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03 December 2021 Supervision Supervision label Supervision Q&A

Question 1:

How can an investment firm apply for permission to exclude intra-group transactions from the calculation of K-TCD?

Answer:

Pursuant to Article 25(3) of the IFR, we will grant permission to exclude intra-group transactions from the calculation of K-TCD if the conditions specified in that article have been met. Investment firms must submit the following information when applying for this permission:

  1. An up-to-date organisation chart of the group, including the prudential qualification of the individual entities (credit institution, investment firm or financial institution) and the identification of the entities that intend to make use of the intra-group permission;

  2. A description of the group's risk management policies and controls and how they are formulated and applied centrally.

  3. The contractual basis of the group-wide risk management framework, if any, and additional documentation, such as the risk policies of the group companies for credit risk, market risk, liquidity risk and operational risk.

  4. A description of the parent company's scope for enforcement of group-wide risk management.

  5. A description of the mechanism that ensures prompt transfer of own funds and repayment of liabilities by any of the group entities in the event of financial difficulties.

  6. A letter, duly signed by a legal representative of the parent company and approved by the management body, stating that the investment firm at group level meets all conditions included in Article 25(3) of the IFR.

  7. A legal opinion from an independent, external third party or an internal legal department, approved by the parent company's management body, confirming that there are no impediments – beyond any restrictions imposed by company law – to the transfer of assets or repayment of liabilities by the parent company under applicable laws and regulations (including tax law) or legally binding agreements.

  8. A statement signed by the legal representatives and approved by the management bodies of the parent company and the group entities wishing to apply Article 25(3) of the IFR, stating that there are no practical impediments to the financing of the transfer of funds or repayment of liabilities.

We will then assess whether the application meets the conditions of Article 25(3) of the IFR before granting permission.

Question 2:

How can an investment firm apply for permission to calculate the exposure value using one of the CRR methods for counterparty credit risk?

Answer:

Pursuant to Article 25(4) of the IFR, we may grant permission to calculate the exposure value of certain derivative contracts and transactions using one of the methods set out in Part Three, Title II, Chapter 6, Articles 3, 4 or 5 of the CRR, i.e. the Standardised Approach for Counterparty Credit Risk (SA-CCR), Simplified Standardised Approach (SSA) or the Original Exposure Method (OEM). Investment firms must submit the following information when applying for this permission:

  1. An explanation on the specific CRR method the investment firm intends to use.|

  2. If the investment firm intends to use the SA-CCR, SSA or OEM, it must be able to demonstrate that the thresholds for these methods referred to in Article 273(1) and (2) of the CRR have been met.

  3. A comparison of the own funds requirements calculated according to K-TCD and the own funds requirements according to the preferred CRR method, including a breakdown of the exposure value according to the reporting in C.34.2 for SA-CCR and SSA, and C.34.3 for the OEM.

We will in principle grant permission to use the CRR methods, provided the conditions set out in the CRR are met. Institutions that have been granted permission must be able to provide the CCR exposure value template from the common reporting (COREP) at our request.

Question 3:

How can an investment firm apply for permission to use a model on the basis of which it can calculate its own delta for monitoring options and swaptions?

Answer:

Pursuant to Article 29(6) of the IFR, an investment firm can apply for permission to calculate its own delta, based on an appropriate model approved by DNB.

We consider the selection of delta formulas and associated parameters in Article 279a of the CRR as appropriate. We will grant permission if an investment firm's delta model meets the conditions set out in this article.

If the institution wishes to apply for permission to use a model or inputs to the model for specific instruments or instrument groups that deviates from this article, it must include the following information:

  1. A request for permission for the above signed by the Management Board.

  2. Specification of the application:
    1. A description of how the institution complies with Article 29(6) of the IFR: An overview of the financial instruments / instrument groups for which permission is requested.
    2. An explanation why the selection of delta formulas in Article 279a of the CRR are incompatible with the instruments or instrument groups for which the institution wishes to apply for permission to use its own delta calculation.
    3. A specification per instrument or instrument group of the model used for the calculation of the firm's own delta.
    4. A description of model governance: which departments are responsible for the calculation, validation and monitoring of the model (for the calculation of the firm's own delta)?

  3. Model description:
    1. A description of the model.
    2. Assumptions underlying the model (constant volatility? European/American, etc.).
    3. Relevant other inputs / variables.

  4. Model validation:
    1. Reasoned validation strategy.
    2. A specification of the data used for any tests.
    3. A specification of the underlying values used in the validation.
    4. A critical review of the validation results, including an explanation regarding any differences with a benchmark model.
    5. An investment mandate or equivalent document describing the products in which the applicant trades, a description of the procedure(s) for enforcing the mandate and the procedures that apply when the mandate is deviated from.

Question 4:

Will DNB change the volatility adjustment for certain types of commodities for which different levels of price volatility exist?

Answer:

No, at this stage we will not exercise our discretion to change the volatility adjustment under Article 30(1) IFR for certain types of commodities for which different levels of price volatility exist.

Question 5:

Does DNB consider the CVA risk exposures arising from securities financing transactions (SFTs) to be material?

Answer:

No. At this stage we will not increase the CVA from 1 to 1.5 based on Article 32(d) of the IFR, which states that the competent authority has the discretion to do so if it finds that investment firms’ CVA risk exposures arising from SFTs are material.

Sector(s)

  • Collective investment schemes
  • Investment firms