Regulatory technical standards for prudent valuation under Article 105(14)
28 January 2016
Regulatory News Alert
On 28 January 2016, the Commission Delegated Regulation (EU) 2016/101 with regard to regulatory technical standards (RTS) for prudent valuation under Article 105(14) of Regulation (EU) No 575/2013 was published in the Official Journal of the European Union.
Institutions shall calculate the total valuation adjustments (AVAs) necessary to quarterly adjust the fair values to the prudent value and shall calculate those AVAs.
The combination of Article 34 and Article 105 of Regulation (EU) No 575/2013 implies that the prudent valuation requirements in these RTS apply to all fair-valued positions regardless of whether they are held in the trading book or banking book.
Positions refers solely to financial instruments and commodities.
The delegated act specifies two approaches for calculating additional valuation adjustments for the purpose of determining the prudent value of fair-valued positions:
- the Simplified approach;
- the Core approach.
Institutions shall apply the Core approach, unless they meet the conditions required for applying the Simplified approach.
Entry into force
This Regulation entered into force on 17 February 2016.
Institutions can apply the simplified approach provided the sum of the absolute value of on-and off-balance sheet fair valued assets and liabilities is less than EUR 15 billion and provided they are not part of a group that exceeds this threshold.
The calculation of the required AVA under the simplified approach is based on a percentage of the aggregate absolute value of fair-valued positions held by the institution which amounts to 0,1%.
The Core approach is obligatory for institutions that are above the threshold of the simplified approach, but may also be implemented by institutions that are below this threshold.
The Core approach can be split in the following key features:
- Every AVA must be calculated as the excess of valuation adjustment required to achieve the identified prudent value over any adjustments applied in the institution's fair value adjustment that can be identified as addressing the same source of valuation uncertainty as the AVA;
- Where possible, the prudent value of a position is linked to a range of plausible values and a specified target level of certainty (90%)
- For all other cases, an expert based approach is specified, together with the key factors that are required to be included in that approach, (90%) target level certainty should also be set.