Final Report on draft amendments to the FRTB RTS (EBA-RTS-2024-18)

EBA/RTS/2024/18
13 August 2024
EBA Regular Use
Final report
Draft Regulatory Technical Standards amending delegated regulations on profit and loss attribution requirements, risk factor modellability assessment, and the treatment of FX and commodity risk in the banking book

FINAL REPORT ON REVIEW OF RTS ON FRTB
Contents

1. Executive Summary 3
2. Background and rationale 5
3. Draft regulatory technical standards 8
4. Accompanying documents 16
   4.1 Draft cost-benefit analysis / impact assessment 16
   4.2 Feedback on the public consultation 19

FINAL REPORT ON REVIEW OF RTS ON FRTB

1. Executive Summary
   The amendments to CRR made as part of the CRR3 legislative process introduced a number of changes to the fundamental review of the trading book framework (FRTB) as implemented in the EU via the CRR2. As a result, the EBA has been mandated in CRR3 to recast regulatory technical standards that it has developed in the past years on FRTB, where the underlying CRR legal basis has been amended. Namely, the EBA has been mandated to re-develop standards in relation to:
   (i) The profit and loss attribution requirements in accordance with Article 325bg CRR3; (ii) The modellability assessment of risk factors to be classified as modellable or as non￾modellable in accordance with Article 325be CRR3; (iii) The treatment of foreign-exchange and commodity risk in the banking book in accordance with Article 325 CRR3. The existing delegated regulations covering for the three abovementioned aspects have been the result of a consultation process where, among others, several market participants were involved. Furthermore, several EU credit institutions have already implemented the provisions included in the existing delegated regulations to obtain the approval from the competent authority to use the internal model approach for computing the own funds requirements for market risk in relation to some trading desks. For these reasons, the recast of the RTS is limited to what is strictly needed for the provisions included therein to fit with the new CRR text (i.e. the text as resulting from the CRR3 legislative process). In relation to the RTS on profit and loss attribution requirements 1 , the amendments aim at reflecting the new wording included in Article 325bg CRR, as well as at removing the formulae for aggregating the own funds requirements for market risk from the delegated regulation as it now been included directly in Article 325ba CRR. In relation to the RTS on modellability assessment 2 , the amendments include documentation requirements supporting the competent authority in assessing which are the risk factors for which data from third-party have been used. This has been introduced in line with the new provision in
   Article 325be stating that competent authority may allow institutions to use market data from
   third-party vendors to perform the modellability assessment.
   1 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022R2059 2 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022R2060

FINAL REPORT ON REVIEW OF RTS ON FRTB
In relation to the RTS on FX and Commodity risk in the banking book3 , the amendments include requirements ensuring that institutions can identify positions that are subject to FX risk only because of the translation risk resulting from the consolidation process, and ensuring that institutions using internal models have clear policies in place clarifying which are the positions that are managed by classical trading desks, and which are instead positions that are managed in the context of a notional trading desk. 3 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32023R1577

FINAL REPORT ON REVIEW OF RTS ON FRTB
2. Background and rationale

1. In the past years, the EBA has developed several RTS implementing in EU law the fundamental
   review of the trading book (FRTB) framework. This followed the approach set out in the EBA roadmap on FRTB4 and allowed credit institutions to prepare for the implementation of the FRTB in EU in accordance with the recently agreed CRR3 package. This package transformed the FRTB reporting requirements into own funds requirements and transposed in EU law the building blocks of the so-called Basel III reforms.
2. In this context, in March 2020, the EBA finalised the development of regulatory technical standards
   (RTS) on back-testing and profit and loss attribution requirements, and RTS on risk factor modellability. The two were subsequently adopted by the European Commission and published on the EU Official Journal 5 in June 2022. Furthermore, in December 2020, the EBA finalised the development of RTS on the treatment of non-trading book positions subject to foreign risk or commodity risk. The RTS have been published on the official journal in August 2023.
3. As part of CRR3, the EBA has received a set of mandates in the area of market risk. Among others,
   the EBA is de-facto required to review those three RTS in light of the changes that have been made to the CRR2 text as part of the CRR3 legislative process. The revision of these RTS is included in the first phase of deliverables included in the EBA CRR3 roadmap6 under the market risk section.
4. Considering that those three RTS have been the result of a consultation process, and that they deal
   with key elements of the FRTB framework that several institutions have already implemented, it is important that the review of such RTS is limited to what is strictly needed for them to fit with the new CRR text (i.e. the text as resulting from the CRR3 legislative process). Not doing so, would risk undermining the significance effort that institutions already did to comply with those regulations, and would question overall the stability of the regulatory framework.
5. Accordingly, the background section highlights the changes made to the CRR text that are relevant
   in the context of the three RTSs, and the amendments made to make the RTS fit with the new text. RTS on Back-testing and PLAT
6. The provisions dealing with the composition of actual and hypothetical changes in back-testing, as
   included in article 325bf CRR, have not been subject to changes as part of the CRR3 process. Accordingly, articles in the delegated regulation on back-testing and PLAT requirements detailing 4 https://www.eba.europa.eu/eba-publishes-its-roadmap-for-the-new-market-and-counterparty-credit-risk-approaches￾and-launches-consultation-on-technical-standards-on-the-ima-under 5 The RTS as published on the official journal can be found here: https://www.eba.europa.eu/regulation-and-policy/market￾risk/draft-technical-standards-on-the-ima-under-the-frtb 6 https://www.eba.europa.eu/publications-and-media/press-releases/eba-publishes-roadmap-implementation-eu-banking￾package

FINAL REPORT ON REVIEW OF RTS ON FRTB out the technical details to be included in actual and hypothetical changes as referred to in article 325bf(9) CRR are not to be amended.
7. Article 325bg dealing with the profit and loss attribution test (PLAT) requirements instead has been
amended as follows:
(i) It clarifies that where the hypothetical P&L (HPL) and risk-theoretical P&L (RTPL) are either close or sufficiently close, the PLAT requirements are met. When not met, a desk falls in the standardised approach, as specified in Article 325az(2)(d) CRR. (ii) It specifies that where the hypothetical P&L (HPL) and risk-theoretical P&L are not close, but they are sufficiently close, an add-on applies (PLAaddon).
8. Accordingly, the RTS should be revised to make clear that:
(i) Green and yellow desk (as allocated in accordance with the rules prescribed in the delegated regulation dealing with PLAT and back-testing requirements), are considered to have HPL and RTPL to be close or sufficiently close – and hence, to pass the PLAT. Amber and red desk should be considered instead to have HPL and RTPL neither close nor sufficiently close – and hence, not to pass the PLAT. (ii) Yellow desks are those characterized by sufficiently close (but not close) hypothetical P&L (HPL) and risk-theoretical P&L, and hence triggering the PLAaddon
9. Furthermore, the RTS should be amended so to remove the formulae to aggregate the own funds
requirements for market risk, as it now provided in Article 325ba(3) CRR.
RTS on FX and COM in BB
10.Article 104b CRR has been amended by introducing the following two paragraphs:
‘5. To calculate their own funds requirements for market risk, institutions shall assign each of their non-trading book positions that are subject to foreign exchange risk or commodity risk to trading desks established in accordance with paragraph 1 that manage risks that are similar to those positions.
6. By way of derogation from paragraph 5, institutions may, when calculating their own funds
requirements for market risk, establish one or more trading desks to which they assign exclusively non-trading book positions subject to foreign exchange risk or commodity risk. Those trading desks shall not be subject to the requirements set out in paragraphs 1, 2 and 3.’; 11.The introductions make clear that institutions can decide to map foreign exchange and commodity risk positions to a so-called “notional trading desk” – this trading desk is indeed not subject to the governance requirements applicable to classical trading desks. 12.Furthermore, CRR3 also introduced, as per article 104c, the structural FX waiver also in the context of the FRTB methods. The EBA is set to deliver RTS specifically on that provision.

FINAL REPORT ON REVIEW OF RTS ON FRTB
13.Finally, article 325b(4) CRR now clarifies that translation risk is to be captured as part of own funds requirements for foreign-exchange risk, given that “institutions and undertakings […] shall use the same reporting currency as the reporting currency used to calculate the own funds requirements for market risk in accordance with this Title on a consolidated basis for the group”, where by consolidated basis, it is meant the highest level of consolidation within the EU. 14.The delegated regulation on foreign exchange and commodity risk in the banking book does not need substantive amendments to cover for these new aspects. However, additions have been made to ensure that the bank can identify positions that are subject to FX risk only because of the translation risk resulting from the consolidation process. Furthermore, the RTS clarify that internal model banks must clarify in their policies which are the positions that are managed by classical trading desks, and which are instead positions that are managed in the context of a notional trading desk. RTS on modellability assessment 15.In the context of the modellability assessment, the CRR3 made more explicit the possibility for competent authorities to allow institutions to use market data provided by third-party vendors. Such possibility was already foreseen in delegated regulation on modellability assessment, and more specifically in Article 2(4). 16.Accordingly, there is no need to make substantive amendments. However, for making the delegated regulation more explicit in this regard, and considering that competent authority may decide to not allow a bank to use data from a given source (for example, because the third-party vendor is found incompliant with the RTS), it is important that, for a given source, the institution can provide the competent authority with an assessment about the number of risk factors whose modellability assessment depend on data coming from that source. 17.Furthermore, the definition of third-party vendor is now removed for the delegated regulation on modellability assessment, given that the term “third party vendors” has been now introduced in the Level 1 text (in article 325be(1) as amended by CRR3), and hence it cannot be defined in Level 2 legislation. Such clarification could however be introduced via a Q&A.

3. Draft regulatory technical standards

COMMISSION DELEGATED REGULATION (EU) …/… of XXX amending the regulatory technical standards laid down in Delegated Regulation (EU) 2022/2059, Delegated Regulation (EU) 2022/2060 and Delegated Regulation 2023/1577 as regards the technical details of back￾testing and profit and loss attribution requirements, the criteria for assessing the modellability of risk factors, and the treatment of foreign￾exchange risk and commodity risk in the non-trading book (Text with EEA relevance) THE EUROPEAN COMMISSION, Having regard to the Treaty on the Functioning of the European Union, Having regard to Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/20127 , and in particular Article 325(9), third subparagraph, Article 325be(3), third subparagraph, Article 325bf(9), third subparagraph, Article 325bg(4), third subparagraph, thereof, Whereas:
(1) Regulation (EU) 2024/1623 of the European Parliament and of the Council of 31 May 20248 amended some provisions of Regulation (EU) No 575/2013 on which existing Delegated Regulations have been built. It is therefore necessary to amend Commission Delegated Regulation (EU) 2022/2059 of 14 June 20229 , Commission Delegated Regulation (EU) 2022/2060 of 14 June 202210 and Commission Delegated 7 OJ L 176, 27.6.2013, p. 1. 8 Regulation (EU) 2024/1623 of the European Parliament and of the Council of 31 May 2024 amending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor (OJ L, 2024/1623, 19.6.2024, ELI: http://data.europa.eu/eli/reg/2024/1623/oj). 9 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 (OJ L 276, 26.10.2022, p. 47). 10 Commission Delegated Regulation (EU) 2022/2060 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 criteria for assessing the modellability of risk factors under the internal model approach (IMA) and specifying the frequency of that assessment under Article 325be(3) of that Regulation (OJ L 276, 26.10.2022, p. 60).

Regulation 2023/1577 of 20 April 202311, accordingly. However, to ensure stability in the regulatory framework and to ensure that institutions that are currently compliant with the existing Delegated Regulations are not disproportionately affected, the amendments to Delegated Regulation (EU) 2022/2059, Delegated Regulation (EU) 2022/2060, and Delegated Regulation (EU) 2023/1577 should not go beyond what is needed to ensure consistency with the amendments introduced by Regulation (EU) 2024/1623. (2) To ensure compliance with the international standards, it is necessary to amend Delegated Regulation (EU) 2022/2059, to specify that green trading desks as allocated in accordance with that Regulation should be considered to have close theoretical and hypothetical changes in the portfolio’s value, and yellow trading desks to have sufficiently close, but not close, theoretical and hypothetical changes in the portfolio’s value. Red and orange desks should instead be considered to have theoretical and hypothetical changes in the portfolio’s value that are neither close nor sufficiently close. (3) It is necessary to amend Delegated Regulation (EU) 2022/2059 by removing the aggregation formula, as it has now been included in Article 325ba(3) of Regulation (EU) No 575/2013. (4) It is necessary to adjust the documentation requirements in Delegated Regulation (EU) 2022/2060, to support competent authorities in their assessment on whether to allow institution to use market data provided by third-party vendors in the assessment of modellability of risk factors in accordance with Article 325be(1), second subparagraph, of Regulation (EU) No 575/2013. (5) To guarantee an appropriate calculation of the own funds requirements for market risk in relation to non-trading book positions, institutions should have clear policies outlining which are the trading desks in charge of managing those positions, and be able to identify whether the foreign exchange positions just relate to translation risk. Accordingly, it is necessary to amend Delegated Regulation (EU) 2023/1577, to ensure that those objectives are achieved. (6) This Regulation is based on the draft regulatory technical standards submitted to the Commission by the European Banking Authority. (7) The European Banking Authority has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the advice of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council12, 11 Commission Delegated Regulation (EU) 2023/1577 of 20 April 2023 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards on the calculation of the own funds requirements for market risk for non-trading book positions subject to foreign exchange risk or commodity risk and
the treatment of those positions for the purposes of the regulatory back-testing requirements and the profit and loss attribution requirement under the alternative internal model approach 12 Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (OJ L 331, 15.12.2010, p.12).

HAS ADOPTED THIS REGULATION:
Article 1
DELEGATED REGULATION (EU) 2022/2059 is amended as follows:
(1) in Article 6, paragraph 1 is replaced by the following:
‘1. For the purposes of Article 325bg of Regulation (EU) No 575/2013, institutions shall calculate, for a given trading desk’s portfolio, the Spearman correlation coefficient laid down in Article 7 of this Regulation, the Kolmogorov￾Smirnov test metric laid down in Article 8 of this Regulation and, based on the results of those calculations, apply the criteria referred to in Article 9 of this Regulation.’; (2) Article 9 is amended as follows:
(a) paragraph 1 is replaced by the following:
‘1. For the purposes of Article 325bg(1) of Regulation (EU) No 575/2013, institutions shall classify each of the trading desks as a green, orange, yellow or red zone desk in accordance with paragraphs 2 to 5.’; (b) the following paragraphs are added:
‘6. For the purposes of Article 325bg(1) Regulation (EU) No 575/2013, a trading desk that has been classified as a green zone desk shall be considered to have theoretical changes in the value of that trading desk's portfolio close to the hypothetical changes in the value of that trading desk's portfolio.
7. For the purposes of Article 325bg(1) Regulation (EU) No 575/2013, a trading
desk that has been classified as a yellow zone desk shall be considered to have theoretical changes in the value of that trading desk's portfolio sufficiently close, but not close, to the hypothetical changes in the value of that trading desk's portfolio.
8. For the purposes of Article 325bg(1) Regulation (EU) No 575/2013, a trading
desk that has been classified as either an orange desk or a red zone desk shall be considered to have theoretical changes in the value of that trading desk's portfolio neither close nor sufficiently close to the hypothetical changes in the value of that trading desk's portfolio.’; (3) Article 10 is replaced by the following: ‘

1. The additional own fund requirement referred to in Article 325bg(2) shall be
   equal to:
   𝑃𝑃𝑃𝑃𝐴𝐴𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 = 𝑘𝑘 ∙ 𝑚𝑚𝑚𝑚𝑚𝑚 {𝐴𝐴𝐴𝐴𝐴𝐴𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 – 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴; 0} Where:
   𝑃𝑃𝑃𝑃 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 = 𝑃𝑃𝑃𝑃 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 as defined in Article 325ba(3) of Regulation (EU) No 575/2013; 𝑘𝑘 = as specified in paragraph 2; 𝐴𝐴𝐴𝐴𝐴𝐴𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 = 𝐴𝐴𝐴𝐴𝐴𝐴𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 as defined in Article 325ba(3) of Regulation (EU) No 575/2013; 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 = 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 as defined in Article 325ba(3) of Regulation (EU) No 575/2013.
2. For the purposes of paragraph 1, the coefficient k shall be calculated in
   accordance with the following formula:
   k = 0.5 ∙ ∑𝑖𝑖 ∈𝑦𝑦 𝐴𝐴𝐴𝐴𝐴𝐴𝑖𝑖
   ∑𝑖𝑖 ∈𝑎𝑎 𝑎𝑎𝑎𝑎 𝐴𝐴𝐴𝐴𝐴𝐴𝑖𝑖
   Where:
   𝐴𝐴𝐴𝐴𝐴𝐴 = the own funds requirements for market risks as calculated in accordance with the alternative standardised approach set out in Part Three, Title IV, Chapter 1a of Regulation (EU) No 575/2013 for all the positions attributed to trading desk ‘𝑖𝑖’; 𝑖𝑖 ∈ 𝑦𝑦 = the indices of all trading desks that have been classified as yellow zone desks in accordance with Article 9 of this Regulation among those for which the own funds requirements for market risks are calculated in accordance with the alternative internal model approach set out in Part Three, Title IV, Chapter 1b of Regulation (EU) No 575/2013;

𝑖𝑖 ∈ = the indices of all trading desks for which the own funds requirements for market risks are calculated in accordance with the alternative internal model approach set out in Part Three, Title IV, Chapter 1b of Regulation (EU) No 575/2013.’; (4) Section 3 is deleted.
Article 2
DELEGATED REGULATION (EU) 2022/2060 is amended as follows:
(1) Article 2, paragraph 4, is deleted;
(2) in Article 7(1), the following subparagraph is added:
‘Where an institution’s sources of verifiable price information referred to in point (b) include third-party vendors, the institution shall document in addition for each third￾party vendor the number of risk factors that have been classified as modellable on the basis of the verifiable prices provided by that third party vendor, and a materiality assessment of those risk factors.’.
Article 3
DELEGATED REGULATION (EU) 2023/1577 is amended as follows:
(1) in Article 1, the following paragraphs is added:
6. When calculating the own funds requirements for market risk on a
consolidated basis, in accordance with Article 325b of Regulation (EU) No 575/2013, institutions shall be able to identify, in their internal risk-management systems, the positions that are included in the foreign exchange risk exposure of the institution, because of the translation risk resulting when translating the positions of each institution or undertaking of the group into the same reporting currency in accordance with that Article.’; (2) in Article 3, the following paragraphs are added:
‘7. Institutions shall document, as part of the internal policies referred to in
Article 325bi of Regulation (EU) No 575/2013, whether non-trading book
positions subject to foreign exchange risk are assigned to a trading desk managing excusively non-trading book positions in accordance with Article 104b(6) of Regulation (EU) No 575/2013, or to a trading desk managing both

trading and non-trading book positions. Where some non-trading book positions subject to foreign exchange risk are assigned to a trading desk managing excusively non-trading book positions in accordance with Article 104b(6) of Regulation (EU) No 575/2013, and some others are assigned to a trading desk managing both trading and non-trading book positions, the internal policies shall specify the criteria and the rationale for the assignment to a trading desk exclusively managing non-trading book positions or to a desk managing both trading and non-trading book positions.
8. When calculating the own funds requirements for market risk on a
consolidated basis, in accordance with Article 325b of Regulation (EU) No 575/2013, institutions shall be able to identify, in their internal risk-measurement systems, the positions that have been included in the foreign exchange risk exposure of the institution because of the translation risk resulting when translating the positions of each institution or undertaking of the group into the same reporting currency in accordance with that Article.’; (3) in Article 4, the following paragraph is added:
‘4. Institutions shall document, as part of the internal policies referred to in
Article 325bi of Regulation (EU) No 575/2013, whether non-trading book
positions subject to commodity risk or both to commodity and foreign exhange risk are assigned to a trading desk managing excusively non-trading book positions in accordance with Article 104b(6) of Regulation (EU) No 575/2013, or to a trading desk managing both trading and non-trading book positions. Where some non-trading book positions subject to foreign exchange risk are assigned to a trading desk managing excusively non-trading book positions in accordance with Article 104b(6) of Regulation (EU) No 575/2013, and some others are assigned to a trading desk managing both trading and non-trading book positions, the internal policies shall specify the criteria and the rationale for the assignment to a trading desk exclusively managing non-trading book positions or to a desk managing both trading and non-trading book positions.’.
Article 4
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. Done at Brussels, For the Commission The President

[For the Commission
On behalf of the President

4. Accompanying documents
   4.1 Draft cost-benefit analysis / impact assessment
   Article 325bg of the CRR3 requires the EBA to develop draft RTS to implement in the EU the Profit
   and Loss attribution (PLA) requirement. In addition, under article 325be of the CRR3, the EBA is mandated to develop draft RTS to specify the criteria for assessing the modellability of risk factors, including where market data are used. Finally, under article 325 of the CRR3, the EBA is required to develop draft RTS to specify how institutions are to calculate the own funds requirements for market risk for non-trading book positions that are subject to foreign exchange risk or commodity risk. As per Article 10(1) of Regulation (EU) No 1093/2010 (EBA Regulation), any regulatory technical standards developed by the EBA shall be accompanied by an Impact Assessment (IA), which analyses ‘the potential related costs and benefits’. This section presents the cost-benefit analysis of the provisions included in the RTS. The analysis provides an overview of identified problems, the proposed options to address those problems and the costs and benefits of those options. Given the nature and the scope of the RTS, the IA is high￾level and qualitative in nature. A. Problem identification In January 2019, the Basel Committee on Banking Supervision (BCBS) finalised the standards on “Minimum capital requirement for market risk”. The CRR2 implemented the FRTB into the EU and required the EBA to develop a series of mandates, including the RTS on back-testing and profit and loss attribution requirements, RTS on risk factor modellability and the RTS on the treatment of non￾trading book positions subject to foreign risk or commodity risk. The EBA has delivered on these mandates, which have been subsequently adopted by the European Commission and published on the official journal. CRR3 amended some provisions related to these RTS, requiring the EBA to review them as these were previously developed based on the CRR2. The lack of such revision would result in a misalignment between the CRR3 and RTS. B. Policy objectives The specific objective of the RTS is to:

• harmonise the implementation of the PLA requirement;

• harmonise the criteria for assessing the modellability of risk factors;

• establish common requirements on how to calculate the own funds requirements for
  market risk for non-trading book positions that are subject to foreign exchange risk or commodity risk. Generally, the RTS aim to create a level playing field, promote convergence of institutions practices and enhance comparability of own funds requirements across the EU. Overall, the RTS are expected to promote the effective and efficient functioning of the EU banking sector.
  C. Baseline scenario
  The baseline scenario aims to describe the regulatory environment and regulatory developments, as well the institutions’ practices. In terms of regulatory environment, the baseline assumes the entry into force of the CRR3. It is also expected that institutions are compliant with the key elements included in the existing RTS adopted under CRR2. D. Options considered, Cost-Benefit Analysis and Preferred Options This section presents the main policy options discussed during the development of the RTS, the costs and benefits of these options, as well as the preferred options included in the RTS. Option 1a: Limiting the changes to the RTS to only those needed to align with the amendments in CRR3 Option 1b: Consider additional changes to the RTS going beyond what would be strictly needed to reflect the amendments in CRR3 Option 1a takes into account that several institutions have already implemented these RTS and ensures regulatory stability in the framework. Under this option, banks would not need to make significant changes in their existing implementation but rather very limited ones to align with the few changes made in CRR3 compared to CRR2. In addition, supervisors would start on-site inspections to grant the internal model approval with a stable regulatory framework against which the implementation of the institution can be assessed. In contrast, Option 1b will require banks to implement new regulatory requirements and possibly undo changes already implemented, impairing the phase-in towards the new IMA approvals. Supervisors would not have a stable RTS to rely on in on-site inspections and would need to wait until the final adoption to have predictability in what the final requirements will be.

Given that the existing RTS have already been developed after an extensive consultation with the industry, it would be counterproductive and disproportionate to repeat the same process for provisions that are not related to the amendments in CRR3. Hence, option 1a is preferred.

4.2 Feedback on the public consultation
The EBA publicly consulted on the draft proposal contained in this paper.
The consultation period lasted for 3 months and ended 14 March 2023. One response wasreceived, that was published on the EBA website as non-confidential. This section presents a summary of the key points and other comments arising from the consultation, the analysis and discussion triggered by these comments and the actions taken to address them if deemed necessary. Changes to the draft RTS have been incorporated as a result of the responses received during the public consultation. Summary of key issues and the EBA’s response The respondent overall agreed with the amendments to the RTS. The respondent only raised one concern on the applicability of some requirements included in the RTS to standardised approach, noting that trading desks requirements in the CRR only apply to institutions using an internal model. The proposal has been amended to reflect the point raised.

Summary of responses to the consultation and the EBA’s analysis Comments Summary of responses received EBA analysis Amendments to the proposals Responses to questions in Consultation Paper EBA/CP/2023/41 Q1. Do you agree with the changes proposed in the context of the RTS on profit and loss attribution requirements? Do you see the need of additional changes to reflect amendments made via CRR3? Please elaborate. One respondent agreed with the changes made, while highlighting the broader challenges that the market participants face with the profit and loss attribution requirements. The EBA takes note of the concerns raised in relation to the profit and loss attribution requirements. As the aim of the amending RTS is to update them to make them fit with the new CRR3 text, no changes are made compared to the draft presented for consultation. No amendments Q2. Do you agree with the changes proposed in the context of the RTS on risk factors’ modellability assessment? Do you see the need of additional changes to reflect amendments made via CRR3? Please elaborate One respondent agreed with the changes made Considering the support for the proposal, no amendments are made in the final draft RTS. No amendments Q3. Do you agree with the changes proposed in the context of the RTS on the treatment of FX and Commodity risk in the non-trading book? Do you see the need of additional changes One respondent notes that the desk requirements should not be made relevant for pure SA banks, given that CRR trading desk requirements are applicable only to internal model banks. The EBA agrees with the comment made, and accordingly removed the provision relating to trading desks in the context of articles relating to the standardised approach. Deletion of the proposed amendments to Article 1 and Article 2 of Regulation (EU) 2023/1577 (i.e. adopted RTS on FX and Commodity risk in the

Comments Summary of responses received EBA analysis Amendments to the proposals to reflect amendments made via CRR3? Please elaborate It should be noted that the requirements included in Article 3(7) and Article 4(4) of the final draft RTS apply also to all desks that are in scope of the internal model approval (as they refer to the internal policies referred to in Article 325bi(1)(e) CRR that institutions must have in place for all desks that are in scope of the approval – i.e. even those that are temporarily in the SA, e.g. due to a failure of the PLAT in one quarter) banking book) relating to trading desk requirements