On November 6, 2020, ISDA submitted a response to a consultation by the Prudential Regulation Authority (PRA) on the calculation of risks not in value at risk (VAR) and stressed VAR.

Market volatility related to the COVID-19 outbreak has highlighted elements of the market risk framework that may lead to an excessively procyclical increase in own funds requirements during periods of stress. For two of those elements (frequency of calculation for the risks-not-in-VAR measure and identification of a ‘period of significant financial stress relevant to the institution’s portfolio’ for the stressed VAR calculation), the PRA proposes to set expectations that are intended to attenuate the procyclicality in own funds requirements for market risk.

The industry commends the PRA’s timely actions throughout 2020 to provide support and guidance to firms during the period of severe market volatility caused by COVID-19, although there is concern that the proposals in this consultation may lead to overly burdensome operational complexities without the desired outcome of reducing the volatility of market risk capital requirements during a crisis period.