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
Response to ESMA Guarantees
On April 30, ISDA responded to the European Securities and Markets Authority (ESMA) consultation paper on guarantees as central counterparty (CCP) collateral and certain aspects of CCP investment policy. ISDA broadly supports ESMA’s proposed draft regulatory technical standards (RTS) to...
ISDA AGM Studio: Jenny Cosco and Jason Granet
Jenny Cosco, global head of government relations and regulatory strategy at LSEG, and Jason Granet, chief investment officer at BNY, speak with Tara Kruse, ISDA’s global head of derivative products and infrastructure, about how firms can manage liquidity pressures during...
Updated OTC Derivatives Compliance Calendar
ISDA has updated its global calendar of compliance deadlines and regulatory dates for the over-the-counter (OTC) derivatives space.
Capital Models Benchmarking: A Framework for Counterparty Credit Risk Internal Models
When firms implement capital models in line with supervisory standards, a range of interpretative and implementation choices inevitably arise. These choices reflect differences in modeling approaches, data availability, system architecture and risk management practices, and can lead to variation in...