(1)

Article 325bf(2) of Regulation (EU) No 575/2013 requires institutions to count daily overshootings on the basis of back-testing of the hypothetical and actual changes in their portfolio’s value composed of all the positions assigned to their trading desks. Such back-testing is intended to assess, depending on the level at which it is performed, whether it is appropriate to calculate the own funds requirements for positions in a trading desk using the alternative internal model approach, and whether the own funds requirements associated with modellable risk factors are adequate. Article 325bf(4) of Regulation (EU) No 575/2013 requires institutions to use the end-of-day value of the portfolio as a starting point for such back-testing, including all adjustments, such as reserves or any valuation adjustment.

(2)

In the back-testing of the value-at-risk number, some market risk effects that are not captured by the internal risk-measurement model should still be included in the actual changes in the portfolio’s value. Accordingly, all adjustments related to market risk, regardless of the frequency at which they are updated by institutions, should be included in the actual changes in the portfolio’s value. The back-testing of the value-at-risk number with the hypothetical changes in the portfolio’s value, however, should be performed under the assumption of a static portfolio. Therefore, institutions should include in the computation of such hypothetical changes in the portfolio’s value only those adjustments that are calculated daily and that are included in the internal risk-measurement model.

(3)

In some cases, it is possible that, due to the nature of an adjustment and due to the internal risk management applicable to that adjustment, such adjustment is computed across sets of positions that are assigned to more than one trading desks. To ensure harmonisation across the Union, institutions should be required, when calculating the actual and hypothetical changes in a trading desk’s portfolio value, to either recalculate such adjustment for each trading desk on the stand-alone basis of the positions assigned to the trading desk only, or, where specific conditions are met, to reflect the changes arising from such adjustment only in the context of the back-testing referred to in Article 325bf(6) of Regulation (EU) No 575/2013. Accordingly, where institutions perform the end-of-day valuation process to derive the trading desks’ end-of-day portfolio values, they should not be allowed, when calculating hypothetical and actual changes at the trading desk level, to allocate the adjustment to the trading desks in a manner that is proportionate to each trading desks’ contribution to the value of the adjustment.

(4)

The profit and loss attribution requirement laid down in Article 325bg of Regulation (EU) No 575/2013 has a prominent role in ensuring that the theoretical changes and the hypothetical changes in the trading desk portfolio’s value are sufficiently close. The statistical tests included in the international standards developed by the Basel Committee for Banking and Supervision, the Spearman correlation coefficient and the Kolmogorov-Smirnov test metric, to operationalise the profit and loss attribution requirement are appropriate for that purpose and should therefore be used by institutions.

(5)

In the international standards, it is laid down that institutions should satisfy an additional capital requirement where the theoretical and hypothetical changes in the value of trading desks’ portfolios are not sufficiently close. In that situation, institutions should be required to calculate and report to competent authorities that additional capital requirement for those trading desks.

(6)

When reporting the profit and loss attribution results in accordance with Article 325az(2), point (d), of Regulation (EU) No 575/2013, institutions should also highlight where the hypothetical changes and theoretical changes to the value of a trading desk’s portfolio materially differ. This should help institutions to identify potential deficiencies in the calculation of the theoretical changes.

(7)

When assessing compliance with the profit and loss attribution requirement, theoretical changes in a portfolio’s value are compared against hypothetical changes which are calculated under the assumption of a static portfolio. That comparison aims at identifying the materiality of differences in the valuation processes of the institution’s risk-measurement model producing the theoretical changes, and the valuation processes of the institution’s internal systems producing the hypothetical changes. To ensure that that comparison is not affected by changes in the composition of the portfolio, the theoretical changes to a portfolio’s value used in the profit and loss attribution requirement should also be calculated under the assumption of a static portfolio.

(8)

To ensure consistency with international standards, the hypothetical changes in the portfolio’s value that are calculated for the purpose of assessing compliance with the profit and loss attribution requirement should be aligned with the hypothetical changes in the portfolio’s value, that an institution calculates for the purposes of the back-testing.

(9)

Differences between the valuation processes producing hypothetical and theoretical changes in a portfolio’s value may be due to omissions of certain risk factors in the risk-measurement model or simplifications of the risk-measurement model. Other differences may be due to misalignments in the data that an institution uses as inputs for determining its portfolios’ value. To avoid additional sources of discrepancies resulting from such differences in input data, institutions should be allowed to align the input data provided that some specific conditions are met.

(10)

The frequency at which the results of the profit and loss attribution requirement are to be reported should be aligned to the frequency at which the modellability of the risk factors is assessed and the frequency at which the own funds requirements for market risk are reported. That way, institutions will be able to determine the own funds requirements for market risk based on consistent results for the back-testing requirements, the profit and loss attribution requirements and the assessment of modellability.

(11)

The manner in which institutions should aggregate their total own funds requirements for market risk should be aligned with the international standards. Therefore, the aggregation formula should reflect the results of the profit and loss attribution requirement, including the additional capital requirement where theoretical and hypothetical changes are not sufficiently close. In addition, the aggregation formula should reflect a reduction in diversification benefits where the own funds requirements for a trading desk are calculated with the alternative standardised approach and not with the alternative internal model approach.

(12)

In order to assist competent authorities to check compliance of institutions with this Regulation, institutions should be required to document their implementation of this Regulation.

(13)

The provisions of this Regulation are closely linked to each other, since they all deal with elements to be included in changes of a trading desk portfolio’s value for the purposes of calculating the own funds requirements for market risks using the alternative internal model approach. To ensure coherence between those provisions, which should enter into force at the same time, to facilitate a comprehensive understanding of those provisions and to ensure easy access to them by persons subject to the obligations set out within, it is desirable to include all the regulatory technical standards required by Article 325bf(9), third subparagraph, and Article 325bg(4), third subparagraph, of Regulation (EU) No 575/2013 in a single Regulation.

(14)

This Regulation is based on the draft regulatory technical standards submitted to the Commission by the EBA.

(15)

The EBA has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits, and requested the advice of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council (2),