20. March 2018
The draft of the adjusted Implementing Technical Standard (ITS) for the Supervisory Reporting was published in March 2016. It defines the details of the necessary reports of the Additional Valuation Adjustments (AVAs) according to Prudent Valuation Regulatory Technical Standard (RTS). The first application is planed for the end of 2018. The resulting implementations and adjustments of the existing Prudent Valuation-solution fall under a strict timeframe and the insecurity of a missing final publication of the standards. Moreover, the requirements of the ITS exceed those of the RTS significantly. The changes affect the following areas:
In addition to the above points, the changed regulatory environment (e.g. IFRS 9 and the resulting Fair Value duty for certain exposures) requires a review and an adjustment of the Prudent Valuation implementation.
A decisive step towards the implementation of the new requirements is the suitable choice or adjustment of the system-architecture in combination with the existing Prudent Valuation-solution.
The introduction of a normalisation layer and an information layer can be essential additions to the existing architecture.
A central normalisation layer makes sure that all requirements for the scope of exposure of the reporting can be shown. The following characteristics of this system component are relevant:
The new requirements for the risk engine (risk engines) can be divided into Upper Uncertainty und the increased requirements for the granularity of the interims- and end-results.
After a definition of the Upper Uncerntainty (ITS only defines the concept as an evaluation adjustment of a 10%-quantile as opposed to a 90%-quantile in the calculation of the AVAs, but doesn’t specify a strict method) follows an extension of the calculation method. Effort and increased requirements depend amongst other things on the chosen model and the respective configuration. Depending on choice of model and possible symmetry assumptions you can deduce results with little effort from existing calculations.
The ITS demands information of a more granular level than institute or group level. For example, data has to be presented on portfolio level or per product type.
In general, branks already allocate AVAs on department, portfolio, or asset category level. But ordinarily this needs a calculation of AVAs on group or institute level. This guarantees the consideration of all netting and hedging effects. After that, the overall AVA, e.g. ranked by sensitivities or suitable parameters, is being allocated.
Higher granularity in the report directly refers to the calculation on portfolio or product type level. In total, this leads to higher AVAs and results in increased data requirements as opposed to the existing AVA-calculation.
This is an example for the higher requirements for the availability of interims- and end-results.
Since July 2015 Andreas Hock has been a manager at LPA in the Risk & Quant Consulting team. Before that, he studied mathematical finance at the Technical University of Munich and gained his first consulting experience at PwC. Here at LPA, he now deals with quantitative topics relating to the valuation of financial instruments and regulatory requirements.