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Response to Commission consultation on trading book and market risk

​​​​BRUSSELS, 27 June 2016

ESBG response to the Commission consultation on proportionality in the future market risk capital requirements and the review of the original exposure method

​ESBG (European Savings and Retail Banking Group)

Rue Marie-Thérèse, 11 - B-1000 Brussels

ESBG Transparency Register ID: 8765978796-80



June 2016​


Doc 0569/2016       


Vers. 1.3

Dear Sir/Madam,


Thank you for the opportunity to comment on the Commission consultation on proportionality in the future market risk capital requirements and the review of the original exposure method. We would like to share with you the following remarks:

​Question 1: Can the new standardised approach in the BCBS FRTB framework be easily applied to all institutions with a trading book? If not, which elements of this approach would be more challenging to implement and for which types of trading books? If possible, please provide a quantification of potential implementation costs for the institution concerned.

The BCBS Fundamental Review of the Trading Book (FRTB) framework is a much more risk sensitive approach than the current framework for market risk. Risk sensitivity is a preferred approach, in ESBG's view. However, the increased risk sensitivity comes at a cost. The FRTB framework including its new standardised approach is assessed as far more complex to implement than the existing approach. For small banks especially, but generally for all banks with small trading books, it could be questioned whether the increased costs would create a sufficiently high benefit for the banks themselves and in relation to financial stability considerations. It is somewhat our fear that smaller banks might struggle to implement the necessary solutions, and their costs will be high compared to the benefits.

Proportionality being at first sight linked to the size of an institution, it should also be pointed out that complexity is also one dimension of proportionality. Decision-making could benefit from taking into account the different facets of proportionality when drafting legislative proposals.

Usually, simple activities draw limited revenues and are less likely to absorb additional implementation and running costs that come with sophisticated approaches. On the other hand, we might expect that complex activities, regardless of their size, are more heavily scrutinised and do not benefit from alleviated frameworks that might bring undue competitive edge. We therefore encourage the Commission to combine size and complexity criteria, for example, to distinguish linear from non-linear products, complex basis risk from basic interest rate hedging positions, etc. One could also give specific consideration to legacy books under extinction.

For such "exempted" books, the current FRTB proposal could deserve some simplifications as long as the calibration does not become more punitive compared to the current proposal.


Question 2: In case the new BCBS standardised approach from Basel is not considered an adequate framework for all institutions with a trading book, which of the following three alternatives would be considered the most appropriate framework to deal with smaller or simpler trading books and why?

  1. The current treatment under the derogation for small trading books with increased thresholds and potentially the necessary clarifications and reviews described above;

  2. a simpler standardised approach;

  3. a combination of the former two elements with potentially two different thresholds.

Please, also specify, for the alternative chosen, which considerations have to be taken into account to re-calibrate the level of the threshold(s) and the appropriate calibration of the threshold(s).

We would prefer option c). The proposed new standardised approach for credit risk from BCBS will, if implemented similarly to what was described in the consultation of December 2015, also increase the risk sensitivity for equities, etc. This reduces the need for handling smaller trading books under the FRTB approach.

As the new definitions of trading book positions would probably lead to more small and medium sized banks having a regulatory trading book than today, it is our opinion that the threshold for the derogation should be reassessed in order to prevent unintended consequences. It would probably also be a meaningful way forward to offer medium-sized trading book banks an option to treat their trading books according to a simplified approach as the effects upon the total own funds requirements would not be material. However, any unintended effects of such an option could be handled through the Pillar 2 process.

In ESBG's opinion, it should moreover be taken into account that the thresholds do not apply for positions in FX and commodities. Additionally, for these types of positions the calculation methods are much more complex under the FRTB. Smaller and less complex banks might have smaller FX positions too. We would therefore propose that a simplified (e,g. the current) approach should be allowed to be used at least for banks with non-significant FX positions. A specific threshold then needs to be implemented for FX positions. Commodities positions might, however, not be so typical for such banks.


​Question 3: In case option b) or c) have been chosen, which of these two possibilities would be considered the most appropriate regime for institutions with smaller or simpler trading books;

  1. a simplified version of the new standardised approach, to be developed; or

  2. the current standardised approach?

Please, justify your answer from a cost-benefit perspective. If a) is chosen, please specify which simplifications to the FRTB standardised approach would need to be performed.

ESBG would prefer option b) as this would create the lowest costs for banks. In our opinion, it would not add value to create a third solution that adds (some degree of increased) complexity without creating the same level of risk sensitivity as the full version of the FRTB would.


Question 4: Please, indicate which of the two conditions provided in Article 94 of the CRR is currently more constraining for your institution, supporting your answer with data reflecting the evolution of total trading exposures in balance sheet.

One ESBG member points out that most of its member banks with small portfolios of financial instruments do not have any trading intent, so the thresholds do not represent any constraints. However, with the new definition of trading books, more banks might be within the definition of trading book positions. As their portfolios normally do not change much in the shorter horizon, the lower of the two thresholds (i.e. the "normal level") should normally also be seen as the most constraining.


Question 5: Besides the level of the thresholds, do you agree with the previous analysis on the other elements of the derogation for small trading book business? Which ones would need to be addressed and how?

  1. The definition of the thresholds, making them more specific and harmonized as described above

  2. the clarifications on the application of the credit risk framework to some trading exposures, especially derivatives; and/or

In the case of item b) please specify which clarifications/modifications would be necessary and for which trading exposures in particular. In the case of changes to a) and b), please provide some measures of quantitative impact of the modifications proposed on your institutions.

The definition of the threshold might need some clarifications, especially the term "normally". In ESBG's opinion, this is a very subjective term, and it could probably be clarified by adding, for example, a criterion stating that "normally" means that the size of the trading portfolio has not exceeded the threshold in more than X% of the bank days since the last reporting date.


Question 6: For those institutions that currently use the OEM, do you see any merits in replacing the OEM with the SA-CCR in the prudential framework? Would the operational difficulty to implement SA-CCR be the only impediment for your institution to the replacement of OEM by SA-CCR? Would your derivative activities be negatively impacted by the introduction of SA-CCR due to the impact of the replacement of OEM by SA-CCR on the risk-based capital requirements and leverage ratio requirement?

The Standardised Approach for Counterparty Credit Risk (SA-CCR) is a more risk sensitive approach, which is generally good, in ESBG's point of view. However, one always has to assess the costs and benefits against each other. For those institutions that use the Original Exposure Method (OEM), the total derivatives/counterparty risk exposure is not significant anyway. The effects of a change from OEM to SA-CCR would therefore be of operational impact primarily as the SA-CCR is significantly more complex. Logically, it would then not add much merit to change as the differences on the own funds requirements for such banks would be insignificant anyway.

For smaller banks with insignificant derivative portfolios, the derivative activities will probably be noticeably influenced by the introduction of the SA-CCR. Such banks, normally relatively small ones, could potentially stop using derivatives. Such banks normally only use derivatives for hedging purposes, and stopping the activities would then increase the risk exposure for market risk (mostly general interest rate risk in the banking book) and at the same time reducing the own funds requirement (as the underlying interest rate risk in the banking book does not have any Pillar 1 own funds requirement, and the counterparty credit risk capital charge would be eliminated by stopping the derivative activity). That would and should not be an intended development, according to our opinion.


Question 7: For those institutions that see no merits in replacing the OEM with the SA-CCR, do you find it appropriate to keep the OEM in its current form, including its link to the derogation for small trading book business, its specific use for the calculating the leverage ratio and the CVA charge? If not, please explain what you would like to change in the current application of the OEM under the CRR and why. In addition, would you find it relevant to develop some limited modifications to the OEM to ensure that it is more consistent with the SA-CCR (while avoiding undue increases to the complexity of the OEM)? If yes, which modifications would you propose to the OEM to be more consistent with SA-CCR?

It might be a better idea to remove the OEM and allow the use of the Current Exposure Method (CEM) instead as the CEM introduces some more degree of risk sensitivity without increasing the complexity too much. We do not believe many banks use the OEM method, hence for simplicity it should be removed. However we do recognize that moving from OEM to SA-CCR would mean a relatively large increase in complexity. Moving from OEM to CEM however should be attainable for every bank trading derivatives.

​It would not help those types of banks operationally to keep the OEM only (or CEM – please see last paragraph above) for capital adequacy purposes. For Basel Leverage Ratio purposes it has been proposed that SA-CCR should be the foundation for measurement of the exposure regarding derivatives. It would still be necessary to allow the use of the same approach for leverage ratio as for capital adequacy if the operational burdens of SA-CCR were really to be relieved for such banks.


Question 8: For those institutions that currently use either the MtM Method or the SM, do you see any merits in replacing these approaches with the SA‐CCR in the prudential framework? Would the operational difficulties to implement SA‐CCR be the only impediment for your institution to the replacement of these approaches by SA‐CCR? Would your derivative activities be negatively impacted by the introduction of SA‐CCR due to the impact of the replacement of these approaches by SA‐CCR on the risk‐based capital requirements and leverage ratio requirements?

ESBG is of the opinion that since the SA‐CCR framework is more risk‐sensitive than the CEM, it should be replaced by the SA‐CCR. There should, however, be sufficient time allowed for implementation following the publication of a final EU regulation since the SA‐CCR method requires considerably more input data. Given the numerous other regulatory initiatives relating to counterparty risk, such as European Market Infrastructure Regulation's (EMIR's) mandatory clearing of certain derivatives, margin requirements for non‐centrally cleared derivatives, the modified SA‐CCR for leverage ratio purposes, revisions to the credit valuation adjustment (CVA) framework and so forth, implementation efforts and IT infrastructure challenges should indeed not be underestimated. This opinion is, however, subject to the precondition that smaller banks are allowed to use the CEM instead.

Regarding the CEM, which could potentially be the most used method, we believe that the replacement (or update) needs to be made at some point. However, from an operational perspective, following the implementation timeline of the BCBS (January 2017) is likely too optimistic for small and many medium sized regional banks. We therefore believe the timing of the introduction should be harmonised with the implementation of other standardised methods (market and credit risk). Possibly a simplified/modified SA-CCR/SM or CEM can be introduced alongside SA-CCR at that time (thus replacing all previous methods).

A replacement of the CEM with the SA‐CCR makes sense from a risk perspective, but the combined effect with other regulation must not be overlooked. Should there, for instance, be a decision to remove exemptions from CVA capital requirements for derivative exposures towards non‐financial counterparties, the combined CCR and CVA capital requirements for such exposures might raise hedging costs for corporate clients to a level where they stop hedging certain financial risks, which could be an unintended effect.

As stated before, the SA-CCR is a more risk sensitive approach, which is generally good. However, the SA-CCR is also a more complex method. The costs must be measured against the benefits. For smaller and medium sized banks without significant derivative portfolios/activities the operational burdens by using the SA-CCR would be by far the most important impediment. The derivatives activities could be negatively impacted. Also such banks mostly use derivatives for hedging purposes. As described above, this could increase the banks' risk exposure and at the same time reduce their Pillar 1 capital requirements.

Besides the implementation complications, capital allocation aspects that might (will) complicate the implementation of the SA‐CCR must also be considered. Aspects, such as derivative trades vs non-collateralised counterparties, will consume more capital while collateralised counterparties will consume less capital (all else equal) under SA‐CCR vs CEM. In short, this means that we expect implications on banks' business models.

In general, and especially for non-collateralised small and medium sized client business, there will be a notable risk based capital requirement impact due to the implicitly increased add-ons and the alpha factor (1.4). Client pricing will need to incorporate this effect and have potential consequences on corporate participation in the derivative market as well as market liquidity as a whole. On the other hand, collateralised and cleared (interbank) trading will, appropriately so, benefit from shorter margin periods of risk provided by the SA-CCR.

Furthermore, ESBG members anticipate that certain client segments will become less profitable, and certain segments will become more profitable. All and all, moving towards a more risk‐sensitive measure, such as SA‐CCR, should be positive.

Concerning the leverage ratio exposure according to SA‐CCR, ESBG is of the opinion that segregated initial margin offsets should be allowed when calculating the exposure measure for derivatives cleared on behalf of clients, in the same manner as in the unmodified version of the SA‐CCR. If not allowing such offsets, clearing fees are likely to become unnecessarily high and potentially banks might be under the disincentive to continue providing clearing services for clients. Moreover, if SA‐CCR is replacing the CEM in the risk‐based framework, we strongly believe that the SA‐CCR should, although modified, be implemented simultaneously in the leverage ratio framework. Otherwise, some banks would in some instances have to support internal model method CCR calculations, SA‐CCR calculations (e.g. for a potential capital floor on internal models) and CEM for leverage ratio. IT solutions to cater for such diverse requirements are likely to be highly complex and require sufficient time for development, testing and implementation.


About ESBG (European Savings and Retail Banking Group)

ESBG brings together nearly 1000 savings and retail banks in 20 European countries that believe in a common identity for European policies. ESBG members represent one of the largest European retail banking networks, comprising one-third of the retail banking market in Europe, with 190 million customers, more than 60,000 outlets, total assets of €7.1 trillion, non-bank deposits of €3.5 trillion, and non-bank loans of €3.7 trillion. ESBG members come together to agree on and promote common positions on relevant regulatory or supervisory matters.


European Savings and Retail Banking Group – aisbl

Rue Marie-Thérèse, 11 ■ B-1000 Brussels ■ Tel: +32 2 211 11 11 ■ Fax: +32 2 211 11 99

Info@wsbi-esbg.org ■ www.wsbi-esbg.org



Published by ESBG. June 2016.


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Capital Requirements Directive and Regulation; European Institutions; European Supervisory Authorities (EBA-ESMA)