Summary of findings, scoring and supervisory measures
Following the above assessment, competent authorities should form a view on the institution’s market risk. This view should be reflected in a summary of findings, accompanied by a risk score based on the considerations specified in table 8. Where, based on the materiality of certain risk sub-categories, the competent authority decides to assess and score them individually, the guidance provided in this table should be applied, as far as possible, by analogy.
Table 8. Supervisory considerations for assigning a market risk score
Supervisory view | Considerations in relation to Considerations in relation to adequate management and inherent risk controls |
There is a low risk of significant prudential impact on the institution considering the level of inherent risk and the management and controls. | • The nature and • There is consistency composition of market risk between the institution’s exposures imply not market risk policy and material/very low risk. strategy and its overall • The institution’s exposures strategy and risk appetite. to market risk are non- • The organisational complex. framework for market risk • The level of market risk is robust, with clear concentration is not responsibilities and a clear material/very low. separation of tasks • The institution’s market between risk-takers and risk exposures generate management and control non-volatile returns. functions. |
There is a medium-low risk of significant prudential impact on the institution considering the level of inherent risk and the management and controls. | • Market risk measurement, • The nature and monitoring and reporting composition of market risk systems are appropriate. exposures imply low to • Internal limits and the medium risk. control framework for • The complexity of the market risk are sound and institution’s market risk in line with the institution’s risk |
Risk score
1
2
Supervisory view | Considerations in relation to Considerations in relation to adequate management and inherent risk controls |
exposures is low to management strategy and medium. risk appetite. • The level of market risk concentration is low to medium. • The institution’s market risk exposures generate returns that have a low to medium degree of volatility. | |
There is a medium-high risk of significant prudential impact on the institution considering the level of inherent risk and the management and controls. | • The nature and composition of market risk • There is not full exposures imply medium consistency between the to high risk. institution’s market risk • The complexity of the policy and strategy and its institution’s market risk overall strategy and risk exposures is medium to profile. high. • The organisational • The level of market risk framework for market risk concentration is medium does not sufficiently to high. separate responsibilities • The institution’s exposures and tasks between to market risk generate risktakers and returns that have a management and control medium to high degree of functions. volatility. • Market risk measurement, |
There is a high risk of significant prudential impact on the institution considering the level of inherent risk and the management and controls. | • The nature and monitoring and reporting composition of market risk systems are not exposures imply high risk. undertaken with sufficient • The complexity of the accuracy and frequency. institution’s market risk • Internal limits and the exposures is high. control framework for • The level of market risk market risk are not in line concentration is high. with the institution’s risk • The institution’s exposures management strategy or to market risk generate risk appetite. returns that have a high degree of volatility. |
Risk score
3
4
The table below presents a non-exhaustive list of supervisory measures that competent authorities may take in case of identified deficiencies in the institution’s market risk management framework. Competent authorities should decide on the type of the measure based on its effectiveness to the specific identified deficiency. Competent authorities may apply other supervisory measures (including quantitative measures in accordance with Article 104(1)(a) of the Directive 2013/36/EU) or a combination of them if these are deemed more appropriate to address the identified deficiencies.
Table 9. Potential and non-exhaustive supervisory measures for market risk Potential supervisory measures for competent authorities in accordance with Article 104(1)(b), (d), (e), (f), (j), (l) (m), (n) of Directive 2013/36/EU – Competent authorities may require the institution to: A. enhance the quality and frequency of the market risk reporting to the institution’s management body and senior management; B. enhance the performance of the institution’s internal approaches, or of its back-testing or stress testing capacity; C. perform more frequent and in-depth internal audits of market activity; D. restrict investment in certain products when the institution’s policies and procedures do not ensure that the risk from those products will be adequately covered and controlled; E. divest financial products when the valuation processes of the institution do not produce conservative valuations that comply with the standards of Regulation (EU) No 575/2013; F. reduce the level of inherent market risk (e.g. through hedging or sale of assets or increase of derivatives settled through central counterparties (CCPs)) when significant shortcomings have been found in the institution’s measurement or control systems; G. present a plan to reduce its exposures to distressed assets and/or illiquid positions gradually.