Commission Delegated Regulation (EU) No 529/2014 of 12 March 2014 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards for assessing the materiality of extensions and changes of the Internal Ratings Based Approach and the Advanced Measurement Approach Text with EEA relevance

Article 1

Subject matter

This Regulation lays down the conditions for assessing the materiality of extensions and changes to the Internal Rating Based approaches, the Advanced Measurement Approaches and the Internal Models Approach permitted in accordance with Regulation (EU) No 575/2013, including the modalities of the notifications of such changes and extensions.

Article 2

Categories of extensions and changes

The materiality of changes to the range of application of a rating system or an internal models approach to equity exposures, or of changes to the rating systems or internal models approach to equity exposures, for the Internal Rating Based approach (‘changes in the IRB approach’) or the materiality of the extensions and changes for the Advanced Measurement Approach (‘extensions and changes in the AMA’) or the materiality of the extensions and changes for the Internal Models Approach (‘extensions and changes in the IMA’) shall be classified into one of the following categories:

(a) material extensions and changes, which, according to Articles 143(3), and 312(2) and 363(3) of Regulation (EU) No 575/2013, require permission from the relevant competent authorities;

(b) other extensions and changes, which require notification to the competent authorities.

The extensions and changes referred to in point (b) of paragraph 1 shall further be classified into:

(a) extensions and changes that require notification before their implementation;

(b) extensions and changes that require notification after their implementation.

Article 3

Principles of classification of extensions and changes

The classification of extensions and changes in the AMA shall be carried out in accordance with this Article and Articles 6 and 7.

The classification of extensions and changes in the IMA shall be carried out in accordance with this Article and Articles 7a and 7b.

Where institutions are required to calculate the quantitative impact of any extension or change on own funds requirements or, where applicable, on risk-weighted exposure amounts, they shall apply the following methodology:

(a) for the purpose of the assessment of the quantitative impact institutions shall use the most recent data available;

(b) where a precise assessment of the quantitative impact is not feasible, institutions shall instead perform an assessment of the impact based on a representative sample or other reliable inference methodologies;

(c) for changes having no direct quantitative impact, no quantitative impact as laid down in Article 4(1)(c) for IRB approach or Article 6(1)(c) for AMA or Article 7a(1)(c) for IMA needs to be calculated.

Article 4

Material changes to the IRB approach

Changes to the IRB approach shall be considered material if they fulfil any of the following conditions:

(a) they fall under any of the changes to the range of application of a rating system or internal models approach to equity exposures described in Annex I, Part I, Section 1;

(b) they fall under any changes to the rating systems or internal models approach to equity exposures described in Annex I, Part II, Section 1;

(c) they result in either of the following: (i) a decrease of 1,5 % of either of the following: — the overall EU parent institution's consolidated risk-weighted exposure amounts for credit and dilution risk, — the overall risk-weighted exposure amounts for credit and dilution risk in the case of an institution which is neither a parent institution, nor a subsidiary; (ii) a decrease of 15 % or more of the risk-weighted exposure amounts for credit and dilution risk associated with the range of application of the internal rating system or internal models approach to equity exposures.

For the purposes of paragraph (1)(c)(i) of this Article, and in accordance with Article 3(2), the impact of the change shall be assessed as a ratio calculated as follows:

(a) in the numerator, the difference in the risk-weighted exposure amounts for credit and dilution risk associated with the range of application of the internal rating system or the internal models approach to equity exposures before and after the change at the EU parent institution's consolidated level or at the institution level which is neither a parent institution, nor a subsidiary;

(b) in the denominator the overall risk-weighted exposure amounts for credit and dilution risk before the change at the EU parent institution's consolidated level or, respectively, at the institution level which is neither a parent institution, nor a subsidiary.

The calculation shall refer to the same point in time.

The determination of the impact on risk-weighted exposure amounts shall refer only to the impact of the change to the IRB approach, and the set of exposures shall be assumed to remain constant.

For the purposes of paragraph (1)(c)(ii) of this Article, and in accordance with Article 3(2), the impact of the change shall be assessed as a ratio calculated as follows:

(a) in the numerator, the difference in the risk-weighted exposure amounts for credit and dilution risk associated with the range of application of the internal rating system or the internal models approach to equity exposures before and after the change;

(b) in the denominator, the risk-weighted exposure amounts for credit and dilution risk before the change associated with the range of application of the rating system or the internal models approach to equity exposures.

The calculation shall refer to the same point in time.

The determination of the impact on risk-weighted exposure amounts shall refer only to impact of the change to the IRB approach, and the set of exposures shall be assumed to remain constant.

Article 5

Changes to the IRB approach not considered material

Changes to the IRB approach, which are not material but are to be notified to competent authorities according to Article 143(4) of Regulation (EU) No 575/2013, shall be notified in the following manner:

(a) changes which fulfil any of the following conditions shall be notified to competent authorities at least two months before their implementation: (i) changes described in Annex I, Part I, Section 2; (ii) changes described in Annex I, Part II, Section 2; (iii) changes which result in a decrease of at least 5 % of the risk-weighted exposure amounts for credit and dilution risk associated with the range of application of the internal rating system or internal models approach to equity exposures.

(b) all other changes shall be notified to the competent authorities after their implementation at least on an annual basis.

For the purposes of paragraph (1)(a)(iii) of this Article, and in accordance with Article 3(2), the impact of the change shall be assessed as a ratio calculated as follows:

(a) in the numerator, the difference in the risk-weighted exposure amounts for credit and dilution risk associated with the range of application of the internal rating system or the internal models approach to equity exposures before and after the change;

(b) in the denominator, the risk-weighted exposure amounts for credit and dilution risk before the change associated with the range of application of the rating system or the internal models approach to equity exposures.

The calculation shall refer to the same point in time.

The determination of the impact on risk-weighted exposure amounts shall refer only to impact of the change to the IRB approach, and the set of exposures shall be assumed to remain constant.

Article 6

Material extensions and changes to the AMA

Extensions and changes to the AMA shall be considered material, if they fulfil any of the following conditions:

(a) they fall under any extensions described in Annex II, Part I, Section 1;

(b) they fall under any changes described in Annex II, Part II, Section 1;

(c) they result in either of the following: (i) in a decrease of 10 % or more of either of the following: — the overall EU parent institution's consolidated own funds requirements for operational risk, — the overall own funds requirements for operational risk in the case of an institution which is neither a parent institution, nor a subsidiary; (ii) in a decrease of 10 % or more of either of the following: — the overall own funds requirements for operational risk at the consolidated level of a parent institution which is not an EU parent institution, — the overall own funds requirements for operational risk of a subsidiary where the parent institution has not received the permission to use the AMA.

For the purposes of paragraph (1)(c)(i), and in accordance with Article 3(2), the impact of any extension or change shall be assessed as a ratio calculated as follows:

(a) in the numerator, the difference in the own funds requirements for operational risk associated with the scope of application of the AMA model before and after the extension or change at the EU parent institution's consolidated level or at the institution level which is neither a parent institution, nor a subsidiary;

(b) in the denominator, the overall own funds requirements for operational risk before the extension or change at the EU parent institution's consolidated level or, respectively, at the institution level which is neither a parent institution, nor a subsidiary.

The calculation shall refer to the same point in time.

The determination of the impact on the own funds requirements shall refer only to impact of the extension and change to the AMA, and therefore the operational risk profile shall be assumed to remain constant.

For the purposes of paragraph (1)(c)(ii), and in accordance with Article 3(2), the impact of any extension or change shall be assessed as a ratio calculated as follows:

(a) in the numerator, the difference in the own funds requirements for operational risk associated with the scope of application of the model before and after the extension or change at the consolidated level of a parent institution which is not an EU parent institution or at the subsidiary level where the parent institution has not received the permission to use the AMA;

(b) in the denominator, the overall own funds requirements for operational risk before the extension or change at the consolidated level of a parent institution which is not an EU parent institution or, respectively, at the subsidiary level where the parent institution has not received the permission to use the AMA.

The calculation shall refer to the same point in time.

The determination of the impact on the own funds requirements shall refer only to impact of the extension and change to the AMA, and therefore the operational risk profile shall be assumed to remain constant.

Article 7

Extensions and changes to the AMA not considered material

Extensions and changes to the AMA, which are not material but are to be notified to competent authorities according to Article 312(3) of Regulation (EU) No 575/2013, shall be notified in the following manner:

(a) extensions and changes falling under Annex II, Part I, Section 2 and Part II, Section 2, shall be notified to competent authorities at least two months before their implementation;

(b) all other extensions and changes shall be notified to the competent authorities after their implementation at least on an annual basis.

Article 7a

Material extensions and changes to the IMA

Extensions and changes to the IMA shall be considered material, if they fulfil any of the following conditions:

(a) they fall under any of the extensions described in Annex III, Part I, Section 1;

(b) they fall under any changes described in Annex III, Part II, Section 1;

(c) they result in a change in absolute value of 1 % or more, computed for the first business day of the testing of the impact of the extension or change, of one of the relevant risk numbers referred to in Article 364(1)(a)(i), or Article 364(1)(b)(i), or Article 364(2)(b)(i) or Article 364(3)(a) of Regulation (EU) No 575/2013, and associated with the scope of application of the relevant IMA model to which the risk number refers, and result in either of the following: (i) in a change of 5 % or more of the sum of the risk numbers referred to in Article 364(1)(a)(i), Article 364(1)(b)(i), scaled up by the multiplication factors (mc) and (ms) respectively according to Article 366 of Regulation (EU) No 575/2013, Article 364(2)(b)(i) and Article 364(3)(a) of Regulation (EU) No 575/2013, and the own funds requirements according to Chapter 2, 3 and 4 of Title IV of that Regulation, as applicable, computed at the level of the EU parent institution or, in the case of an institution which is neither a parent institution nor a subsidiary, at the level of that institution; (ii) in a change of 10 % or more of one or more of the relevant risk numbers referred to in Article 364(1)(a)(i), or Article 364(1)(b)(i), or Article 364(2)(b)(i) or Article 364(3)(a) of Regulation (EU) No 575/2013, and associated with the scope of application of the relevant IMA model to which the risk number refers.

For the purposes of paragraph (1)(c)(i), and in accordance with Article 3(2), the impact of any extension or change shall be assessed as the highest absolute value over the period referred to in paragraph 4 of this Article of a ratio calculated as follows:

(a) in numerator, the difference between the sum referred to in paragraph (1)(c)(i) with and without the extension or change;

(b) in the denominator, the sum referred to in paragraph (1)(c)(i) without the extension or change.

For the purposes of paragraph (1)(c)(ii), and in accordance with Article 3(2), the impact of any extension or change shall be assessed as the highest absolute value over the period referred to in paragraph 4 of this Article of a ratio calculated as follows:

(a) in the numerator, the difference between the risk number referred to in Article 364(1)(a)(i), Article 364(1)(b)(i), Article 364(2)(b)(i) or Article 364(3)(a) of Regulation (EU) No 575/2013 with and without the extension or change;

(b) in the denominator, the risk number referred to, respectively, in Article 364(1)(a)(i), or Article 364(1)(b)(i), or Article 364(2)(b)(i) or Article 364(3)(a) without the extension or change.

For the purposes of paragraph (1)(c)(i) and (1)(c)(ii) the ratios referred to in paragraphs 2 and 3 shall be calculated for a period the duration of which is the shortest between the following points (a) and (b):

(a) 15 consecutive business days starting from the first business day of the testing of the impact of the extension or change;

(b) until such day where a daily calculation of either one of the ratios referred to in paragraphs 2 and 3 results in an impact equal or greater than the percentages referred to in either paragraph (1)(c)(i) or paragraph (1)(c)(ii), respectively.

Article 7b

Extensions and changes to the IMA not considered material

Extensions and changes to the IMA, which are not material but are to be notified to competent authorities according to the second subparagraph of Article 363(3) of Regulation (EU) No 575/2013, shall be notified in the following manner:

(a) extensions and changes falling under Annex III, Part I, Section 2, and Part II, Section 2, shall be notified to competent authorities two weeks before their planned implementation;

(b) all other extensions and changes shall be notified to the competent authorities after implementation at least on an annual basis.

Article 8

Documentation of extensions and changes

For extensions and changes to the IRB approach, or to the AMA or to the IMA classified as requiring competent authorities' approval, institutions shall submit, together with the application, the following documentation:

(a) description of the extension or change, its rationale and objective;

(b) implementation date;

(c) scope of application affected by the model extension or change, with volume characteristics;

(d) technical and process document(s);

(e) reports of the institutions' independent review or validation;

(f) confirmation that the extension or change has been approved through the institution's approval processes by the competent bodies and date of approval;

(g) where applicable, the quantitative impact of the change or extension on the risk weighted exposure amounts, or on the own funds requirements, or on the relevant risk numbers or sum of relevant own funds requirements and risk numbers;

(h) records of the institution's current and previous version number of internal models which are subject to approval.

Article 9

Entry into force

This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

ANNEX I

PART I

CHANGES TO THE RANGE OF APPLICATION OF RATING SYSTEMS OR INTERNAL MODELS APPROACHES TO EQUITY EXPOSURES

SECTION 1

Changes requiring competent authorities' approval (‘material’)

1.Extending the range of application of a rating system to:

(a) exposures in an additional business unit, that are of the same type of product or obligor;

(b) exposures of an additional type of product or obligor unless the additional type of product or obligor falls within the range of application of an approved rating system based on the criteria as referred to in points (c)(i) and (ii);

(c) additional exposures related to the lending decision of a third party to the group, unless the institution can prove that the additional exposures fall within the range of application of an approved rating system, based on all of the following criteria: (i) the ‘representativeness’ of the data used to build the model to assign exposures to grades or pools with respect to the key characteristics of the institution's additional exposures where the lending decision has been taken by a third party, according to Article 174(c) of Regulation (EU) No 575/2013; (ii) the ‘comparability’ of the population of exposures represented in the data used for estimation, the lending standards used when the data was generated and other relevant characteristics with the ones of the additional exposures where the lending decision has been taken by a third party, according to Article 179(1)(d) of Regulation (EU) No 575/2013. For the purposes of establishing ‘representativeness’ and ‘comparability’ under points (i) and (ii) of the first paragraph institutions shall provide a complete description of the criteria and measures used.

2.Extending the range of application of an internal models approach to equity exposures, to one of the following type of exposures:

(a) to the Simple risk weight method according to Article 155(2) of Regulation (EU) No 575/2013;

(b) to the PD/LGD approach according to Article 155(3) of Regulation (EU) No 575/2013;

(c) to the temporary partial use provision according to Article 495 of Regulation (EU) No 575/2013;

(d) to the same type of product in an additional business unit;

(e) to an additional type of product unless the institution can prove that it falls within the range of application of an existing internal models approach to equity exposures.

SECTION 2

Changes requiring prior notification to competent authorities