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

• 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/2013/575/2020-12-28
• Parts of the regulation were left to a future delegated act.
• This delegated act is: https://ec.europa.eu/finance/docs/level-2-measures/crr-delegated-act-2019-9068_en.pdf
• The delegated act was published in the EU official journal on 2021-03-11: https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32021R0424&from=EN

Reporting Template

• May 2020: Final report on draft ITS on specific reporting requirements for market risk (see article 430b(6) of CRR2)
• Published in the EU official journal on 2021-03-16: https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32021R0453&from=EN

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.
• Article 325w allows for adjustments to be added when calculating the DRC non-Sec gross JTD.
• GIRR inflation and cross-currency basis curves are not included when dividing the risk-weights by sqrt(2) for major currencies
• Article 325k allows the SBM sensitivities to be scaled to account for underwriting
• 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.

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.

There are several potential interpretations for how to calculate $DRC_b$ for CRR2. Two of these are:

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 can be achieved in the accelerator by omitting these exposures from the input files.

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).

Currently, this can be partially achieved in the accelerator by creating different obligors for the domestic and foreign currency bonds and creating a new rating that has zero risk weight. This workaround only works if the net exposures to the domestic and foreign bonds are either both short or both long (per member state), so that there is no need to offset between the domestic and foreign bonds.

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:

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

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

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