sensitivities FRTB-SA and SA-CCR to identify the main risk factor and position direction (p. 6-7, 16-19).
- A simplified method is proposed for simple instruments, accessible to all institutions, with precise rules and tables for bonds (p. 7-13, 22-23).
- Cash positions in the reporting currency do not contribute to the size of activities (p. 15).
Assumptions:
- The simplification of ignoring foreign exchange risk for non-FX instruments affected only by translation risk is considered acceptable in the simplified method (p. 7, 12, 19).
- Modified duration is assimilated to residual maturity for bond sensitivity calculations (p. 9).
Interpretations:
- The extension of the simplified method to all institutions aims to reduce operational burden and ensure a level playing field (p. 4, 14).
- The harmonized method avoids interpretation divergences that could distort access to simplified methods and create competitive disadvantages (p. 24).
Uncertainties:
- The complexity of instruments not covered by the simplified method requires more advanced analysis, which may pose operational challenges for some institutions (p. 7).
- The precise impact of the new rules on the calculated size of activities and access to simplified methods remains to be observed in practice (p. 24-28).
The EBA concludes that the proposed RTS provide necessary clarification and harmonize the method to identify the main risk factor and determine long or short positions, essential conditions for calculating the size of trading and derivative activities. The coexistence of a general method based on FRTB-SA and SA-CCR sensitivities, and a simplified method covering simple instruments, ensures a proportionate approach adapted to the diversity of institutions. The extension of the simplified method to all institutions promotes competitive fairness and reduces operational burden. The RTS will be submitted to the European Commission for adoption and publication, after which they will become directly applicable in all Member States. The report recommends rapid adoption of these RTS to guarantee consistency and transparency in calculating access thresholds to simplified methods, thus contributing to the stability and effective supervision of the European banking sector.
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