Capital Requirements Directive IV (CRD IV) Large Exposures
AxiomSL automates the process of calculating and reporting on large exposures and concentration risk, as required by the Capital Requirements Directive IV (CRD IV). Its transparent solution gives users full access to its interpretation of the European Banking Authority’s (EBA’s) technical standards.
AxiomSL’s ‘one platform’ model means the same system can be used for all other regulatory reporting and calculation requirements, greatly reducing the cost and complexity of compliance.
CRD IV large exposures: The requirements and challenges
CRD IV is the implementation in Europe of Basel III. It defines large exposures as those that are greater than 10% of an institution’s capital resources. Banks, building societies and investment firms must report on exposures that fit this description and on other concentrations of risk to which they are exposed.
The large exposure requirements involve a series of complex calculations, including the Concentration Risk Capital Component (CNCOM), which firms must interpret and implement in their systems. The calculations require enormous quantities of data from multiple sources, which must be enriched and validated before being used. Counterparty reference data presents a significant data normalization challenge because it is usually set up differently in individual systems.
Once firms have computed their large exposures and concentration risk, they must report them to their regulator as part of Common Reporting (COREP), using the EBA’s XBRL taxonomy.
The AxiomSL solution
AxiomSL provides all of the CRD IV calculations required to compute large exposures and concentration risk. These include:
The CRD IV large exposure calculations provided by AxiomSL are:
- Calculation of exposure value
- Large exposure identification
- Large exposure reporting requirements
- Limits to large exposures
- Additional own funds requirements for large exposures in trading book
- Large exposure exemptions
- Exposures arising from mortgage lending
The CRD IV credit risk calculations provided by AxiomSL are:
- Exposure value exposure classes
- Risk-weighted exposure amounts
- Risk weight codes
- Market to market
- Volatility adjustments
- Scaling op of volatility adjustment
- Conditions for applying of 0% volatility adjustment
- Financial collateral comprehensive method
- Maturity mismatch (guarantees)
- Valuation of protection
- Master netting agreement
- Unfunded credit protection
- Alpha to calculate exposure value (IMM)
- Effects of recognition of netting as risk-reducing
- Application of scalar based on margin period of risk
- Treatment of exposures to CCP
- Own funds requirements for pre-funded contributions to the default fund of a CCP
- Own funds requirements for pre-funded contribution to the defaults fund of a QCCP
- Maturity (for CVA calculations)
- CVA standardized method
- Settlement/delivery risk
- Free deliveries
The CRD IV operational risk calculations provided by AxiomSL are:
- Basic indicator approach
- Standardized approach
The CRD IV market risk calculations provided by AxiomSL are:
- Delta plus non-continuous
- Delta plus continuous
- Scenario approach
- Interest rate risk on derivatives instruments – full offsetting
- Net position in debt instruments
- Allowance for hedges by credit derivatives
- Maturity-based calculation of general risk
- Duration-based calculation of general risk
- Own funds requirement for non-securitization debt instruments
- Own funds requirements for securitization instruments
- Net positions in equity instruments
- General risk of equity instruments
- Specific risk of equity instruments
- Stock indices
- Calculation of the overall net foreign exchange position
- Closely correlated currencies
- De minimis and weighting for foreign exchange risk
- Positions in commodities
- Particular instruments
- Maturity ladder approach
- Extended maturity ladder approach
- Basic Method
AxiomSL’s solution offers the data normalization functionality needed to combine counterparty reference data from different systems. When users upload their data to the AxiomSL platform, it is normalized, enriched and validated, and users are given the ability to make manual adjustments. The data is then used to calculate the firm’s market risk and credit risk. The results of these calculations are aggregated to identify large exposures and are used to run the CNCOM algorithms.
When the calculations have been completed, users can review the results and check whether they are as expected, based on trend analysis and the thresholds they have set. If necessary, they can adjust the input data. If a firm’s exposures exceed the limits set by the EBA, AxiomSL’s solution automatically populates the required COREP templates, using the EBA’s XBRL taxonomy. Users sign off on the reports before they are submitted to the regulator.
Users also have the option to utilize the results of the calculations to create client results cubes, which can be enriched with additional, client-specific data. These cubes give users management information (MI) about their exposures. For example, a client may wish to see all of its large exposures to banks in the UK.
AxiomSL’s solution offers unparalleled transparency. Users can drill down into all of the calculations that are used and can see how the EBA’s technical standards have been applied. Each of the standards implemented in the platform includes a reference to the corresponding article in CRD IV. This makes it easy for users to understand how AxiomSL has interpreted every article of the directive.
AxiomSL continually monitors changes to the CRD IV requirements and makes the necessary upgrades to its solution. It gives users ongoing access to earlier iterations of the EBA’s Regulatory Technical Standards (RTS), Implementing Technical Standards (ITS) and XBRL taxonomy. These are important when rerunning or resubmitting reports.
The CRD IV large exposures solution is built on the same platform as all of AxiomSL’s other offerings. This ‘one platform’ approach ensures consistency across reports submitted for different regulations. It also reduces cost and complexity because clients do not need to maintain separate systems to comply with different regulations.
- A single platform that can be used not only for CRD IV, but also for all other reporting and calculation requirements globally
- Automates the calculation and reporting of large exposures and concentration risk
- Enriches and validates data
- Enables manual adjustments
- Drilldown into calculations, which include references to CRD IV articles
- Sign-off functionality
- XBRL reporting
- MI report creation
- Solution updated as requirements change
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