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CRR ToolDelegated Regulation 2024/1085
Article 39

Article 39 - Assessment of the calculation of the own funds requirements for foreign exchange and commodity risk in the non-trading book

Article 39

Assessment of the calculation of the own funds requirements for foreign exchange and commodity risk in the non-trading book

1.   When assessing an institution’s compliance with Article 325bi(1), point (e), of Regulation (EU) No 575/2013 in relation to requirements on the calculation of own funds requirements for market risk for positions in the non-trading book, competent authorities shall verify whether the internal policies referred to in that Article specify:

(a)

the scope of foreign exchange positions in the non-trading book for which the institution calculates the own funds requirements with the alternative internal model approach and, where applicable, the underlying reason for excluding some positions from that scope;

(b)

the scope of commodity positions in the non-trading book for which the institution calculates the own funds requirements with the alternative internal model approach, and where applicable, the underlying reason for excluding some positions from that scope;

(c)

for positions subject to foreign exchange risk but not to commodity risk:

(i)

whether the value that is used as a basis to calculate the own funds requirements for foreign exchange risk is the last available accounting value referred to in Article 3(1) of Delegated Regulation (EU) 2023/1577, or the last available fair value referred to in Article 3(2) of that Delegated Regulation, and the frequency at which such value is recalculated;

(ii)

whether there are trading desks whose non-linear positions in the exchange rate are subject to the treatment referred to in Article 3(4) and Article 5(1), second subparagraph, of Delegated Regulation (EU) 2023/1577 and, where applicable, the reason for using such derogation for some trading desks, while not for some others;

(d)

the trading desks for which the hypothetical and the actual changes in the portfolio’s value in relation to a non-trading book position which is subject to commodity risk or both to commodity and foreign exchange risk are calculated in accordance with Article 5(2), point (a), of Delegated Regulation (EU) 2023/1577, and trading desks for which the changes are calculated in accordance with Article 5(2), point (b), of that Delegated Regulation, and the reason for that choice.

2.   When assessing whether an institution’s internal model is implemented with integrity as required by Article 325bi(1), of Regulation (EU) No 575/2013 in relation to requirements on the calculation of own funds requirements for market risk for positions in the non-trading book, competent authorities shall:

(a)

verify whether the internal processes referred to in Article 325bi(1), point (e), of Regulation (EU) No 575/2013 ensure:

(i)

the traceability of non-trading book positions incorporated in the scope of the alternative internal model approach, and the correctness of the accounting values or fair values used as a basis to calculate the own funds requirements for market risk, as required by Articles 3 and 4 of Delegated Regulation (EU) 2023/1577;

(ii)

that non-trading book positions attracting foreign exchange risk or commodity risk booked on a given date are included in the calculation of the expected shortfall risk measure referred to in Article 325bb of Regulation (EU) No 575/2013 or the stress scenario risk measure referred to in Article 325bk of that Regulation;

(iii)

that any foreign exchange risk positions stemming from a change in the reporting currency at the different levels of consolidation (‘translation risk’) are included in the scope of positions subject to foreign exchange risk;

(iv)

a correct identification of foreign-exchange positions meeting the conditions for using the treatment referred to in Article 3(4) and Article 5(1), second subparagraph, of Delegated Regulation (EU) 2023/1577, where the institution uses that treatment;

(v)

a correct and complete identification of items meeting the conditions set out in Article 3(6) of Delegated Regulation (EU) 2023/1577;

(b)

in relation to the calculation of own funds requirements for positions that are subject to foreign exchange risk as referred to in Article 3 of Delegated Regulation (EU) 2023/1577, verify whether:

(i)

foreign exchange positions for which the institution uses the derogation laid down in Article 3(4) and Article 5(1), second subparagraph, of Delegated Regulation (EU) 2023/1577 are distinguished from foreign exchange positions for which the institution does not use that derogation;

(ii)

only foreign-exchange risk factors of the last available accounting value or fair value are updated to determine the value of the position before the application of the scenario of future shock, unless the treatment referred to in Article 3(4) of that Regulation is used, as required by Article 3(3) of Delegated Regulation (EU) 2023/1577;

(iii)

for positions for which the treatment in Article 5(1), second subparagraph of that Regulation is used, all risk factors are updated to determine the value of the position before the application of the scenario of future shock, as required by Article 3(4) of Delegated Regulation (EU) 2023/1577;

(c)

in relation to items meeting the conditions referred to in Article 3(6) of Delegated Regulation (EU) 2023/1577, verify whether:

(i)

the criteria established by the institution to identify events triggering an impairment are appropriate, based on historical data and historical events;

(ii)

the criteria referred to in point (i) are consistent with the internal risk-management of impairment risk;

(iii)

the level of impairment recognised following the events referred to in point (i) is based on objective reasoning;

(d)

in relation to the calculation of own funds requirements for positions that are subject to commodity risk or both to commodity and foreign exchange risk as referred to in Article 4 of Delegated Regulation (EU) 2023/1577, verify whether scenarios of future shocks are applied only to risk factors belonging to the commodity broad risk factor category, and, where applicable, to the foreign exchange broad risk factor category;

(e)

verify whether the hypothetical and actual changes related to non-trading book positions subject to foreign exchange risk or commodity risk are calculated in accordance with Article 5 of Delegated Regulation (EU) 2023/1577.

For the purposes of point (a)(iii), competent authorities shall verify how the institution includes in the internal risk-measurement model the net open positions stemming from different entities of the group.

3.   For the purposes of paragraph 2, point (a)(ii), competent authorities may apply one of the two following approaches:

(a)

on a sample of non-trading book positions taken on a given reference date, verify whether those positions are included in the scope of positions captured in the expected shortfall risk measure or stress scenario risk measure at that reference date or in the scope of positions of the alternative standardised approach;

(b)

require the institution to reconcile, on the one hand, the non-trading book positions taken at a given reference date and, on the other hand, the non-trading book positions that are in the scope of the internal risk-measurement model and in the scope of the alternative standardised approach at that reference date.

4.   For the purposes of paragraph 2, point (a)(iii), competent authorities may require the institution to provide types of positions that are included in the model and that stem from assets and liabilities that do not attract market risk when the own funds requirements are calculated at the individual level, but attract it when the own funds requirements are calculated at the consolidated level because of translation risk.

5.   For the purposes of paragraph 2, point (a)(v), competent authorities may require the institution to reconcile the items that the institution identified as meeting the conditions referred to in Article 3(6) of Delegated Regulation (EU) 2023/1577 for calculating the own funds requirements with the alternative internal model approach, with the items meeting those conditions in accordance with the applicable accounting framework.

6.   For the purposes paragraph 2, point (b), competent authorities may, on a sample of non-trading book positions and for a reference date for the calculation of the expected shortfall risk measure as referred to in Article 325bb of Regulation (EU) No 575/2013 and the stress scenario risk measure as referred to in Article 325bk of that Regulation, apply the following assessment method:

(a)

require the institution to provide the list of:

(i)

risk factors used as inputs to determine the fair value constituting the basis for the calculation of the own funds requirements as required by Article 3 of Delegated Regulation (EU) 2023/1577;

(ii)

out of the risk factors included in the list referred in point (i), those risk factors on which the institution applies scenarios of future shocks calculating the expected shortfall risk measure referred to in Article 325bb of Regulation (EU) No 575/2013 or the stress scenario risk measure referred to in Article 325bk of that Regulation;

(b)

require the institution to provide the value of the risk factors referred to in point (a) at the following dates:

(i)

the date at which the last available fair value was determined;

(ii)

the given reference date for the calculation of the expected shortfall risk measure or the stress scenario risk measure;

(c)

verify whether:

(i)

for positions for which the treatment set out in Article 3(4) of Delegated Regulation (EU) 2023/1577 is not used, the value of risk factors not reflecting foreign exchange risk has not been updated between the two dates referred to in points (b)(i) and (b)(ii);

(ii)

for positions for which the treatment set out in Article 3(4) of Delegated Regulation (EU) 2023/1577 is used, the value of all risk factors is updated between the two dates referred to in points (b)(i) and (b)(ii);

(iii)

the risk factors referred to in point (a)(ii) relate only to foreign exchange risk, regardless of whether the treatment set out in Article 3(4) of Delegated Regulation (EU) 2023/1577 is used.

7.   For the purposes of paragraph 2, point (b), competent authorities may, on a sample of non-trading book positions and for a reference date for the calculation of the expected shortfall risk measure as referred to in Article 325bb of Regulation (EU) No 575/2013 and the stress scenario risk measure as referred to in Article 325bk of that Regulation, apply the following assessment method:

(a)

assess how the institution disentangles the foreign exchange risk factors from other inputs used to determine the accounting value of a position;

(b)

require the institution to provide the list of risk factors out of the foreign exchange risk factors referred to in point (a) on which the institution applies scenarios of future shocks when calculating the expected shortfall risk measure referred to in Article 325bb of Regulation (EU) No 575/2013 or the stress scenario risk measure referred to in Article 325bk of that Regulation;

(c)

obtain the value of the foreign exchange risk factors and of other inputs used to determine the accounting value at the following dates:

(i)

the date at which the last available accounting value was determined;

(ii)

the given reference date for the calculation of the expected shortfall risk measure and the stress scenario risk measure;

(d)

verify whether:

(i)

for positions for which the treatment set out in Article 3(4) of Delegated Regulation (EU) 2023/1577 is not used, the valuation inputs not reflecting foreign exchange risk have not been updated between the two dates referred to in points (c)(i) and (c)(ii);

(ii)

for positions for which the treatment set out in Article 3(4) Delegated Regulation (EU) 2023/1577 is used, the valuation inputs, including foreign exchange risk factors, have been updated between the two dates referred to in points (c)(i) and (c)(ii);

(iii)

the risk factors referred to in point (b) relates only to foreign exchange risk, regardless of whether the treatment set out in Article 3(4) of Delegated Regulation (EU) 2023/1577 is used.

8.   For the purposes of paragraph 2, point (d), competent authorities may, on a sample of non-trading book positions and for a reference date for the calculation of the expected shortfall risk measure referred to in Article 325bb of Regulation (EU) No 575/2013 and the stress scenario risk measure referred to in Article 325bk of that Regulation, apply the following assessment method:

(a)

require the institution to provide the list of:

(i)

risk factors used as inputs to determine the fair value constituting the basis for the calculation of the own funds’ requirements as required by Article 4 of Delegated Regulation (EU) 2023/1577;

(ii)

out of the risk factors included in the list referred to in point (a), those risk factors on which the institution applies scenario of future shock when calculating the expected shortfall risk measure referred to in Article 325bb of Regulation (EU) No 575/2013 or extreme scenario of future shock when calculating the stress scenario risk measure referred to in Article 325bk of that Regulation;

(b)

verify whether in the list referred to in point (a)(ii), there are only risk factors reflecting commodity risk, and foreign exchange risk where applicable.

9.   For the purposes of paragraph 2, point (e), competent authorities may, on a sample of non-trading book positions, apply the following assessment method:

(a)

require the institution to provide a description of the valuation inputs used to determine the accounting or the fair value of the position;

(b)

require the institution to provide the values of such valuation inputs at the end of the day following the calculation of the value-at-risk number referred to in Article 325bf of Regulation (EU) No 575/2013 and at the end of the previous day, as used in the calculation of the hypothetical and actual changes to the portfolio’s value;

(c)

verify whether, depending on the position subject to the assessment, the values are updated or kept unchanged as required by Article 5(2) of Delegated Regulation (EU) 2023/1577.