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CRR2 support

CRR2 is the European regulation that contains the EU version of FRTB.

This page walks you through the CRR2 support provided in the FRTB Accelerator via the following elements:

  • CRR2 parameter set
  • CSR buckets
  • DRC non-Sec Adjustments
  • ERM II
  • GIRR Inflation and Cross-Currency Basis curve risk-weights
  • Underwriting positions
  • Positive and Negative Delta Sensitivities

CRR2 Specification

Current status

Reporting Template

Differences with BCBS 457

  • In article 325h Table 4 (replaced in delegated act), the CSR non-Sec sovereign and cover-bond buckets are both split into member state and non-member state buckets.
  • Article 325y (referring to article 114 – Chapter 2 of Title II), for DRC non-Sec Default risk weights, member states issuing in their domestic currency have a risk weight of 0%.
  • Article 325av (and Article 325ag), specify different FX risk weights and GIRR inter-bucket correlations for currencies participating in ERM II.
  • In the technical standard on Backtesting and PLA requirements, the “Amber” PLA zone has been replaced with “Yellow” and “Orange”; both of these replacement zones are treated the same as the amber zone in the Capital Charge calculations. By adding “Y” (Yellow) and “O” (Orange) to the property ima.capital-surcharge.amber-zones in the frtb-config.properties file, the accelerator will treat the yellow and orange zones as if they were amber when calculating the capital charge.
  • In the reporting requirements, sums of positive and negative delta sensitivities are required.

CRR2 parameter set

The FRTB Accelerator includes the CRR2 parameter set, inheriting all the parameters from the (default) BCBS parameter set.

To use these parameters in queries, in the ParameterSet.csv configuration file set the “Parameter Set” level to CRR2 (instead of the default BCBS).

For an overview, see Parameter Sets

CSR buckets

For the CSR non-Sec and CSR Sec CTP risk classes, the CRR2 regulation has added new buckets for exposures to member states. In doing this, the numbering of the buckets has been shifted.

To support these additional buckets, the risk weights and correlations in the FRTB Accelerator have been updated for the CRR2 parameter set. For details of each file, see the Configuration section.

File Additions made for CRR2 support
FRTBParameters.csv For the CRR2 parameter set:
  • For CSR non-Sec and CSR Sec CTP: other bucket
  • For CSR non-Sec: covered bonds bucket and index buckets

Note: The ERM II configuration is included, see below for details.
CSRNS_Bucket_Correlations.csv
CSR_Sec_CTP_Bucket_Correlations.csv		 Inter-bucket gamma correlations for CRR2
CSR_BucketsRiskWeights_NONSEC.csv
CSR_BucketsRiskWeights_SECCTP.csv		 CRR2 risk-weights

Overriding Buckets

The Underlying Description Overrides file can be used to change the bucket for every CSR non-Sec issuer credit spread curve and CSR Sec CTP underlying. For each of these curves and underlyings, add an entry to override the bucket for the CRR2 parameter set.

This allows the CSR sensitivities to be loaded into the BCBS buckets, but then shifted to the CRR2 buckets by selecting the CRR2 parameter set.

DRC non-Sec Risk Weights

Interpretation Question

Pending an interpretation, the FRTB Accelerator does not yet have a specific implementation of the CRR2 regulations for the DRC non-Sec risk weights.

In both BCBS and CRR2 it is ambiguous as to whether the risk weight is applied per instrument or per obligor. In both cases the risk-weight is stated as being per obligor:

  • In BCBS, the NetJTD is calculated per obligor MAR22.3 (2) and the risk weight is determined per NetJTD MAR22.24.

  • In CRR2, this is stated directly in Article 325v (1)(f)

However, in the formula for $DRC_b$ (MAR22.25 and Article 325y(4)), the risk-weights and NetJTD are used at the instrument level. Additionally for CRR2, in Article 327y (2), the risk-weights may be overridden at the exposure level.

Impact of ambiguity:

  • This does not impact the HBR/WtS ratios as these are calculated from the aggregated Net JTD long/short values (before any risk weights are applied).

  • This does not impact BCBS, as long as we have a single rating (and hence risk weight) per obligor.

  • It does impact CRR2, a single obligor may have different risk weights for different exposures. i.e. a member state issuing bonds in both domestic and foreign currencies.

In FRTB Accelerator , the exposures (risk-factors) can be flagged as “zero risk-weight” (and this can be overridden per exposure and per jurisdiction). The parameter sa.drc.use-zero-risk-weight (true for CRR2; false for BCBS) indicates that exposures tagged as “zero risk-weight” should be treated according to one of the following interpretations when calculating $DRC_b$:

Exclude Zero Risk-Weight Exposures

In this interpretation, the member state bonds in domestic currencies are excluded from both the HBR/WtS ratio and the $DRC_b$ formulas.

This interpretation can be selected by setting the configuration property sa.drc.zero-risk-weight-mode=ignore

Apply the Offsetting Twice

In this interpretation, the member state bonds in both domestic and foreign currencies are treated as having the same obligor for offsetting when calculating the HBR/WtS ratio.

However, when calculating the $DRC_b$, the exposures with different risk-weights are considered to have different obligors for the purposes of offsetting. Effectively the member state bonds in domestic currencies are omitted from the $DRC_b$ formula (having been included previously in the HBR/WtS formula).

This interpretation can be selected by setting the configuration property sa.drc.zero-risk-weight-mode=hbr (default).

Weighted Average Risk-Weight

In this interpretation, the weighted average of the risk-weights to the domestic and foreign currency bonds is determined using the Gross JTD per exposure as the weighting. This weighted average is then used as the single risk-weight for the obligor (member state).

This interpretation can be selected by setting the configuration property sa.drc.zero-risk-weight-mode=weighted

DRC non-Sec Maturity Scaling 3-Month Floor

Unlike BCBS, the 3-Month floor for maturity scaling does not always apply in CRR2.

For BCBS, we have:

  • MAR 22.18 Use 3M floor on the maturity scaling. This is applied prior to offsetting.

For CRR2, we have:

  • Article 325x (2)(b): when offsetting, apply maturity scaling (no floor)
  • Article 325x (3): when offsetting is not possible, apply maturity scaling (with 3M floor).

This means that the 3M floor depends on whether offsetting occurs or not, and it cannot be independently applied prior to offsetting.

This behavior is controlled by a configuration parameter sa.drc.no-maturity-floor-when-offsetting. When true, the 3M floor will only apply when no offsetting is possible. When false, the 3M floor is always applied. It is set to true for CRR2 and false for BCBS.

warning

When this parameter is true, the measure “DRC non-Sec Scaled Gross JTD” is no longer an intermediate value in the calculation. This “intermediate” measure is calculated from the Gross JTD independently of the offsetting and will always apply the 3M floor to the scaling.

DRC non-Sec Adjustments

Article 325w allows for adjustments to be added when calculating the gross JTD.

To support this

  • The “Adjustment” field has been added to the DRC input file. The value of this field is available as the SA cube measure “DRC Adjustment”.
  • The flag sa.drc.adjustment.apply has been added to specify if adjustments are to be used in the calculations. The flag is set to false by default for the BCBS parameter set, however it is set to true for the CRR2 parameter set in FRTBParameters.csv.

ERM II

ERM II currencies (i.e. DKK, BGN, and HRK) are handled through the “FX Risk-Weight Overrides” and “GIRR Correlation Overrides”.

From Article 325ag:

2. The parameter ($γ_{bc}$) = 80 % shall be used to aggregate an interest rate risk factor based on a currency as referred to in Article 325av(3) and an interest rate risk factor based on the euro.

The GIRR Correlation Overrides allows the inter-bucket $γ_{bc}$ correlation to be overridden for a currency (or bucket) pair.

Article 325av, allows the FX risk-weights to be based on formally agreed fluctuation bands. And from https://ec.europa.eu/info/business-economy-euro/euro-area/introducing-euro/adoption-fixed-euro-conversion-rate/erm-ii-eus-exchange-rate-mechanism_en:

Currently, ERM II includes the currencies of Bulgaria, Croatia and Denmark. The Bulgarian lev joined ERM II on 10 July 2020 and observes a central rate of 1.95583 to the euro. Bulgaria also committed unilaterally to continue its currency board arrangement within the ERM II. The Croatian kuna joined ERM II on 10 July 2020 and observes a central rate of 7.53450 to the euro with a standard fluctuation band of ±15%. The Danish kroner joined ERM II on 1 January 1999, and observes a central rate of 7.46038 to the euro with a narrow fluctuation band of ±2.25%.

The FX Risk-Weight Overrides allows the risk-weight to be overridden by currency.

So, for ERM II the FRTB Accelerator includes the following new elements:

File Details Description
FX_Risk_Weight_Overrides.csv Currency,FX Risk Weight,Start Date,Parameter Set
DKK,0.0225,2016-01-01,CRR2
DKK,0.0225,2020-07-10,CRR2
BGN,0.05,2020-07-10,CRR2
HRK,0.05,2020-07-10,CRR2		 Overrides FX risk-weights for DKK, BGN, and HRK to 2.25%, 5%, and 5%, respectively.
GIRR_Correlation_Overrides.csv Currency,Counter Currency,Correlation,Start Date,Parameter Set
DKK,EUR,0.8,2016-01-01,CRR2		 Sets the GIRR bucket correlation between DKK and EUR to 80%.

GIRR Inflation and Cross-Currency Basis Curve Risk-Weights

A flag has been added to exclude the inflation and cross-currency basis curves when dividing the risk-weights for major currencies by sqrt(2). This flag is sa.girr.inflation-basis-adjustment in FRTBParameters.csv; it defaults to true for BCBS to include the curves when dividing the risk-weights, and has been set to false for CRR2 to exclude them.

Underwriting Positions

To support underwriting positions as per Article 325k, a sale factor may be applied to some of the SBM sensitivities.

This scale factor is determined by assigning trades to Sensitivity Scaling Categories in the Trade Attributes file. The scale factor for each category is specified in the Sensitivity_Scaling.csv configuration file:

Business Day 0,0,2016-01-01,CRR2
Business Day 1,0.1,2016-01-01,CRR2
Business Day 2,0.25,2016-01-01,CRR2
Business Day 3,0.25,2016-01-01,CRR2
Business Day 4,0.50,2016-01-01,CRR2
Business Day 5,0.75,2016-01-01,CRR2

EBA Reporting

Subsidiaries

The CRR2 specification does not always allow for netting sensitivities between legal entities. Where netting is not allowed, the capital charges are calculated independently, then summed.

The FRTB Accelerator includes two features to support this:

  • Netting Sets. The capital charges are calculated independently within the nettings sets, then summed.
  • Imported Values. For capital changes calculated in external systems. These can be imported into the FRTB Accelerator and added to the reported values.

EBA Reporting Template Bookmark

The ActiveViam FRTB / CRR2 / EBA Template - Annex I bookmark included with the FRTB Accelerator includes all the measures requested by the EBA. It also uses the variation of the measures that include support for the Netting Sets and Imported Values.