Market risk sub-categories
The table below presents a non-exhaustive list of sub-categories for market risk that competent authorities should consider when relevant.
Market risk sub-categories (level 1) | Legal references/Definitions(63) |
General interest rate risk (trading book) | The risk of losses arising from changes in the market value of debt instruments due to a change in the level of interest rates unrelated to any specific attributes of those individual debt instruments. Relevant legal references for capital treatment: > Pre-Fundamental Review of the Trading Book (FRTB) – internal models Regulation (EU) 575/2013, Part Three, Title IV, Chapter 5 – Article 362 > Pre-FRTB – Standardised Approach /Post-FRTB – Simplified Standardised Approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 2, Section 2, Subsection 2 – Articles 339-340 (general risk of debt instruments) > Post-FRTB – Alternative Standardised Approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 1a, Section 2 – Articles 325d-325k (sensitivity-based method, general interest rate risk) > Post-FRTB – Alternative internal model approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 1b – Articles 325az-325bp (expected shortfall /Stress Scenario Risk Measure (SSRM) component) |
Credit spread risk (trading book) | The risk arising from changes in the market value of debt financial instruments due to fluctuations in their credit spread (please refer to ‘Definitions’, Title 1). - Capital treatment differentiated by type of instrument/portfolio: 1) Credit spread risk of non-securitisations |
Market risk sub-categories (level 1) | Legal references/Definitions(63) |
2) Credit spread risk of securitisations (outside the alternative correlation trading portfolio (ACTP)) 3) Credit spread risk of securitisations included in the ACTP - Also covers sovereign risk (i.e. risk of losses due to decreasing market values of sovereign exposures) Relevant legal references for capital treatment > Pre-FRTB – internal models Regulation (EU) 575/2013, Part Three, Title IV, Chapter 5 CRR – Article 362 (Value at Risk (VaR) - component; and additional ACTP component (‘comprehensive risk measure’) for positions in the ACTP) > Pre-FRTB – Standardised Approach /Post-FRTB - Simplified Standardised Approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 2, Section 2, Subsection 1 – Articles 335-338 (specific risk of debt instruments) > Post-FRTB – Alternative Standardised Approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 1a, Section 2 – Articles 325d-325k (sensitivity-based method, credit spread risk (CSR) non-securitisation, CSR securitisation non-ACTP, CSR securitisation-ACTP) > Post-FRTB – Alternative internal model approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 1b – Articles 325az-325bp (expected shortfall/SSRM component) | |
Equity risk (trading book) | The risk of a change in the market value of an instrument due to a broad equity-market movement or due to factors related to the issuer of the instrument or, in the case of a derivative, the issuer of the underlying instrument. Relevant legal references for capital treatment > Pre-FRTB – internal models Regulation (EU) 575/2013, Part Three, Title IV, Chapter 5 – Article 362 CRR > Pre-FRTB – Standardised Approach /Post-FRTB – Simplified Standardised Approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 2, Section 3 – Articles 341-344 (general risk of equity instruments + specific risk of equity instruments) |
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Market risk sub-categories (level 1) | Legal references/Definitions(63) |
> Post-FRTB – Alternative Standardised Approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 1a, Section 2 – Articles 325d-325k (sensitivity-based method, risk class equity risk) > Post-FRTB – Alternative internal model approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 1b – Articles 325az-325bp (expected shortfall/SSRM component) | |
Migration risk | The risk of loss on financial instruments due to the deterioration of the creditworthiness of the issuer or of the issuer of reference assets or underlying assets. This excludes default risk. Under FRTB this risk is treated as part of credit spread risk. Relevant legal references for capital treatment > Pre-FRTB – internal models Regulation (EU) 575/2013, Part Three, Title IV, Chapter 5, Section 4 – Articles 372-376 > Post-FRTB – Alternative Standardised Approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 1a, Section 2 – Articles 325d-325k > Post-FRTB – Alternative internal model approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 1b – Articles 325az-325bp |
Default risk (trading book) | The risk of loss on financial instruments due to the default of the issuers of those financial instruments or of the issuers of reference or of underlying assets. Also covers sovereign risk, i.e. risk of losses due to the default of sovereign exposures. Relevant legal references for capital treatment > Pre-FRTB – internal models Regulation (EU) 575/2013, Part Three, Title IV, Chapter 5 – Articles 372-376 (‘Incremental default risk charge’-component) > Post-FRTB – Alternative Standardised Approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 1a, Section 5 – Articles 325v-325ad |
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Market risk sub-categories (level 1) | Legal references/Definitions(63) |
> Post-FRTB – Alternative internal model approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 1b – Articles 325az-325bp (default risk charge) | |
Foreign exchange risk (trading and banking books) | Regulation (EU) 575/2013, Article 4(1), point (142) – includes, among others, translation risk and structural foreign exchange risk Relevant legal references for capital treatment I) Exemption for Structural Foreign Exchange positions (S-FX positions) - Regulation (EU) 575/2013, Article 104c - Guidelines on S-FX (EBA/2020/09) II) Treatment of positions other than S-FX positions > Pre-FRTB – internal models Regulation (EU) 575/2013, Part Three, Title IV, Chapter 5 – Articles 362-377 > Pre-FRTB – Standardised Approach /Post-FRTB – Simplified Standardised Approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 3 – Articles 351-354 > Post-FRTB – Alternative Standardised Approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 1a, Section 2 – Articles 325d-325k (sensitivity-based method, risk class foreign exchange risk) > Post-FRTB – Alternative internal model approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 1b Articles 325az-325bp (expected shortfall/SSRM component) |
Commodities risk (trading and banking books) | Regulation (EU) 575/2013, Article 4(1), point (143) Relevant legal references for capital treatment > Pre-FRTB – internal models |
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Market risk sub-categories (level 1) | Legal references/Definitions(63) |
Regulation (EU) 575/2013, Part Three, Title IV, Chapter 5 – Articles 362-377 > Pre-FRTB – Standardised Approach /Post-FRTB - Simplified Standardised Approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 4 – Articles 351-354 > Post-FRTB – Alternative Standardised Approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 1a, Section 2 – Articles 325d-325k (sensitivity-based method, risk class commodities risk) > Post-FRTB – Alternative internal model approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 1b – Articles 325az-325bp (expected shortfall/SSRM component) | |
Credit valuation adjustment risk (trading and banking books) | Regulation (EU) 575/2013, Article 381 |
Market risk sub-categories (level 2) Legal references/Definitions | |
Valuation risk (trading and non-trading books) | The risk of losses from revisions of or adjustments to the - Market price uncertainties RTS on Prudent Valuation accounting value of fair-valued assets and liabilities - Close-out costs (Regulation (EU) 2016/101) (Regulation (EU) 575/2013, Article 105 and Regulation (EU) - Valuation model risks 2016/101) - Unearned credit spreads - Investing and funding costs - Concentrated positions - Future administrative cost |
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Market risk sub-categories (level 1) | Legal references/Definitions(63) |
- Early termination - Operational (valuation) risks | |
Residual risk | Regulation (EU) 575/2013, Article 325u and RTS on Residual Risk Add-on (Regulation (EU) 2022/2328) – comprises the broad categories of risks arising from instruments with exotic underlying and residual risk of instruments bearing other residual risks Relevant legal references for capital treatment > Post-FRTB – Alternative Standardised Approach Regulation (EU) 575/2013, Part Three, Title IV, Chapter 1a, Section 4 – Article 325u |
Market risk: Model risk | Regulation (EU) 575/2013, Article 4(1), point (52b) |
Market risk: Risks by linearity | - Delta risk (risk of changes of the value of a financial instrument due to a change in the value of the risk factor (first order effects)) - Vega risk (risk arising from changes of the volatility of the underlying of a non-linear instrument) - Curvature risk (including gamma risk) (risks not captured under delta and vega risk, including risk arising from second order effects of changes in the underlying and from other parameters of options) |
Market risk: Market liquidity and concentration risk | The risk that the institution will incur market/liquidity losses stemming from a concentration either from exposures to a single risk factor or from exposures to multiple risk factors that are correlated, or from instruments with high liquidity horizons |
Market risk: Basis risk | Risk of losses due to imperfect correlation in the value change of nominally offsetting instruments |
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