EBA · 2016_2948 Final Q&A

Valuation input consisting of a matrix of parameters

Name: Valuation input consisting of a matrix of parameters: EBA Q&A — EU Financial Regulatory Q&A
Creator: European Banking Authority
License: https://creativecommons.org/licenses/by/4.0/

Regulation: Regulation (EU) No 575/2013 (CRR)
Article: 105, para. 14
Topic: Market risk
Submitted by: Competent authority
Submitted: 2016-10-18
Answered: 2017-03-17
Answer provided by: ESAs (EBA, ESMA, EIOPA)

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Question

For the purposes of calculating AVAs for Market Price Uncertainty, where a valuation input consists of a matrix of parameters (for example a curve or a surface), can the AVAs be calculated at the level of the matrix as a whole (i.e. the curve or surface) based on the valuation exposures related to each parameter within that matrix, rather than be calculated at the individual parameter level?

Background

Where AVAs can be calculated at the level of the matrix as a whole, then the interrelationship in market price uncertainty between the constituent parameters are implicitly taken into consideration. This removes the dependency on the ratio of variance test to permit some interrelationship via netting on the basis of historical price or spread movements when AVAs are calculated at the individual parameter level. This also helps ensure that the curve or surface will be internally consistent helping to prevent issues such as implying impossible forward curve or surface constructions.

Answer

In accordance with Article 9(4)(b) of Regulation (EU) 2016/101, where a valuation input consists of a matrix of parameters (for example a curve or surface), the AVAs for Market Price Uncertainty can be calculated at the level of the matrix as a whole (i.e. the curve or surface) rather than calculated at the individual parameter level. This is also applicable for the calculation of close-out costs AVAs under Article 10(5)(b) of Regulation (EU) 2016/101.

Original source: European Banking Authority, Q&A ID 2016_2948

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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