Article 5
Bucketing approaches for risk factors belonging to curves, surfaces or cubes
1. For each curve, surface or cube to which a risk factor belongs, institutions shall determine the buckets of that curve, surface or cube using either the standard pre-defined buckets referred to in paragraph 2, or buckets defined by the institutions themselves provided that those institutions meet the requirements of paragraph 3.
2. For the purposes of paragraph 1, the standard pre-defined buckets shall be the following:
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(a) |
the nine buckets referred to in row i of Table 1 of paragraph 3 for risk factors with one maturity dimension ‘t’ , expressed in years, which have been assigned to the following broad risk factor categories:
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(b) |
the six buckets referred to in row ii of Table 1 of paragraph 3 for each maturity dimension ‘t’ of risk factors with more than one maturity dimension, expressed in years, which have been assigned to the following broad risk factor categories:
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(c) |
the five buckets referred to in row iii of Table 1 of paragraph 3 for each maturity dimension ‘t’ for risk factors with one or several maturity dimensions, expressed in years, which have been assigned to the following broad risk factor categories:
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(d) |
the five buckets referred to in row iv of Table 1 of paragraph 3 for any risk factors with one or several moneyness dimensions, as expressed using the options’ delta (‘δ ’ ); |
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(e) |
the five buckets referred to in row iii of Table 1 of paragraph 3 and the five buckets referred to in row iv of Table 1 of paragraph 3 for risk factors which have been assigned to the following broad risk factor categories:
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(f) |
the six buckets referred to in row ii of Table 1 of paragraph 3, the five buckets referred to in row iii of Table 1 of paragraph 3 and the five buckets referred to in row iv of Table 1 of paragraph 3 for risk factors assigned to the broad risk factor category ‘interest rate’ and to the broad risk factor subcategory ‘volatility’ with a maturity, expiry and moneyness dimension. |
For the purposes of point (d), for option markets using other conventions than the option’s delta for the definition of the moneyness, institutions shall convert the buckets referred to in row iv of Table 1 of paragraph 3 to the prevailing conventions in those option markets using quantitative techniques derived from the institution’s own pricing models provided that those pricing models have been well documented and have been independently reviewed.
3. For the purposes of paragraph 2, a standard bucket may be subdivided in smaller buckets.
Table 1
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Bucket no. |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
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i. |
0 ≤ t < 0,75 |
0,75 ≤ t <1,5 |
1,5 ≤ t <4 |
4 ≤ t < 7 |
7 ≤ t < 12 |
12 ≤ t < 18 |
18 ≤ t < 25 |
25 ≤ t < 35 |
35 ≤ t |
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ii. |
0 ≤ t <0,75 |
0,75 ≤ t < 4 |
4 ≤ t < 10 |
10 ≤ t < 18 |
18 ≤ t < 30 |
30 ≤ t |
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iii. |
0 ≤ t < 1,5 |
1,5 ≤ t < 3,5 |
3,5 ≤ t < 7,5 |
7,5 ≤ t < 15 |
15 ≤ t |
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iv. |
0 ≤ δ < 0,05 |
0,05 ≤ δ < 0,3 |
0,3 ≤ δ < 0.7 |
0,7 ≤ δ < 0,95 |
0,95 ≤ δ ≤ 1 |
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4. For the purposes of paragraph 1, institutions may establish themselves buckets for a given curve, surface or a cube where all of the following conditions are met:
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(a) |
the buckets cover the whole curve, surface or cube; |
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(b) |
the buckets are non-overlapping; |
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(c) |
each bucket contains exactly one risk factor that is part of the calculation of the theoretical changes in the portfolio’s value of one of the trading desks of the institution to assess compliance with the profit and loss attribution requirements laid down in Article 325bg of Regulation (EU) No 575/2013. |
5. For the assessment of the modellability of risk factors of the broad risk factor category ‘credit spread’ belonging to a certain maturity bucket, an institution may reallocate the verifiable prices of a bucket to the adjacent bucket related to shorter maturities only where all of the following conditions are met:
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(a) |
the institution does not have exposure to any risk factor belonging to the bucket corresponding to the longer maturities and hence does not use any of these risk factors within its risk-management model; |
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(b) |
any verifiable price is only counted in a single maturity bucket; |
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(c) |
any verifiable price is only reallocated once. |