European Banking Authority Publishes Final Draft Regulatory Technical Standards on Extraordinary Circumstances for Continuing the Use of Internal Models for Market Risk

The European Banking Authority has published its final draft regulatory technical standards on the conditions and indicators that the EBA shall use to determine whether extraordinary circumstances have occurred for the purposes of Articles 325az(5) and 325bf(6) of the EU Capital Requirements Regulation. Under the CRR, national regulators may permit institutions to soften or waive the application of certain requirements for the use of internal models in accordance with the Fundamental Review of the Trading Book, under extraordinary circumstances. The draft RTS establish a high-level framework for identifying the occurrence of extraordinary circumstances, setting out conditions that need to be met and indicators that could support the identification of extraordinary circumstances. More specifically, they set out that only a situation of cross-border financial market stress, or a regime shift, can qualify as a situation of extraordinary circumstances, and only subject to the additional condition that this stress or regime shift impacts the validity or suitability of the results of the back-testing or the profit and loss attribution test. The draft RTS will be submitted to the European Commission for endorsement following which they will be subject to scrutiny by the European Parliament and the Council of the European Union before being published in the Official Journal of the European Union. The draft RTS will apply from 20 days after their entry into force.

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