The European Banking Authority (EBA) has outlined the method for identifying the material risk drivers of derivative transactions based on which the mapping to one or more of the risk categories is to be done.
This development comes after the regulator publishes its final draft on the Regulatory Technical Standards (RTS) on the Standardised Approach for Counterparty Credit Risk (SA-CCR).
The RTS has also laid out the formula institutions should use to calculate the supervisory delta of options, when mapped to the interest rate risk category. It also presents a method suitable for determining the direction of the position in a material risk driver.
For mapping derivatives into risk categories, the RTS offers a three-pronged methodology for the identification of risk drivers. The first is based solely on qualitative information and is best used on simple and standard derivative transactions.
Approach two is more in-depth and relies on a quantitative assessment of the sensitives in order to classify possible risks based on materiality considerations.
The third and final approach identifies all possible risk drivers of a transaction as a material. This method is used as a fall-back option and allows a proportionate implementation of the framework when the second approach is too much hassle.
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