Climate scenario analysis has been an area of increasing focus for banks and financial institutions in recent years. Firms need a better understanding of the short- and longer-term financial risks associated with climate change, especially given the changing regulatory landscape and increased focus on mitigating the direct impact of climate-related risks. Climate scenario analysis for the trading book poses a particular set of challenges, given the need to develop bespoke, short-term scenarios that include a detailed set of market risk factors.
In response to these challenges, ISDA has engaged in a multi-phase project to develop a framework for climate scenario analysis for the trading book. The two main factors that differentiate ISDA’s work from previous efforts are the focus on very short-term horizons that are applicable to the trading book and the proposed calibration of market risk factor shocks for each scenario.
In 2023 and 2024, ISDA published detailed papers covering Phase 1 and Phase 2 of this initiative. This paper sets out the work completed during Phase 3 and has two components: a survey to assess industry progress and operational readiness; and an expansion of the market risk factors for the transition risk scenario developed in Phase 2.
Documents (2) for Climate Risk Scenario Analysis for the Trading Book: Phase 3
Latest
Expanding the Universe of Eligible VM
ISDA conducted a series of interviews with buy- and sell-side firms to understand the drivers of a growing use of non-cash assets as variation margin (VM) for non-cleared over-the-counter (OTC) derivatives and the barriers that remain to expanding the use...
ISDA Response on Hedge Accounting Guidance
On August 14, ISDA responded to an exposure draft from the Financial Accounting Standards Board (FASB). ISDA broadly supports the FASB’s proposed targeted improvements to hedge accounting, including allowing interest rate hedging of held-to-maturity (HTM) debt securities, recognizing all Secured...
Joint Response to EBA Consultation
On August 12, ISDA and the Association for Financial Markets in Europe (AFME) responded to the European Banking Authority’s discussion paper on certain taxonomy key performance indicators (KPIs) and other aspects of the Disclosures Delegated Act under Article 8 of...
Response to JSCC on Clearing Fund Consolidation
On August 12, ISDA responded to the Japan Securities Clearing Corporation’s (JSCC) consultation on its proposal to consolidate clearing fund consumption, calculation and deposit segmentation across six clearing qualifications under the Financial Instruments and Exchange Act. ISDA members broadly support...