On October 22, 2020, ISDA submitted a response to a consultation by the European Banking Authority (EBA) on the requirements of the internal default risk model to estimate default probabilities and losses given default.
Institutions using an alternative internal model to compute own funds requirements for market risk and holding positions in traded debt and equity instruments through trading desks covered by internal models approach permission are required to additionally compute an own funds requirement using an internal default risk model.
One of the requirements under the internal default risk model is for institutions to be capable of modelling the default of individual issuers, as well as the simultaneous default of multiple issuers, and computing the impact of those defaults on the market values of the positions that are included in the scope of that model. This consultation specifies the requirements that an institution’s internal methodology or external sources are to fulfil for estimating default probabilities and losses given default.
The industry appreciates the EBA’s efforts in developing regulatory standards for the sources used to develop default probabilities and losses given default. However, there are concerns about using the internal rating-based approach, which was built and designed for banking book activities. Utilizing this approach for market risk could lead to model design inconsistencies.
Documents (1) for Consultation Response on Internal Default Risk Model Requirements
Latest
S&P Global Selected as DC Administrator
ISDA and the Credit Derivatives Governance Committee have announced that S&P Global Market Intelligence has been selected as the administrator for the Credit Derivatives Determinations Committees (DCs). The announcement follows an invitation to tender in November 2025. The DC administrator...
Supporting ISDA SIMM Adoption in Australia
Derivatives have become a critical tool for Australia’s massive superannuation sector, as funds look to manage the risks associated with their expanding offshore investments. The use of derivatives brings real risk management benefits, but it also means funds need to...
ISDA, GDF Respond to the Central Bank of Ireland on DLT and Tokenization
On June 3, ISDA and Global Digital Finance responded to the Central Bank of Ireland’s discussion paper on distributed ledger technology (DLT) and tokenization in financial services. The response focuses on the potential role of DLT and tokenization within wholesale...
Response to Consultation on Dividend Stripping
On May 28, ISDA and the Association for Financial Markets in Europe (AFME) responded to the Dutch Ministry of Finance’s consultation on additional anti-dividend stripping measures, urging that the proposed rules should target only abusive arrangements and not ordinary, commercially...