Article 4
Method for identifying the material risk drivers and the most material of those risk drivers
1. After identification of all the risk drivers of a transaction in accordance with Article 1 and where the cash flows of the transaction depend on more than one risk driver, institutions shall identify the material risk drivers and the most material of those risk drivers by applying one of the methods laid down in paragraphs 2, 3 and 4, as appropriate.
2. Institutions shall apply the following steps at inception of the transaction:
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(a) |
they shall consider all the risk drivers of the transaction identified in accordance with the procedure referred to in Article 1 to be material risk drivers; |
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(b) |
for each risk category corresponding to those material risk drivers, they shall identify as the most material risk driver the risk driver corresponding to the highest risk category add-on from those referred to in Articles 280a to 280f of Regulation (EU) No 575/2013. |
3. Institutions shall apply the following steps at inception of the transaction, and then at least on a quarterly basis:
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(a) |
they shall calculate the delta risk sensitivities in accordance with Article 325r of Regulation (EU) No 575/2013 for each risk driver identified in accordance with Article 1 of this Regulation; |
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(b) |
they shall calculate the weighted sensitivities in accordance with the formula laid down in Article 325f(6) of that Regulation based on the sensitivities calculated in accordance with point (a); |
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(c) |
for each of the risk categories referred to in Article 277(1) of that Regulation, they shall calculate the risk class specific own funds requirement for market risk in accordance with the formula laid down in Article 325f(8) of that Regulation, based on all the weighted sensitivities referred to in point (b) of risk drivers that have been assigned to that risk category; |
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(d) |
they shall rank all the risk class specific own funds requirements for market risk referred to in point (c) from the greatest to the smallest in absolute terms, in order to obtain a monotonically decreasing sequence of entries, where the entry a1 is the greatest absolute term, a2 is the second greatest term and so on; |
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(e) |
they shall, for each entry ai calculated and ranked in accordance with point (d) and in the order resulting from their ranking, verify whether the following condition is met:
where:
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(f) |
they shall consider as material:
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(g) |
they shall, for each of the risk categories that correspond to risk drivers that are not material in accordance with point (f), verify whether the following condition is met by the corresponding entry ai :
where:
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(h) |
in addition to the material risk drivers identified in accordance with point (f), they shall also consider as material risk drivers those risk drivers that correspond to the risk categories for which the condition laid down in point (g) is met; |
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(i) |
for each of the risk categories referred to in points (f) and (h), they shall consider as the most material risk driver for that risk category the risk driver corresponding to the highest absolute value of the weighted sensitivities referred to in point (b). |
4. Institutions that either meet the conditions set out in Article 94(1) of Regulation (EU) No 575/2013, or are exempted from the reporting requirement in accordance with Article 325a(1) of that Regulation, may identify the most material risk driver by applying the following steps at inception of the transaction, and then at least on a quarterly basis:
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(a) |
they shall calculate the risk category add-ons as referred to in Articles 280a to 280f of Regulation (EU) No 575/2013, as applicable, for each risk driver identified in accordance with Article 1. Where more than one risk driver identified in accordance with Article 1 have been assigned to the same risk category, institutions shall keep for the application of point (b) the risk driver in that risk category corresponding to the highest risk category add-on in that risk category; |
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(b) |
they shall apply the steps laid down in paragraph 3, points (d) to (h), where the entries used in those steps shall be based on the risk category add-ons calculated in accordance with point (a) of this paragraph; |
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(c) |
they shall identify as the most material risk drivers in the relevant risk categories the material risk drivers identified as a result of the method referred to in point (b). |