EBA Sets New Criteria for Assessing Risk in Securities Financing Transactions

The European Banking Authority (EBA) has released its final draft Regulatory Technical Standards (RTS) this week, introducing a detailed framework to define how financial institutions should assess the materiality of Credit Valuation Adjustment (CVA) risk exposures arising from fair-valued securities financing transactions (SFTs).

The newly published draft RTS lay out the specific conditions and criteria that banks and other financial institutions must apply to determine whether CVA risk exposures from fair-valued SFTs are considered material. They also clarify how often these assessments must be carried out.

According to the EBA, the concept of “materiality” outlined in the RTS plays a key role in establishing whether such fair-valued SFTs may be exempted from own funds requirements for CVA risk. The introduction of this materiality test aims to ensure that institutions maintain an accurate and proportionate understanding of their risk exposure in line with prudential standards.

The standards adopt a quantitative threshold approach based on a ratio that measures the relative increase in own funds requirements for CVA risk. This ratio is designed to quantify how much the inclusion of fair-valued SFTs would raise the capital requirements for CVA risk, providing a consistent and measurable benchmark for determining materiality.

In addition, the draft RTS require institutions to conduct these materiality assessments on a quarterly basis. This frequency aligns with the regular calculation and reporting cycles for own funds requirements, ensuring that the evaluation of CVA risk exposure remains current and in sync with broader regulatory reporting obligations.

These final draft RTS are part of the second phase of deliverables under the EBA’s roadmap for implementing the EU banking package in the area of market risk. The initiative forms a key step in strengthening the overall regulatory framework and promoting consistent risk management practices across European financial institutions. 

By fLEXI tEAM