Transfer pricing risk measurement
P2R for transfer pricing risk should be determined by summing up the P2R corresponding to the risk linked to each transfer pricing arrangement (TPA) that is based on the transaction profit-method (TPM) as referred to in paragraph 173 of these Guidelines. Other types of TPA, similarly transferring material losses to the EU entity, should be assessed in a similar way. P2R corresponding to a TPA belonging to the set TPM should be determined as follows:
The institution should identify the portfolio whose profits and losses are used as a basis to determine the amount to be allocated to the institution in accordance with the TPA.
On the basis of (i) empirical evidence and (ii) key-metrics included in the pricing arrangement as referred to in paragraph 1743, point (b), of these Guidelines, the institution should determine its marginal contribution ‘m’ to the key metrics used to determine the portion of profits and losses to be allocated across the entities taking part to the TPA.
The institution should obtain the market risk capital requirements (C_MRPortfolio) relating to the portfolio identified in point (a).
The P2R for the transfer pricing arrangement is m × C_MRPortfolio. This may be capped by the maximum loss that can be allocated to the institution in accordance with the TPA.
An institution may be provided with C_MRPortfolio by an entity established outside of the Union with which there is the TPA. That entity may provide the capital requirements on the basis of the rules for market risk applicable in the jurisdiction where it is established. Where those third country provisions are based on a Pillar 1 capital framework that is not in line with the Pillar 1 market risk capital framework implemented in the EU in accordance with Regulation (EU) 575/2013, competent authorities should increase the requirement by a factor of 1.5. Competent authorities can lower or increase that multiplier to reflect the materiality of the differences in the market risk rules between the EU and the third country.
Competent authorities may set the P2R of a transfer pricing arrangement to a lower value than the one obtained in accordance with the first paragraph of this Annex when all the below conditions are met:
a. In the context of that TPA, the institution is assessed to hold and manage most of the market risk relating to the portfolio on which the transfer pricing arrangement is based;
b. The booking model implies that the institution may allocate its trading book losses to other entities taking part to the transfer pricing arrangement;
c. The institution provides sufficient evidence that, in light of its role as main contributor to the TPA in the sense of point (a), the capital requirements for market risk relating to the positions that are subject to the TPA already cover for potential losses resulting from the TPA.