6.3 Assessment of market risk
6.3.1 General considerations
238160. CompetentWhen assessing the market risk management framework, competent authorities should assessevaluate inter alia the compliance of the institution with the legal acts published separately on the EBA website as referred to in paragraph 12.
161. In these guidelines, references to ‘market risk’ concerningwill thoseencompass all the following risks, which should be assessed by competent authorities:
a. the market risk arising from all on- and off-balance-sheet positions which are subject to losses arising from movements in market prices, i.e. Whenrisks assessingin markettrading book positions as well as the foreign-exchange and commodity risk forin institutionsthe whichnon-trading dobook;
b. notthe meetrisk of losses arising from changing CVA amounts in response to changes in counterparty credit spreads and/or market prices, impacting the conditionsfair value of derivative transactions and, if applicable, of security financing transactions (SFTs);
c. the smallrisk tradinglinked bookto asthe setvaluation outof fair-valued instruments in the sense of Article 94105 of Regulation (EU) 575/2013.
162. competentCompetent authorities shouldmay considerperform thea relevanceless andgranular materialityanalysis offor atinstitutions leastwhich meet the followingconditions subcategoriesof carryingthe outsmall atrading morebook detailedas assessmentset out in Article 94 of thoseRegulation subcategories(EU) which575/2013. areFor consideredinstitutions with immaterial exposures, the mostassessment relevantshould forfocus on the institutionadequacy :
a.of interestthe rate risk inmanagement and governance structure and the tradingquality book;and effectiveness of systems and controls.
b163. creditCompetent spreadauthorities andshould defaulttake riskinto inaccount the tradingimpact book;
c.of equityESG riskrisks inon the tradinginherent book;
d.market foreign-exchange risk;
e. commoditiesas risk;
f.well creditas valuationthe adjustmentadequacy risk;
g.of non-deltathe market risk;
h. basismanagement risk;
i.framework marketand liquiditycontrols risk;
j.related modelto riskESG forrisks, regulatorygiving approvedpriority modelsto environmental risks.
6.3.2 Assessment of inherent market risk
239164. Through the assessment of inherent market risk, competent authorities should determine the main drivers of the institution’s market risk exposureexposures and evaluate the risk of significant prudential impact on the institution. TheTo assessmentdevelop ofsuch inherentan marketunderstanding, riskcompetent authorities should befirst structuredidentify around the followingmarket mainrisks steps:
a.to preliminarywhich assessment;
b. assessment of the nature and composition of the institution’s positionsis subjector tomay marketbe risk;
c.exposed assessmentand offocus profitability;
d.their assessmentattention ofon marketthe concentrationsubcategories risk; and
e. outcomedrivers ofdeemed stressthe testing.
240.most Competentmaterial authorities may perform a less granular analysis for institutions which meet the conditions of the small trading book as set out in Article 94 of Regulation (EU) 575/2013institution.
Preliminary assessment
241165. To determinesupport thethis scope of the assessment of market riskanalysis, competent authorities should firstconsider, identifyas a minimum, the sourcesproducts, ofactivities marketand riskbusiness tolines whichof the institution. isThey orshould maycompare bethe exposed.own Tofunds dorequirements so,for competentmarket authoritiesand shouldCVA leveragerisk theand knowledge gained from the assessmentadditional ofvaluation otheradjustment SREPdeducted elements, from the comparison of the institution’s positionown tofunds, peersagainst andthe fromtotal anyown otherfunds supervisory activitiesrequirements.
242. AsWhere arelevant minimum,they competent authorities should consider:
a.compare the institution’sinternal marketcapital activities,allocated businessto linesthose andrisks products;
b.by the maininstitution strategyagainst of the markettotal riskinternal portfoliocapital. andThey themay riskalso appetiteconsider in market activities;
c. the relative weight of market risk positions in terms of total assets, changes over time and the institution’s strategy for these positions;
d. the relative weight of net gains on market risk positions into total operating income; and
e. the own funds requirement for market risk compared to the total own funds requirement, and – where relevant – the internal capital allocated for market risk compared to the total internal capital, including the historical changechanges in thisthese figurefigures and forecasts.
243. In their initial assessmentsAlso, competentthe authoritiesstrategy shouldof also consider significant changes in the institution’s as regards market activities withand the focusrelated on potential changes in the total exposure to market risk. Asappetite ashould minimum,be theytaken shouldinto assess:
aaccount. significantWhen changesconsidering in market risk strategyactivities, policiescompetent andauthorities sizesshould ofrefer limits;
b.to the potentialrisks impactmentioned onin theparagraph institution’s161 riskwhich profilemay ofencompass those changes; and
c. major trends in the financialtrading markets and thenon-trading institution’s strategy towards it (including potential risks in case the trends unexpectedly reverse)book.
Nature and composition of the institution’s market risk activities
244166. CompetentThe authoritiesfirst shouldstep analysein assessing the nature of the institution’sinherent market risk exposuresof byan consideringinstitution theis subcategories defined in paragraph 238 to identify particularits risk exposures and related market risk factors/driversexposures (e.g.consistently exchangeand rates, interest rates or credit spreads) for further in-depth assessmentcomprehensively.
245. Competent authorities should analyseuse marketavailable riskregulatory exposuresreporting bytemplates, relevantsuch assetas classesCOREP and/or financialFINREP, instrumentsinternal according to their sizereporting, complexityinsights andgained levelfrom of risk. For the mostassessment relevantof exposures,other competentSREP authoritieselements should(such assessas theirthe relatedBMA) riskor factorsprior andsupervisory drivers.
246. While analysing market risk activities, competentand authoritiescomparisons shouldwith also consider the complexityinstitution’s ofpeers, thewhere financial products (eavailable.g
167. over-the-counterCompetent (OTC)authorities productsshould orbase productstheir valuedassessment usingprimarily mark–to-modelon techniques)the andmost ofsignificant specificidentified marketsources operationsof (e.g.risk, high-frequencyevaluating trading).their Themateriality followingfor pointsthe shouldinstitution befrom considered:
a prudential perspective. ifTo assess the institutionnature holdsof derivativesmarket positionsrisk, competent authorities should assessconsider bothat least the marketfollowing valuesubcategories:
a. andinterest therate notionalrisk amount;(trading andbook);
b. whencredit thespread institutionfor is engaged in OTC derivativesnon-securitisation, competentcredit authoritiesspread shouldfor evaluatesecuritisation the(trading weightbook);
c. ofequity theserisk transactions(trading inbook);
d. themigration totalrisk derivatives(for portfoliobusiness andsubject theto breakdowna ofdefault therisk OTC portfolio by type of contract (swap, forward, etc.charge), underlying financial instruments, etc;
e. (thedefault counterparty credit risk associated(for withbusiness thesesubject productsto isa covereddefault under the credit risk methodologycharge).;
247f. Whenforeign appropriateexchange risk, competentincluding authoritiestranslation shouldrisk assess(both in the institution’strading evaluation of distressed and/or illiquidbanking positions (e.book);
g. ‘legacycommodities portfolios’,risk i.e.(trading portfoliosand ofbanking illiquidbook);
h. assetsCVA relatedrisk to(trading theand discontinued banking practices/activitiesbook);
i. thatvaluation arerisk managed on a run(fair-offvalued model)instruments andin the impacttrading ofand suchnon-trading positions on the institution’s profitabilitybooks).
248168. ForCompetent those institutions using the internal model approach (IMA) to calculate their regulatory own funds requirements, competent authorities should also consider the following indicators to identify particular risk areas and related risk drivers:
a. the splitcomplexity of marketfinancial riskproducts own(e.g. fundsproducts requirementsvalued betweenusing themark–to-model value at risk (VaR)techniques, stressedproducts VaRbearing (SVaR),non-delta incrementalrisks risk charge (IRC) and chargebasis for correlation trading portfolio;
brisks). theCompetent VaRauthority brokenmay downassess this by riskusing factors;
c.as thean changeindicator in the VaRadd-on andresulting SVaRfrom (possibleresidual indicatorsrisks couldas beper theArticle day-to-day/week-to-week325u change,of theRegulation quarterly average and back-testing results)575/2013/EU; and
db. the multiplicationliquidity factorsof appliedthe toinstitution’s VaR and SVaR
eexposure. theThe resultscompetent ofauthority thecan calculationsdo performedso forby theassessing purposewhether of the specificinstitution reportingis requirementsexposed forto marketsubcategories risk,with basedhigh onliquidity usinghorizons the alternative standardised approach set out in Chapteraccordance 1awith oftable Title2 IV of PartArticle Three325bd of Regulation (EU) No 575/2013/EU; and
fc. where relevant, the resultsconcentration of themarket calculationsrisk performedtowards forspecific thenames, purposesectors, ofeconomies, risk-classes;
d. the specificemployment reportingof requirementsspecific for market risk,operations based on using the alternativerisk internalof modelwhich approachmay (IMA)not setbe outfully inrepresented Chapterby 1bthe ofmarket Titlerisk IVown offunds Partrequirements Three of Regulation (EU)e.g. Nohigh-frequency 575/2013trading).
249169. When appropriate, competent authorities should also consider the internal risk measures of institutions. These could include the internal VaR or expected shortfall not used in the calculations of own funds requirements or sensitivities of the market risk to different risk factors and potential losses.
250170. When analysing inherent market risk, competent authorities should consider ‘point-in-time’ figures and trends, both on an aggregate basis and by portfolio. Where possible, this analysis should be completed with a comparison of the institution’s figures to peers and to relevant macroeconomic indicators.
Profitability analysis
251. Competent authorities should analysealso the historic profitability, including volatility of profits, of market activities to gain a better understanding of the institution’s market risk profile. This analysis could be performed at portfolio level as well as being broken down by business line, asset class or desk (potentially as part of the wider assessment carried out as part of the BMA).
252. While assessing profitability, competent authorities should pay specific attention to the main risk areas identified during the examination of market risk activities. Competent authorities should distinguish between trading revenues and non-trading revenues (such as commissions, clients’ fees, etc.) on one hand and realised and unrealised profits/losses on the other hand.
253. For those asset classes and/or exposures generating abnormal profits or losses, competent authorities should assess profitability in comparison to the level of risk assumed by the institution (e.g. VaR/net gains on financial assets and liabilities held for trading) to identify and analyse possible inconsistencies. Where possible, competent authorities should compare the institution’s figuresability to its historical performance and its peers.
Market concentration risk
254. Competent authorities should form a comprehensive view on the degree of market concentration risk to which theit institution is exposed, either from exposures to a single risk factor or from exposures to multiple risk factors that are correlated.
255. When evaluating possible concentrations, competentthereby authoritiespaying shouldspecific pay special attention to concentrations in complex productsand (e.g. structured products), illiquid products (e.g. collateralisedThey debtshould obligationsreview (CDOs)) or products valued using mark-to-model techniques.
Stress testing
256. When evaluating the inherentfirm’s marketown riskassessment of anconcentrations institution,and competentilliquid positions. Competent authorities should takerequire intoinstitutions accountto thereduce resultsexposure oftowards stressa testsgiven performedCCP byin thecase institution to identify any previously unidentified sources of marketexcessive risk.concentration This is especially important for tail-risk events, which may be underrepresented or entirelyto absentrealign fromexposures historicalacross data because of their lowclearing frequencyaccounts of occurrence. Another source of potential hidden vulnerabilities that competent authorities should consider is the potential for jumps in pricingaccordance parameters,with suchArticle as 7(a) suddenof changeRegulation in certain prices or price bubbles in commodities648/2012.
6171.3.3 AssessmentWhen ofdetermining marketwhether riskP2R managementshould andbe controls
257.imposed Tofor achieve a comprehensive understanding of the institution’s market risk profile,to competentwhich authorities should review the governanceinstitution andis riskexposed, managementin frameworkline underlyingwith itsparagraph market activities. To this end300, competent authorities should assessconsider the following elements:
a. market risk strategy and risk appetite;
b. organisational framework;
c. policies and procedures;
d. risk identification, measurement, monitoring and reporting; and
e. internal control framework.
Market risk strategy and appetite
258. Competent authorities should assess whether institutionsthe havePillar a1 sound,methodology clearlyadequately formulatedcaptures andthe documented market risk strategy, approvedtaking by their management body. For this assessment, competent authorities should, in particular, take into account whetherthat:
a. theinstitutions managementemploying body clearly expresses the marketalternative riskstandardised strategyapproach andare appetiterequired andunder thePillar process1 forto theircalculate review (e.g. in the event of an overalladd-on (residual risk strategy review, or profitability and/or capital adequacy concernsadd-on);
b. seniorfor management properly implements the marketrisks riskinherent strategyin approvedcomplex byfinancial theproducts management body, ensuring that theare institution’snot activitiessufficiently arecaptured consistentin with the establishedsensitivity-based strategy,method written procedures are drawn up and implemented,the anddefault responsibilitiesrisk are clearly and properly assignedcharge;
cb. theinstitutions institution´semploying market risk strategy properly reflects the institution’sinternal appetitemodel forapproach marketor risk and is consistent with the overallalternative riskinternal appetite;
d.model theapproach institution’s market risk strategy and appetite are appropriaterequired forto thecapture institution,all givenmaterial its:
businessrisks model;
overallin riskthose strategyinternal and appetitemodels;
marketc. environmentthe andrisk-weights roleprovided in the financialalternative system;standardised and
financial conditionapproach, funding capacity and capital adequacy;
e. the institution´sexpected marketshortfall riskmeasures strategyreferred establishesto guidancein forArticle the325bb management of theRegulation different instruments and575/or2013/EU portfolios that are subject to market risk, and supports risk-based decision-making;
f. the institution’sstress marketscenario risk strategymeasures broadlyreferred coversto allin theArticle activities325bk of theRegulation institution575/2013/EU wherein marketthe riskalternative isinternal significant;
g.model theapproach institution’sare marketdesigned riskto strategycater takesfor into account the cyclicalpositions’ aspectsliquidity ofin theline economywith andliquidity thehorizon resultingreferred shiftsto in thetable composition2 of theArticle positions325bd subjectof toRegulation market risk; and575/2013/EU.
h172. theCompetent institutionauthorities hasshould anidentify appropriateand frameworkanalyse in placerelation to ensure that market risk strategypositions isand effectivelythe communicatedcorresponding togovernance allarrangements, relevantany staff.
Organisationaltransfer framework
259.pricing Competentarrangements authoritiesbetween shouldinstitutions assessestablished whetherin the institutionUnion hasthat anare appropriatepart organisationalof frameworka forthird-country marketgroup riskand management,other measurement,entities monitoringof andthat controlgroup functions,established withoutside sufficientof (boththe qualitativeUnion and quantitative)not humanconsolidated andby technicalthe resources.EU Theyparent shouldundertaking. takeThe intoanalysis accountshould whetherinclude:
a. therea arequantitative clearcomponent linesto ofidentify responsibilitythe formateriality taking,of monitoring,the controllingtransfer andpricing reportingarrangements marketrelative risk;
b.to there is a clear separation, in the businesstrading area,book betweentotal theP&L front office (position takers) and the backown officefunds (responsibleof forthe allocating, recording and settling transactions)institution;
cb. thea marketqualitative riskcomponent controlto andassess monitoringif system is clearly identified in the organisation,effect and functionally and hierarchically independent of thethese businessarrangements area, and whether it is subjecttransparent to independent review;
d. the riskinstitution’s management, measurement,board monitoring and controlappropriately functionsreflected coverin marketthe risk inmanagement thegovernance;
c. entirea institutionqualitative (includingcomponent subsidiariesto andassess branches),how andthe intransfer particularpricing allarrangement areasaffects wherethe marketbusiness riskdecisions canof bethe takeninstitution, mitigatedincluding orhow monitored;the and
e.dynamics of the stafftransfer involvedpricing inarrangement marketpotentially activitiesaffect (boththe indecisions businessof areasfront-office desks, and inthe managementpotential andconflicts controlof areas)interest havethat appropriatethe skillsarrangement andmay experiencecreate.
Policies and procedures
260173. Competent authorities should assessidentify whether the institutionmateriality hasof clearlythe definedtransfer policiespricing andin proceduresthe forcontext theof identification,trading management,book measurementitems andby controlfocusing ofon marketthe risk.transfer Theypricing shouldarrangements takethat intomeet accountthe following conditions:
a. whetherthey theinvolve managementat bodyleast approvesone entity of the policiesgroup forthat managing,is measuringestablished andoutside controllingof marketthe riskUnion and discussesfor andwhich reviewsthe themhighest regularly,level inof lineconsolidation withis riskoutside strategiesthe Union;
b. whetherthey seniorare managementbased ison responsiblea fortransaction developingprofit them,method ensuring(TPM) adequate– implementationor ofany thesimilar managementpractice body’sthat decisions;
c.would whetherbe marketeconomically policiesequivalent are– compliantin accordance with relevantwhich regulations and adequate for the natureprofits and complexitylosses ofrelating theto institution’spositions activities,owned enablingby aseveral clearentities understandingare ofre-distributed theacross marketthose riskentities inherenton to the differentbasis products and activities under the scope of the institution,marginal andcontribution whether‘m’ suchof policieseach areentity clearlytowards formalised,key-metrics communicatedset andout appliedin consistently across the institution;pricing andarrangement.
d174. forFor groups,institutions whetherunder theseparagraph policies1733, arepoint applied(a), consistentlywhere across the groupprofits and allowlosses, properre-allocated managementas ofa theresult risk.
261.of Competenttransfer authoritiespricing shouldarrangements assessbased whetheron thetransaction institution’sprofit marketmethods, policies and procedures are soundmaterial and(e.g. consistentaccount withfor themore marketthan risk5% strategyof andthe coverP&L allgenerated by the maininstitution) businesses and processesthis relevantrisk foris managing,not measuringcovered andor controllingfully marketcovered risk.by In particularP1R, thecompetent assessmentauthorities should cover:
a. theconsider naturethis ofrisk operations,for financial instruments and markets in which the institutiondetermination canof operateP2R;
b. consider the positionsresults toof includethe in,components andlisted toin excludeparagraph from1722, thesuch tradingas book for regulatory purposes;
c. policies regarding internal hedges;
d. the definition,materiality structure and responsibilities of the institution’stransfer tradingpricing desksarrangements, wherein appropriate;
e.relation requirements relating to tradingthe and settlement processes;
f. procedures for limiting and controlling market risk;
g. thecapital frameworkrequirements forof ensuringthe thatportfolio allwhose positionsprofits measuredand atlosses fair value are subjectused to additionaldetermine valuationthe adjustmentsamount into accordancebe withtransferred Commissionto Delegated Regulation (EU) 2016/101 (RTS on prudent valuation);
h. the criteria applied by the institution toas avoidwell associationas withpotential individuals/groupsweaknesses involved in fraudulentthe activitiesrelated andgovernance other crimesarrangements; and
ic. proceduresdetermine forP2R newthat marketsufficiently activitiescover and/orthe products;market competentrisks authoritiesnot shouldcaptured ensureunder that:
newP1R marketwhich activitiesare and/orgenerated productsunder arethe subjecttransfer topricing adequatearrangement. proceduresTo andthat controlsend, beforecompetent beingauthorities introducedmay oruse undertaken;
the institutioncalculation hasmethod undertakenas anlaid analysisdown ofin theirAnnex possibleV impactor onan itsalternative overallmethodology riskthat profile.
Riskprovides identification,accurate measurement, monitoringof and reporting
262. Competent authorities should assess whether the institutionrisk hasnot ancovered appropriatein frameworkP1R for identifying, understanding and measuringidentifies market risk, in line with the institution’sconsequent size and complexityP2R, andconsidering thatas thisa frameworkreference isthe compliantmethodology with relevant minimum requirements in accordanceAnnex withV.
Profitability theanalysis relevant EU and nationalstress implementing legislationtesting
175. TheyCompetent authorities should consideranalyse whether:
a. the datahistoric profitability, informationincluding systemsvolatility andof measurementprofits, techniquesof enablemarket managementactivities to measuregain thea marketbetter riskunderstanding inherentof inthe allinstitution’s materialrisk on-profile andfor off-balancemarket sheetrisk. activitiesThis (whereanalysis relevantcould be performed at groupportfolio level), including both trading and banking portfolios, as well as complyingbeing withbroken supervisorydown reportingby requirements;
b.business institutionsline, haveasset adequateclass staffor anddesk methodologiesdepending toon measure the marketmateriality risk in their trading and bankingcomplexity portfolios,of taking into account the institution’s sizeexposures and(as complexityemerging andfrom the riskBMA profileor ofother itssupervisory activities;insight).
c176. theCompetent institution’sauthorities riskshould measurementdistinguish systembetween takestrading intoand accountnon-trading allrevenues material risk factors related to its market risk exposures (includingsuch basisas riskcommissions, creditclients’ spreadsfees, inetc.) corporateon bondsone orhand creditand derivatives,realised and vegaunrealised andprofits/losses gammaon risksthe inother options)hand.
177. WhereFor somethose instrumentsasset classes and/or factorsexposures aregenerating excludedsignificant fromprofits theor risk measurement systemslosses, competent authorities should assess theprofitability materialityin ofcomparison to the exclusionslevel andof determinerisk whetherassumed suchby exclusions are justified;
d. the institution’s risk measurement systems are able to identify possible market risk concentrations arising either from exposures to a single risk factor or from exposures to multiple risk factors that are correlated;
(e.g. riskVaR/net managersgains andon thefinancial institution’sassets seniorand managementliabilities understandheld the assumptions underlying the measurement systems, in particular for moretrading) sophisticatedto riskidentify management techniques; and
f. riskanalyse managerspossible andinconsistencies. theWhere institution’spossible, seniorcompetent managementauthorities areshould awarecompare of the degree of model risk that prevails in the institution’s pricingfigures modelsto andits riskhistorical measurementperformance techniques and whetherits they periodically check the validity and quality of the different models used in market risk activitiespeers.
263178. Competent authorities should assess whether an institution has implemented adequate stress tests that complement its risk measurement system. For this purposespurpose, they should take into account the following elements:
a. stress test frequency;
b. whether relevant risk drivers are identified (e.g. illiquidity/gapping of prices, concentrated positions, one-way markets, etc.);
c. assumptions underlying the stress scenario; and
d. internal use of stress testing outcomes for capital planning and market risk strategies.
2646.3.3 ForAssessment of the purposesmarket risk management and control framework
179. To achieve an adequate understanding of Articlethe 101management of Directivemarket 2013/36/EUrisk, ifcommensurate to the institution’s isrisk authorisedprofile, tocompetent useauthorities internalshould modelsreview tothe determineinstitution’s minimumrisk ownmanagement fundsand requirementscontrol forframework marketand its adequacy with respect to inherent risk exposures. For this assessment, the competent authoritiesauthority should verifyuse thatthe paragraphs set out in this section, while also leveraging on:
a. the institutionoutcome continuesof tothe fulfilassessment of other SREP elements (such as the minimumBMA requirementsand specifiedgovernance inareas);
b. the relevantoutcome of the assessment referred to in Article 325c of Regulation 575/2013/EU andfor nationalinstitutions implementingusing legislationthe alternative standardised approach, and thatthe suchoutcome internalof modelsthe doassessment notperformed involvein anyaccordance underestimationwith Delegated Regulation (EU) 2024/1085, especially in relation to the requirements referred to in Articles 104b, 325bi, and 325bj of materialRegulation risk575/2013/EU.
265180. Competent authorities should also assess whetherthe institutionspolicies haveand inprocedures placeof aninstitutions adequateto monitoringallocate andthe reportingpositions frameworkto forthe markettrading riskbook thatand ensuresto therethe willbanking bebook, promptas actiondescribed atby theTitle appropriate1 level of theChapter institution’s3 seniorof managementRegulation or575/2013/EU.
Market managementrisk bodystrategy whereand necessaryrisk appetite
181. TheCompetent monitoringauthorities system should includeassess specificwhether indicatorsinstitutions have sound, clearly formulated and relevantdocumented triggersrisk toappetite, providestrategy effectiveand earlylimits warningapproved alertsby their management body. CompetentFor this assessment, among other factors, competent authorities should take into account whether:
a. the institutionrole hasof effectivethe informationmanagement systemsbody forin accurate and timely identificationsetting, aggregation,approving monitoring and reportingreviewing ofthe market risk activities;strategy and
b. appetite, the managementproper andimplementation controlof areathis reportsstrategy regularlyby to the management body andas seniorwell managementas with,its asappropriateness afor minimum,the informationinstitution ongiven currentits marketbusiness exposuresmodel, P&Loverall resultsrisk andappetite, riskcurrent measuresand (e.g.perspective VaR)market comparedenvironment toand policyfinancial limitscondition.
InternalOrganisational and internal control framework
266182. Competent authorities should assess whether the institution has aan strongappropriate andorganisation comprehensive control framework andfor soundidentifying, safeguardsunderstanding, tomeasuring, mitigatemonitoring itsand controlling market risk, in line with itssufficient market(both riskqualitative managementand strategyquantitative) human and risktechnical appetite.resources Theyto shouldcarry takeout intothe accountrequired whether:
atasks. theFor scopethis coveredassessment, bycompetent theauthorities institution’sshould controltake functioninto includesaccount allthe consolidatedadequacy entities,of allthe geographicallines locationsof andresponsibility allfor financialtaking, activities;
b.monitoring, therereporting areand internalcontrolling controlsmarket risk, operatingtheir limitscoverage andof otherthe practicesentire aimedinstitution, atthe ensuringexistence marketof riska exposuresclear doseparation notbetween exceedthe levelsfront acceptableoffice toand theback institution,office inand accordancebetween with the parametersrisk-taking setand by the managementcontrol bodyfunctions, and seniorthe managementskills and theexpertise institution’sof riskstaff appetite; andinvolved.
c183. Competent authorities should assess whether the institution has appropriateclearly internaldefined controlspolicies and practicesprocedures tofor ensurethe thatidentification, breachesmanagement, ofmeasurement and exceptionscontrol toof policies,market proceduresrisk and limitswhether these are reportedsound inand aconsistent timelywith manner to the appropriateinstitution’s levelrisk ofstrategy managementand forcover action.all Theythe shouldmain takebusinesses intoand accountprocesses. whetherThis includes the institution’sassessment internalof controlswhether these policies and practices:
procedures are ableclearly toformalised, identifycommunicated breachesand ofapplied individualconsistently limitsacross setthe atinstitution.
184. deskIn orparticular, business-unitthe level,assessment asshould wellcover asthe breachespositions ofto be included/excluded from the overalltrading limitbook for theregulatory marketpurposes, activities;the and
allowpolicies dailyon identificationinternal hedges and monitoringthe ofprocedures breachesfor ofnew limitsmarket activities and/or exceptionsproducts.
267185. Competent authorities should assess the limit system, including whether:
a. the limitsinstitution establishedhas arean absoluteappropriate orframework whetherfor breachesidentifying, ofunderstanding limitsand aremeasuring possible.market Inrisk, thein latterline case,with the institution’s policiessize shouldand clearlycomplexity, describeand thethat periodthis offramework timeis duringcompliant whichwith andrelevant theminimum specificrequirements circumstancesin underaccordance whichwith suchthe breachesapplicable oflegal limitsand areregulatory possible;framework.
b186. theCompetent limitauthorities systemshould setsassess anwhether overallinstitutions limithave forin marketplace activitiesan adequate monitoring and specificreporting limitsframework for themarket mainrisks riskthat subcategories;ensures wherethere appropriate,will itbe shouldprompt allowaction allocationat ofthe limitsappropriate bylevel portfolio,of desk,the businessinstitution’s unitsenior management or typemanagement ofbody instrument;in thecase level of detailbreaches. The monitoring system should reflectinclude thespecific characteristicsindicators ofand therelevant institution’striggers marketto activities;
c.provide effective early warning alerts and should inform the setmanagement ofbody limitsand (limitssenior basedmanagement onabout riskcurrent metric,exposures notionaland limits,measures losscompared controlto limits,policy etclimits.)
187. establishedCompetent byauthorities should assess whether the institution suitshas thea sizestrong and complexitycomprehensive oflimit itssystems marketand activities;
d.control theframework institutionwith hassound proceduressafeguards to keepmitigate tradersits uprisks toin dateline aboutwith theirits limits;risk strategy and
e appetite. theFor institutionthis hasassessment, adequatecompetent proceduresauthorities toshould updatepay itsparticular limitsattention regularly.
268.to Competentthe authoritiesadequate shouldscope assesscovered by the functionalityinstitution’s ofcontrol thefunctions internal(including auditall function.consolidated Theyentities, shouldgeographical assesslocations whether:
a.and themarket institutionactivities), conductsto internalthe auditsexistence of theoperating marketlimits risk(including managementindividual frameworklimits onat adesk regularor basis;
b.business-unit thelevel internalwhich auditshould functionbe coversdaily themonitored) mainand elementsother ofpractices aimed at keeping market risk management,exposures measurementwithin andlevels controlacceptable acrossto the institution; in accordance with its risk appetite and limits.
c188. Competent authorities should also assess whether the internal auditvalidation functionprocess is sound and effective in determiningchallenging adherencemodel toassumptions internal policies and identifying any relevantpotential externalshortcomings regulations,with andrespect addressingto anythe deviationsmarket fromrisk eithermanagement system.
269. For institutions usingadopting an internal modelsapproach to determinedetermining minimum own funds requirements for market risk, competentthis authoritiesassessment should assessbe whetherbased – where available – on the information stemming from already performed supervisory activities on internal validationmodels process(such isas soundon-site andinspections).
189. effectiveCompetent inauthorities challengingshould modelalso assumptionsassess andthe identifyingfunctionality anyof potentialthe shortcomingsinternal withaudit respectfunction toin marketterms riskof modellingadequacy, scope and frequency of internal audits on the market risk quantification,management framework. This should comprise the marketreview of the main elements of risk management, systemmeasurement and othercontrols relevantframework minimumacross requirementsthe asinstitution specifiedand in the adherence to relevant EUexternal regulations of the internal policies and nationalprocedures implementingand legislationany deviations from either.
6.3.4 Summary of findings, scoring and scoringsupervisory measures
270190. 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 Tabletable 58. Where, based on the materiality of certain risk subcategoriessub-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.
271Table 8. SinceSupervisory factorsconsiderations suchfor asassigning complexity,a level of concentration and the volatility of market exposures’risk returnsscore
Supervisory mayview Considerations notin berelation perfectto indicatorsConsiderations ofin therelation marketto riskadequate level,management in assessing and scoring inherent market risk, competentcontrols authorities
There shouldis considera alllow theserisk factorsof insignificant parallelprudential andimpact noton inthe isolationinstitution andconsidering understand the driverslevel behindof volatilityinherent trends.
Table 5. Supervisory considerations for assigning a market risk scoreand
Riskthe score Considerations in relation to Considerations in relation to Supervisory view adequate management and inherent risk controls
1. • The nature and composition of • There is consistency composition of market risk exposures imply not between the institution’s Thereexposures isimply anot lowmarket levelrisk ofpolicy and material/very low risk. marketstrategy risk policy and riskits ofoverall significant • The institution’s exposures to strategy and itsrisk overallappetite. prudentialto impact on market risk are non-complex. strategy• andThe riskorganisational appetitecomplex. theframework institutionfor market risk • The level of market risk •is Therobust, organisationalwith consideringclear the level concentration is not frameworkresponsibilities forand marketa riskclear of inherent risk and material/very low. isseparation robust,of withtasks clear the management and • The institution’s market between risk-takers responsibilities and arisk clear controls. exposures generate management and control non-volatile separationreturns. offunctions.
There tasksis returns.a betweenmedium-low risk-takers and
2 managementof andsignificant controlprudential •impact Theon naturethe andinstitution compositionconsidering ofthe functions.level marketof inherent risk exposuresand implythe lowmanagement and controls. • Market risk measurement, There• isThe anature medium-and tomonitoring mediumand reporting composition of market risk systems are appropriate. monitoringexposures imply low to • Internal limits and reportingthe lowmedium risk. ofcontrol significantframework for • The complexity of the systemsmarket risk are appropriate.sound prudentialand impact on institution’s market risk •in Internalline limitswith and the the institution’s exposuresrisk
Risk isscore
1
2
Supervisory lowview Considerations in relation to medium.Considerations controlin frameworkrelation forto consideringadequate themanagement leveland •inherent Therisk levelcontrols of
exposures marketis risklow marketto management strategy and medium. risk areappetite. sound• andThe level of inherentmarket risk and concentration is low to medium. in line with the the management and • The institution’s market risk institution’s risk controls. exposures generate returns management strategy and that have a low to medium risk appetite. degree of volatility.
3There 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 There is a medium- market risk exposures imply medium consistency between the high risk of significant medium to high risk. institution’s market risk prudential impact on • The complexity of the policy and strategy and its the institution institution’s market risk overall strategy and risk considering the level exposures is medium to highprofile. profilehigh. of• inherentThe riskorganisational and • The level of market risk •framework Thefor organisationalmarket therisk management and concentration is medium does not sufficiently to high. frameworkseparate forresponsibilities market risk controls. • The institution’s exposures toand doestasks notbetween sufficientlyto market risk generate risktakers and returns that separatehave responsibilities
Riska score Considerationsmanagement inand relationcontrol medium to Considerationshigh indegree relationof tofunctions. Supervisoryvolatility. view• adequateMarket managementrisk andmeasurement,
There inherentis a high risk controlsof
havesignificant aprudential mediumimpact toon highthe degreeinstitution ofconsidering andthe taskslevel betweenof inherent risk-volatility. takers and the management
4 and control functionscontrols. • The nature and monitoring and reporting composition of •market Market risk measurement,systems marketare risknot exposures imply high Thererisk. isundertaken awith highsufficient risk• The complexity of monitoringthe accuracy and reportingfrequency. institution’s market risk. significant• prudentialInternal systemslimits areand notthe exposures is high. control framework for • The complexitylevel of themarket impactrisk onmarket therisk undertakenare not in line concentration is high. with sufficientthe institution’s market risk • The institution’s accuracyexposures andmanagement frequencystrategy or to market risk generate risk appetite. exposuresreturns isthat have a high degree of volatility.
Risk consideringscore
3
4
191. theThe leveltable •below Internalpresents limitsa andnon-exhaustive thelist •of Thesupervisory levelmeasures 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 inherentthe riskmeasure 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 controlnon-exhaustive frameworksupervisory measures for concentrationmarket isrisk highPotential 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 managementquality and frequency of the market risk arereporting notto inthe lineinstitution’s •management Thebody and senior management; B. enhance the performance of the institution’s exposuresinternal toapproaches, controlsor of its back-testing or stress testing capacity; C. withperform 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 generate(e.g. returnsthrough thathedging managementor strategysale of assets or increase of derivatives settled through central counterparties (CCPs)) when significant shortcomings have abeen highfound degreein ofthe volatilityinstitution’s measurement or control systems; G. riskpresent appetitea plan to reduce its exposures to distressed assets and/or illiquid positions gradually.