Commission Delegated Regulation (EU) 2022/2059 of 14 June 2022 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards specifying the technical details of back-testing and profit and loss attribution requirements under Articles 325bf and 325bg of Regulation (EU) No 575/2013 (Text with EEA relevance)

CHAPTER 1

TECHNICAL ELEMENTS TO BE INCLUDED IN THE ACTUAL AND HYPOTHETICAL CHANGES IN A PORTFOLIO’S VALUE FOR THE PURPOSES OF THE BACK-TESTING REQUIREMENTS

Section 1

Technical elements to be included in the actual changes in a portfolio’s value

Article 1

Technical elements to be included in the actual changes in a trading desk portfolio’s value for the back-testing requirements performed at trading desk level

When calculating the actual changes in a trading desk portfolio’s value, institutions shall include in that value all those adjustments that have been considered in the end-of-day valuation process referred to in paragraph 1 and that are market risk related, with the exception of all of the following adjustments:

(a) credit valuation adjustments reflecting the current market value of the credit risk of counterparties to the institution;

(b) adjustments attributed to the institution’s own credit risk that have been excluded from own funds in accordance with Article 33(1), point (b) or (c), of Regulation (EU) No 575/2013;

(c) additional value adjustments deducted from Common Equity Tier 1 capital in accordance with Article 34 of Regulation (EU) No 575/2013.

In addition to the exclusions laid down in paragraph 3, points (a), (b), and (c), institutions may exclude from the calculation of the actual changes in a trading desk portfolio’s value an adjustment that is calculated in the end-of-day valuation process across sets of positions assigned to more than one trading desk on a net basis, where all of the following conditions are met:

(a) that adjustment is, due to its nature, calculated on a net basis across sets of positions that are assigned to more than one trading desk;

(b) the internal risk management of that adjustment is consistent with the level at which the adjustment is calculated;

(c) the institution concerned documents all of the following: (i) the sets of positions across which the adjustment is calculated; (ii) the reasoning underpinning the calculation of the adjustment across the sets of positions referred to in point (i); (iii) the justification for not calculating the adjustment on the basis of positions assigned to that trading desk only.

Article 2

Technical elements to be included in the actual changes in the portfolio’s value for the back-testing requirements performed at institution level

When calculating the actual changes in a portfolio’s value, institutions shall include in that value all the adjustments that have been considered in the end-of-day valuation process referred to in paragraph 1 and that are market risk related, with the exception of all of the following adjustments:

(a) credit valuation adjustments reflecting the current market value of the credit risk of counterparties to the institution;

(b) adjustments attributed to the institution’s own credit risk that have been excluded from own funds in accordance with Article 33(1), point (b) or (c), of Regulation (EU) No 575/2013;

(c) additional value adjustments deducted from Common Equity Tier 1 capital in accordance with Article 34 of Regulation (EU) No 575/2013.

Institutions shall calculate the change in the value of the adjustments referred to in paragraph 3 on the basis of either of the following:

(a) all positions that are assigned to trading desks for which institutions calculate the own funds requirements for market risk in accordance with the alternative internal model approach set out in Part Three, Title IV, Chapter 1b of Regulation (EU) No 575/2013;

(b) all positions subject to the own funds requirements for market risk.

Section 2

Technical elements to be included in the hypothetical changes in a portfolio’s value requirements

Article 3

Technical elements to be included in the hypothetical changes in a trading desk portfolio’s value for the back-testing requirements performed at trading desk level

When calculating the hypothetical changes in the trading desk portfolio’s value, institutions shall reflect the changes in the value of the trading desk portfolio that are due to the passage of time in the same way they reflect such changes in the calculation of:

(a) the expected shortfall risk measure referred to in Article 325ba(1), point (a), of Regulation (EU) No 575/2013;

(b) the stress scenario risk measure referred to in Article 325bk of Regulation (EU) No 575/2013.

When calculating the hypothetical changes in a trading desk portfolio’s value, institutions shall include in that value all those adjustments that have been considered in the end-of-day valuation process referred to in paragraph 1 and that are market risk related, that are calculated on a daily basis, and that are included in the institution’s risk-measurement model, with the exception of all of the following adjustments:

(a) credit valuation adjustments reflecting the current market value of the credit risk of counterparties to the institution;

(b) adjustments attributed to the institution’s own credit risk that have been excluded from own funds in accordance with Article 33(1), point (b) or (c), of Regulation (EU) No 575/2013;

(c) additional value adjustments deducted from Common Equity Tier 1 capital in accordance with Article 34 of Regulation (EU) No 575/2013.

In addition to the exclusions laid down in paragraph 3, points (a), (b), and (c), institutions may also exclude from the calculation of the hypothetical changes to a trading’s desk portfolio’s value an adjustment that is calculated on a net basis in the end-of-day valuation process across sets of positions assigned to more than one trading desk, where all of the following conditions are met:

(a) that adjustment is, due to its nature, calculated on a net basis across sets of positions that are assigned to more than one trading desk;

(b) the internal risk management of that adjustment is consistent with the level at which the adjustment is calculated;

(c) the institution documents all of the following: (i) the sets of positions across which the adjustment is calculated; (ii) the reasoning underpinning the calculation of the adjustment across the sets of positions referred to in point (i); (iii) the justification for not calculating the adjustment on the basis of positions assigned to that trading desk only.

Article 4

Technical elements to be included in the hypothetical changes in the portfolio’s value for the back-testing requirements performed at institution level

When calculating the hypothetical changes in the portfolio’s value, institutions shall reflect the changes in the value of the portfolio that are due to the passage of time in the same way they reflect such changes in the calculation of:

(a) the expected shortfall risk measure referred to in Article 325ba(1), point (a), of Regulation (EU) No 575/2013;

(b) the stress scenario risk measure referred to in Article 325bk of Regulation (EU) No 575/2013.

When calculating hypothetical changes in a portfolio’s value, institutions shall include in that value all those adjustments that have been considered in the end-of-day valuation process referred to in paragraph 1 and that are market risk related, that are calculated on a daily basis and that are included in the institution’s risk-measurement model, with the exception of all of the following adjustments:

(a) credit valuation adjustments reflecting the current market value of the credit risk of counterparties to the institution;

(b) adjustments attributed to the institution’s own credit risk that have been excluded from own funds in accordance with Article 33(1), point (b) or (c), of Regulation (EU) No 575/2013;

(c) additional valuation adjustments deducted from Common Equity Tier 1 capital in accordance with Article 34 of Regulation (EU) No 575/2013.

Institutions shall calculate the changes in the value of the adjustments referred to in paragraph 3 on the basis of either of the following:

(a) all those positions that are assigned to trading desks for which institutions calculate the own funds requirements for market risk in accordance with the alternative internal model approach set out in Part Three, Title IV, Chapter 1b of Regulation (EU) No 575/2013.

(b) all positions subject to own funds requirements for market risk.

Article 5

Documentation requirements

Institutions shall have policies and procedures in place setting out how they calculate the actual and hypothetical changes in a trading desk portfolio’s value or in a portfolio’s value in accordance with Articles 1 to 4 of this Regulation. Those policies and procedures shall contain all of the following elements:

(a) when describing how the actual changes in value of the portfolio concerned are calculated, an outline of the differences between the changes in the end-of-day portfolio values produced by the end-of-day valuation process and the actual changes in the value of the portfolio concerned;

(b) the fees and commissions and how the exclusion referred to in Article 325bf(4), point (b), of Regulation (EU) No 575/2013 is applied;

(c) a list of all adjustments, specifying for each adjustment all of the following: (i) a description and purpose of the adjustment; (ii) the methodology and process used for the calculation of the adjustment; (iii) the frequency of the calculation of the adjustment and, where the frequency is less than daily, the reasoning for such frequency; (iv) whether the adjustment is sensitive to market risk; (v) the sets of positions across which the adjustment is calculated and the reasons for performing the calculation across such sets; (vi) whether and how the risk stemming from changes in the adjustment is actively hedged and which trading desk or desks are responsible for such hedging; (vii) whether and how the adjustment is taken into account in the actual changes in the value of the portfolio concerned for the purposes of the back-testing referred to in Article 325bf(3) of Regulation (EU) No 575/2013 and the back-testing referred to in Article 325bf(6) of that Regulation; (viii) whether and how the adjustment is taken into account in the hypothetical changes in the value of the portfolio concerned for the purposes of Articles 325bf and 325bg of Regulation (EU) No 575/2013, and an outline of how the change in the adjustment is calculated if unchanged positions in the portfolio are assumed.

CHAPTER 2

TECHNICAL SPECIFICATION OF THE PROFIT AND LOSS ATTRIBUTION REQUIREMENT

Section 1

Criteria necessary to ensure that the theoretical changes and the hypothetical changes in the value of a trading desk portfolio are sufficiently close and consequences for trading desks that do not meet that condition

Article 6

General requirements

Article 7

Calculation of the Spearman correlation coefficient

Institutions shall calculate the Spearman correlation coefficient referred to in Article 6(1) of this Regulation by performing the following steps in the following order:

(a) they shall determine the time series of observations of the hypothetical and theoretical changes in the trading desk portfolio’s value for the most recent 250 business days;

(b) from the time series of the hypothetical and theoretical changes referred to in point (a), institutions shall produce the corresponding time series of ranks in accordance with paragraph 2, treating the time series of the hypothetical and theoretical changes as the originating time series;

(c) they shall calculate the Spearman correlation coefficient in accordance with the following formula: Where: R HPL = the time series of ranks produced from the time series of hypothetical changes referred to in point (b); R RTPL = the time series of ranks produced from the time series of theoretical changes referred to in point (b); = the standard deviation of the time series of ranks RHPL calculated in accordance with paragraph 3, point (a); = the standard deviation of the time series of ranks RRTPL calculated in accordance with paragraph 3, point (b); cov (RHPL, RRTPL) = the covariance calculated in accordance with paragraph 3, point (c), between the times series of ranks RHPL and RRTPL.

Institutions shall produce the time series of ranks referred to in paragraph 1, point (b), from an originating time series by performing the following steps in the following order:

(a) for each observation within the originating time series, institutions shall count the number of observations with a lower value than that observation within that time series;

(b) institutions shall label each observation with the number resulting from the calculation set out in point (a) increased by one;

(c) where, as a result of the labelling in accordance with point (b), two or more observations are labelled with the same number, institutions shall in addition increase the numbers of those labels with the following fraction: where N equals the quantity of the labels with the same number;

(d) institutions shall consider as time series of ranks, the time series of the labels obtained in accordance with points (b) and (c).

Institutions shall calculate the standard deviation of the time series of ranks RHPL in accordance with the formula laid down in point (a), the standard deviation of the time series of ranks RRTPL in accordance with the formula laid down in point (b), and the covariance between those time series in accordance with the formula laid down in point (c) as follows:

(c) Where: i = the index that denotes the observation in the time series of ranks; = the ‘i-th’ observation of the time series of ranks R HPL; = the mean of the time series of ranks RHPL; = the ‘i-th’ observation of the time series of ranks RRTPL; = the mean of the time series of ranks RRTPL.

Article 8

Calculation of the Kolmogorov-Smirnov test metric

Institutions shall calculate the Kolmogorov-Smirnov test metric referred to in Article 6(1) of this Regulation by performing the following steps in the following order:

(a) they shall determine the time series of the most recent 250 business days of observations of the hypothetical and theoretical changes in the trading desk portfolio’s value;

(b) they shall calculate the empirical cumulative distribution function of the hypothetical changes in the trading desk portfolio’s value from the time series of the hypothetical changes referred to in point (a);

(c) they shall calculate the empirical cumulative distribution function of the theoretical changes in the trading desk portfolio’s value from the time series of the theoretical changes referred to in point (a);

(d) they shall obtain the Kolmogorov-Smirnov test metric by calculating the maximum difference between the two empirical cumulative distributions calculated in accordance with points (b) and (c) at any possible value of profit and loss.

Article 9

Specification of criteria necessary to ensure that the theoretical changes and the hypothetical changes in the value of a trading desk portfolio are sufficiently close

A trading desk shall be classified as a ‘green zone desk’ where all of the following conditions are met:

(a) the Spearman correlation coefficient for the trading desk, calculated in accordance with Article 7 of this Regulation, is greater than 0,8;

(b) the Kolmogorov-Smirnov test metric for the trading desk, calculated in accordance with Article 8 of this Regulation, is lower than 0,09.

A trading desk shall be classified as a ‘red zone desk’ where either of the following conditions is met:

(a) the Spearman correlation coefficient for the trading desk, calculated in accordance with Article 7 of this Regulation, is lower than 0,7;

(b) the Kolmogorov-Smirnov test metric for the trading desk, calculated in accordance with Article 8 of this Regulation, is greater than 0,12.

A trading desk shall be classified as an ‘orange zone’ desk where all of the following conditions are met:

(a) the trading desk is not classified as either a green or a red zone desk;

(b) the own funds requirements for all the positions assigned to that trading desk were calculated in the previous quarter based on the alternative standardised approach set out in Part Three, Title IV, Chapter 1a of Regulation (EU) No 575/2013.

Article 10

Calculation of the additional own funds requirement referred to in Article 325bg(2) of Regulation (EU) No 575/2013

The additional own funds requirement referred to in Article 325bg(2) shall be equal to:

Where:

Where:

Article 11

Frequency of the assessment of compliance with the profit and loss attribution requirement

Institutions shall assess compliance with the profit and loss attribution requirement on a quarterly basis for all trading desks for which those institutions have the permission referred to in Article 325az(2) of Regulation (EU) No 575/2013 to calculate the own funds requirements using internal models.

Section 2

Technical elements to be included in the theoretical and hypothetical changes in a trading desk portfolio’s value for the purposes of the profit and loss attribution requirement

Article 12

Technical elements to be included in the theoretical changes in the trading desk portfolio’s value

Article 13

Technical elements to be included in the hypothetical changes in a trading desk portfolio’s value for the profit and loss attribution requirement

For the purposes of Article 325bg of Regulation (EU) No 575/2013, institutions shall calculate hypothetical changes in a trading desk portfolio’s value in accordance with Article 3 of this Regulation.

Article 14

Alignment of data for the profit and loss attribution requirements

For the purposes of Article 325bg of Regulation (EU) No 575/2013, institutions may replace the value of input data for a given risk factor used in the calculation of the theoretical changes in the trading desk portfolio’s value with the value of the input data of the same nature for the same risk factor used in the calculation of the hypothetical changes in the trading desk portfolio’s value, provided either of the following conditions is met:

(a) differences in the input data are due to the fact that the data are sourced from different data providers;

(b) differences in the input data are due to the fact that the input data are extracted from the market data source at different times during the same business day.

For the purposes of Article 325bg of Regulation (EU) No 575/2013, institutions may replace the value of a risk factor used in the calculation of the theoretical changes in the trading desk portfolio’s value with the value of the same risk factor used in the calculation of the hypothetical changes in the trading desk portfolio’s value where all of the following conditions are met: