The European Banking Authority’s (EBA) has published the final draft regulatory technical standards (RTS) on how to identify the main risk driver and determine whether a transaction represents a long or short position.
This is the latest in the authority’s implementation of the EU Banking Package, which will introduce the final Basel III reforms. The initiative aims to improve the region’s prudential framework and ensure a level playing field across countries. It will go live from 1 January 2025.
In the Capital Requirements Regulation (CRR), firms are expected to calculate and aggregate the absolute value of long and short positions to determine the size of a business. However, the details of these calculations are unclear.
As part of its amendments to the regulation, the EBA specifies that “A long position means that the market value of the position increases when the value of its main risk driver increases, and a short position means that the market value of the position decreases, when the value of its main risk driver increases”.
To identify the main risk driver of a non-derivative position, institutions must identify all risk factors, standardise their measurement and rank them. Sensitivities such as volatility will be risk-weighted.
Alongside clarifications, the update also introduces a simplified method for simpler instruments, including fixed-rate bonds, floating-rate notes, stocks, forwards, futures, simple swaps and plain vanilla options. This will allow smaller banks to comply with the regulation, and will help to provide a level playing field for institutions of all sizes, the authority stated. FX risk drivers for specific non-FX trades will be disregarded under the simplified method.
The RTS will go through the European Commission, the European Parliament and the European Council before being published in the Official Journal of the European Union.
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