Response to consultation on Regulatory Technical Standards on the method for identifying the main risk driver of a position and for determining whether a transaction represents a long or a short position
1. Do you agree with the general method for identifying the main risk driver of a non-derivative position and for determining its direction?
The French Banking Federation (FBF) welcomes the opportunity to express the views of the French banking industry on the EBA public consultation on Regulatory Technical Standards on the method for identifying the main risk driver of a position and for determining whether a transaction represents a long or a short position. In this context, we herewith provide you with our responses to the questions listed in the Consultation Paper. We appreciate your consideration about our answers and remain at your disposal for further clarifications.
We would also like to take this opportunity to underline, as previously stated in our response to the consultation paper on draft ITS on supervisory reporting in March 2024, the very high complexity of the template C 90.05. In particular, given that the approaches detailed in this ‘RTS on long and short positions’ must be used for the reporting broken down by main risk drivers in template C 90.05. Indeed, unnecessary complexity is introduced in terms of implementation, as data required implies several new developments in the systems and the creation of new axes of reporting.
Such additional breakdown will have no added value from a supervision standpoint and is not required on the Level 1 texts (neither CRR2 nor CRR3). Respondents suggest accordingly to delete this information from the template.
Regarding the general method for identifying the main risk driver of a non-derivative position and for determining its direction, yes our members agree with this method.
2. Do you agree with the analysis proposed in the background section and with the inclusion of this simplified method for fixed-rate bonds, floating-rate notes and stocks?
Yes we agree.
3. Do you think that other non-derivative instruments should be included in the simplified method? If yes, please provide rationale and proposed treatment.
No we don't think so.
4. Do you agree with the general method for identifying the main risk driver of a derivative position and for determining its direction?
Yes we agree.
5. Do you agree with the analysis proposed in the background section and with the inclusion of this simplified method for futures, options and swaps?
The background section raises several questions that are answered in the proposed RTS, but generating some discrepancies between both.
a/ Indeed, in the background section:
- Paragraph 25 (forwards and futures on equity, commodity and FX) mentions that, for contracts in a foreign currency, FX and the underlying are the two main risk drivers.
- It is slightly different for equity stocks in a foreign currency (in that case, we understand that it can be assumed that FX is not a main risk driver, according to paragraph 24).
From our perspective, this approach is questionable: a basket on an equity index and a future on the same equity index should be strictly considered in the same way.
However, in the proposed RTS (article 8.2), the underlying is well mentioned as the unique main risk driver, that makes sense in our view.
b/ Furthermore, paragraph 29 of the background section mentions that “[…] one possible way to treat all plain vanilla options […] is simply to disregard the FX component for the determination of the main risk driver.” It should be clarified, given that it could suggest that the institutions are free to choose if FX is a main risk driver or not (including the case of plain vanilla puts).
However, this point is clarified in article 8.5: “[…] the institution shall determine the main risk driver as the equity spot price or the index spot price, respectively”.
c/ Paragraph 26 of the background section mentions that “If the IR swap is in foreign currency, there are two risk drivers, but FX moves in the same direction as the other risk driver”.
We think that this statement should be clarified (our opinion is that FX and IR do not always affect the IR swap valuation in the same direction).
However, in the draft RTS (article 8.8), FX is not considered as a main risk driver in such an IR swap, that makes sense in our view: “For interest rate swaps where one counterparty receives floating-rate interest and pays fixed-rate interest […] The position is long if the institution pays fixed-rate interest and short if the institution receives fixed rate interest.
Furthermore, we think that the background section (as in paragraph 26 for instance) could be clearer about the determination of the direction in case of products in a foreign currency.
We understand that FX refers to the “foreign_currency/institution’s reporting currency” risk factor i.e. FX higher means that the foreign currency appreciates against institution’s reporting currency.
We propose to replace “If the IR swap is in foreign currency, there are two risk drivers, but FX moves in the same direction as the other risk driver” by:
“If the IR swap is in foreign currency, there are two risk drivers, but the FX rate foreign currency/ institution’s reporting currency moves in the same direction as the other risk driver.”
6. Do you think that other derivative instruments should be included in the simplified method? If yes, please provide rationale and proposed treatment.
We think that it could make sense to clarify for Interest Rates futures and options (caps, floors, €STR futures and options, SOFR futures and options, T-Bill futures, options on Bund futures,). We are not aware of any reason to exclude these product types: they are often traded, and interest rates are major underlyings as equity, FX and commodities.
As for fixed rate bonds, futures and forward contracts move in the opposite direction of interest rates. In case of foreign currency, we propose to consider that the underlying is the main risk driver. In the same way, for plain vanilla options we propose to apply the same treatment as for other underlyings (equity, FX, commodities).
In addition, the consultation paper mentions (article 8.7) the case of single name Credit Default Swaps (CDS). It could be relevant to consider the CDS index, too. The main risk driver and the sense should be the same as for single name CDS.