Consultation Response on Data Inputs in the Risk Measurement Model

On November 12, 2020, ISDA submitted a response to a consultation by the European Banking Authority (EBA) on criteria for the use of data inputs in the risk-measurement model.

The Fundamental Review of the Trading Book alternative internal model is introduced through the second Capital Requirements Regulation, where the approach presents specific features aimed at enhancing the reliability of an institution’s capacity for appropriately capturing risks through internal models. The alternative internal model approach is designed to capture market risks and take into account tail risks, risk of market illiquidity and default risk through the sum of three components: i) the expected shortfall risk measure, which determines capital requirements for those risk factors for which a sufficient amount of observable data is available (modellable risk factors); ii) the stress scenario risk measure for risk factors with limited observable data (non-modellable risk factors); and iii) the own funds requirement for default risk associated with credit and equity positions. The guidelines propose qualitative conditions that the data related to modellable risk factors should meet to be used in an institution’s expected shortfall calculations.

The industry appreciates the EBA’s efforts to develop guidelines to align industry standards on data inputs used in firms’ risk measurement models. However, there are concerns about the prescriptive nature of the regulatory technical standards – in particular, on the allowance of appropriate extrapolation techniques and how this could lead to a level-playing-field issue if European banks have a different set of modelling options compared to banks in other jurisdictions.

Documents (1) for Consultation Response on Data Inputs in the Risk Measurement Model

Response on Commodity Derivatives Markets

On April 22, ISDA and FIA submitted a joint response to the European Commission’s (EC) consultation on the functioning of commodity derivatives markets and certain aspects relating to spot energy markets. In addition to questions on position management, reporting and...

Episode 50: The Value of Derivatives

A new report from ISDA shows that companies all over the world use derivatives to alleviate uncertainty, transfer risk and enhance profitability. ISDA discusses the findings with Boston Consulting Group’s Roy Choudhury. Please view this page via Chrome to access...

ISDA/IIF Response to EC Market Risk Consultation

On February 22, ISDA and the Institute of International Finance (IIF) submitted a joint response to the European Commission’s (EC) consultation on the application of the market risk prudential framework. The associations believe the capital framework should be risk-appropriate and...

ISDA Submits Letter on Environmental Credits

On April 15, ISDA submitted a response to the Financial Accounting Standards Board’s (FASB) consultation on environmental credits and environmental credit obligations. The response supports the FASB’s overall proposals to establish clear and consistent accounting guidance for environmental credits, but...