Context and objectives

On 23 October 2020, the Commission de Surveillance du Secteur Financier (CSSF) published Circular CSSF 20/753 to provide counterparty credit risk institutions (“institutions”) with updated supervisory expectations on the regulatory requirements that apply to the Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP), as well as to stress testing programs under the European Banking Authority’s guidelines (EBA/GL/2018/04).

Regulators’ expectations regarding ICAAP/ILAAP and stress testing programs continue to evolve. Circular CSSF 20/753 notably amends:

• Circular CSSF 07/301 (as amended by Circular CSSF 08/338, Circular CSSF 09/403, Circular CSSF 11/506 and Circular CSSF 13/568) on the implementation of the internal capital and liquidity adequacy assessment process (“the ICAAP Circular”); and
• Circular CSSF 11/506 on the principles of a sound stress testing program.

Circular 20/753 clearly establishes that Circulars CSSF 07/301 and CSSF 11/506 shall no longer apply to non-counterparty credit risk investment firms.

Amendments to the ICAAP Circular

The ICAAP/ILAAP is a set of sound, effective and comprehensive strategies and processes to assess and maintain, on an ongoing basis, the amount, type and distribution of internal resources (capital and liquidity) that an institution considers adequate to cover the nature and level of the risks to which it is or may be exposed.

As the general principles of ICAAP/ILAAP are now broadly understood, Circular CSSF 20/753 has considerably shortened the ICAAP Circular to focus on the key implementing provisions that institutions shall meet to comply with the ICAAP/ILAAP requirements of CSSF Regulation N°15-02.

In addition, Circular CSSF 20/753 aligns the ICAAP Circular’s wording with the current methodology, provides clarification regarding the reporting requirements and, most importantly, provides further guidance on the following aspects:

• Business model, strategy and risk appetite
• Risk identification
• Risk and internal capital measurement

Principles of a sound stress testing program

Circular CSSF 11/506 further specifies the implementation of Article 6 of CSSF Regulation N°15-02 in the field of stress testing, which is a key practice for sound risk management as well as capital and liquidity planning.

Circular CSSF 20/753’s amendments of Circular CSSF 11/506 are meant to provide further guidance on:

• The principle of proportionality: Circular CSSF 20/753 states that proportionality applies to all aspects of the stress testing framework, including methodology and design, technical infrastructure, and resources and processes. Institutions that are designated as other systemically important institutions (pursuant to article 59-3 of the law of 5 April 1993 on the financial sector) are expected to benchmark their stress testing framework against the more granular requirements of EBA/GL/2018/04.
• Operational arrangements relating in particular to the coverage of longer-term risks: Circular CSSF 20/753 states that institutions shall also have a clear understanding of how successive stress tests link up to provide time-consistent management of risks and capital/liquidity over the long run. This is particularly relevant for longer-term risks, where the materialization of risks spans longer time horizons. Regarding individual risk areas, Circular CSSF 20/753 states that these may require special attention and all material risks should be covered in proportion to the nature, scale, size and complexity of the institution’s activities and risks. Institutions should incorporate relevant longer-term risks into their stress tests, such as climate-related risks.
• Data infrastructure: Circular CSSF 20/753 states that institutions shall ensure that their stress-testing program is supported by a data (management) infrastructure that permits the timely production of all required data points and their processing (including aggregation), to ensure the integrity, comprehensiveness and accuracy of stress test results.

Next steps

The amended versions of Circulars CSSF 07/301 and CSSF 11/506 apply from 31 October 2020.
The CSSF expects these changes to be reflected in their governance and operating frameworks from 31 December 2020.

How can Deloitte help?

Our Risk Advisory services help clients manage risk and uncertainty from the boardroom to the network. We provide an array of services that can help you better measure and manage risk and control, and to enhance the reliability of systems and processes throughout the organization.

In this particular context, Deloitte can support you in enhancing your risk management capabilities to address the new expectations of the CSSF. To adopt this circular, the industry will need to gain maturity on several topics, such as the development of the economic perspective in the management of own funds or on the integration of new stress-testing capabilities related to climate risk.

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