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
• Simultaneous BCBS and CRR2 calculations
• ERM II
• Positive and Negative Delta Sensitivities

CRR2 Specification

Current status

• The law enacting this regulation is EU 575 / 2013.
• The main page for the regulation is https://ec.europa.eu/info/law/banking-prudential-requirements-regulation-eu-no-575-2013_en
• It was most recently amended in 2019 / 2033 (Nov 2019). The previous version 2019 / 876 (June 2019) contains the latest FRTB-related changes.
• The current consolidated regulation (with amendments applied) is: https://eur-lex.europa.eu/eli/reg/2013/575/2019-12-25
• In Dec 2019 a “delegated act” filled in some of the gaps left in the June 2019 version.
• This delegated regulation is: https://ec.europa.eu/finance/docs/level-2-measures/crr-delegated-act-2019-9068_en.pdf

EBA Draft Technical Standards

• EBA Draft technical standards on the IMA under the FRTB
• May 2020: Final report on draft ITS on specific reporting requirements for market risk (see article 430b(6) of CRR2)

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”
• 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](../../documentation-main/user/Content/REVISED_FRTB _ Parameter Sets.html)

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 in the FRTB Accelerator Help Portal.

Changes to daily sensitivities files

To use these additional buckets, you need to make the following changes to the daily sensitivities files. For details of each file, see the SA Input File Formats.

Simultaneous BCBS and CRR2 calculations

It is possible to load a single set of sensitivities into the FRTB Accelerator and use those sensitivities for both BCBS and CRR2 calculations. However, because the buckets are materialized in the cube (i.e. part of the fact), we cannot easily change the bucketing. In other words, we need to load two different versions of the CSR bucket (and bucket description) files. But, the accelerator data model currently only supports a single version of these files.

Example

The CSR non-Sec sensitivity files use sectors “Member State Sovereigns” and “Sovereigns” depending on if the issuer is a member state or not. For CRR2 we can map the member state and other sovereigns to different buckets as follows:

CRR2_CSR_Bucket_NONSEC.csv

1,IG,Member State Sovereigns,2018-09-28

1,HY,Member State Sovereigns,2018-09-28

1,NR,Member State Sovereigns,2018-09-28

2,IG,Sovereigns,2018-09-28

...

11,HY,Sovereigns,2018-09-28

11,NR,Sovereigns,2018-09-28

...

While for BCBS we can map them to the same buckets:

1,IG,Member State Sovereigns,2018-09-28

1,IG,Sovereigns,2018-09-28

...

9,HY,Member State Sovereigns,2018-09-28

9,NR,Member State Sovereigns,2018-09-28

9,HY,Sovereigns,2018-09-28

9,NR,Sovereigns,2018-09-28

...

This requires loading two different versions of the CSR bucket (and bucket description) files.

Loading different versions of CSR bucket files

As the FRTB Accelerator data model currently only supports a single version of these files, there are two options for loading the different versions:

• The easiest way is to load them into different instances of the FRTB Accelerator . For example, load the CRR2 buckets for BAU use, and load the BCBS buckets for QIS exercises.

• Use what-if branches to load one version of the files into a what-if branch. In the master branch we will map the sensitivities to the BCBS buckets, then in a “CRR2” branch we will map sensitivities to CRR2 buckets.

  Follow these steps:

  1. Update the sensitivities files to use the new Member State sectors (for sovereigns and covered bonds).

  2. Modify the BCBS versions of the CSR bucket mappings files to map the new CRR2 Member State sectors to BCBS buckets (see below)

  3. Start up the cube with the following:

     • Updated configuration files, which still default to BCBS, but contain CRR2 parameters as well

     • Updated sensitivities files

     • Unmodified (BCBS) CSR bucket description files

     • Modified bucket mapping files (with Member State sectors mapped to BCBS buckets)

     • All other files unchanged

  4. Create a “CRR2” what-if branch, and load the CRR2 versions of the CSR bucket and CSR bucket description files

  Result

  When querying the cube:

  • The master branch, with the BCBS parameter set, will perform the BCBS calculations.

  • The CRR2 branch, with the CRR2 parameter set, will perform the CRR2 calculations.

For more information on What-If, see Parameter Sets What-If Widget in the FRTB Accelerator Help Portal

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.

Article 325y, paragraph 2 states:

Exposures which would receive a 0% risk-weight under the Standardised Approach for credit risk in accordance with Chapter 2 of Title II shall receive a 0 % default risk weight for the own funds requirements for the default risk.

Which refers to Article 114 (Chapter 2 of Title II), which says in paragraph 4:

Exposures to Member States' central governments, and central banks denominated and funded in the domestic currency of that central government and central bank shall be assigned a risk weight of 0%.

We interpret this to mean that if a member state issues a bond in their domestic currency, then exposures to that bond will have zero risk weight. However, if the member state issues a bond in a foreign currency, then exposures will have a risk weight determined by the creditworthiness of the member state. The problem is that before applying the risk weights, the positions are first netted by obligor to produce the net JTD (according to article 325x), and it isn’t clear which risk weight to apply if the net JTD combines both domestic and foreign currency bonds.

ERM II

ERM II currencies (i.e. DKK) are handled through the concept of “Adjunct Currencies”, these are currencies that have a special relationship to the reporting currency.

Currently, based on Article 325ag (2), the Adjunct Currency support includes:

• Different GIRR bucket correlation ($γ_{bc}$) with reporting currency

• Specific FX risk weights per (adjunct) currency

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.

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 only includes the currency of Denmark. 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%.

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

Positive and Negative Delta Sensitivities

The positive and negative delta sensitivity measures have been added to meet the reporting requirements. The sensitivities are netted up to the risk-factor level, then sorted into positive and negative measures.

The Long/Short measures follow the pattern: risk-class Delta Sensitivities direction.

• Commodity Delta Sensitivities Long
• Commodity Delta Sensitivities Short
• CSR non-Sec Delta Sensitivities Long
• CSR non-Sec Delta Sensitivities Short
• CSR Sec CTP Delta Sensitivities Long
• CSR Sec CTP Delta Sensitivities Short
• CSR Sec non-CTP Delta Sensitivities Long
• CSR Sec non-CTP Delta Sensitivities Short
• Equity Delta Sensitivities Long
• Equity Delta Sensitivities Short
• FX Delta Sensitivities Long
• FX Delta Sensitivities Short
• GIRR Delta Sensitivities Long
• GIRR Delta Sensitivities Short