GARP Risk Analytics (GRA)

GARP Risk Analytics is an initiative launched by GARP several years ago to provide independent, non-partisan analysis of regulatory quantitative impact studies, hypothetical portfolio exercises, stress testing and other industry-initiated studies in an effort to further more robust risk measurement and management practices by allowing banks to anonymously and confidentially benchmark themselves against their peers. GRA has completed over 25 studies and now has over 60 active participating banks.

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GARP Analysis of the EBA 2017 Benchmarking Exercise

Last Revised: November 9, 2016

One objective of the GARP Analysis of the EBA 2017 Benchmarking Exercise is to help participating banks reach a common understanding of the exercise portfolios by aggregating and analyzing the banks’ initial market valuations (IMV) of these portfolios and other relevant data points.

GARP supports the EBA’s objective of using benchmark portfolio exercises to improve comparability of capital requirements calculated using internal approaches. The credibility of the risk measure results for the benchmark portfolios, though, requires reasonable satisfaction that the banks are considering the same positions. To achieve this, the participating banks were asked to submit any questions/issues they had about the benchmark portfolios and their specification. The responses, grouped by topics, are provided below.

  • IMV definition

    • Point (b) in Annex V defines IMV as ‘the profit or loss that has been made but not yet realized or it would be realized if the position is closed out’.
    • Please confirm that the IMV to be reported is the profit & loss as of 27-Oct-2016 relative to the price observed on 13-Oct-2016, i.e. MtM (27-Oct-2016)-MtM (13-Oct-2016), and not just the MtM of portfolios on valuation date 27-Oct-2016.
    • EBA confirmed that this is exactly what they want to get.
    • Particular portfolio questions
      • Portfolio 10 – Two-year swaption on ten-year interest rate swap
        • Please confirm that the ‘fair settlement amount’ of the swaption should be included in the IMV. Point (o) in Annex V suggests the IMV calculations should exclude the premium (‘fair settlement amount’ in this case) for all the options. Point (b) suggests the realized P&L should be reported but the ‘fair settlement amount’ won’t be paid until then.
        • EBA responded that Portfolio 10 is a 2y swaption on a 10y IR swap, with premium piad at expiry. The institution is the seller of the option on the swap and should report the IMV of the naked option.
      • Portfolio 14 – Mark-to-market cross-currency basis swap
        • Please confirm that banks should exclude the initial exchanve of notional for the cross-currency basis trade in their IMV and risk calculations so that the risk is dominated by a final FX exchange.
        • EBA replied that banks shall include the exchange of the national and all the cashflows.

  • Market Conventions

    • The use of standard market conventions would make booking and consistency easier to achieve. We would like to confirm that EBA wants banks to use standard market conventions throughout the study as follows.
    • EBA confirmed that banks shall follow Annex V common instruction (r) , i.e. follow appropriate market conventions where not otherwise specified, which implies to follow market date conventions as well, with slight changes on dates that shall be reported in the appropriate text box (for each portfolio) in the template as further comments and information.
    • Particular portfolio questions
      • (INTEREST RATE) Portfolio 9 – Interest Rate Swap
        • Market convention has 2 day lag between the fixing rate and the start date. Please confirm that banks should book the swap with start date of the 15th Oct using fixing rate of the 13th Oct. The maturity date will be 15th Oct 2026.
        • EBA confirmed banks should use market standards
      • (INTEREST RATE) Portfolio 12 – Inflation zero coupon swap
        • Market standard has lag on index fixing and the base. Please confirm banks should use the July fixing rate for this trade.
        • EBA confirmed banks should use market standards
      • (COMMODITY) Portfolio 18 – Short oil put options
        • To reference an underlying for the 6-month option, market convention would be to use the 6-month forward contract. Please confirm that banks should reference the April 2016 forward contract as the underlying since this settles closest to 13 April 2016.
        • EBA noted that 6-month ahead as of 13/10/2016 means mid-April 2017 expiry.
      • (CREDIT SPREAD) Portfolios 19, 21, 23 and 26
        • It is unclear whether CDS contracts are to be booked according to 2003 or 2014 ISDA definition (also for sovereign CDS). Annex V requires doc clause FULL for portfolio 19, and doc clause MM for portfolio 21, 23 and 26. However, the 2003 Credit Derivatives Definitions has been overhauled by the 2014 Definitions. Please confirm that for portfolio 19, CR14 is the relevant document clause for full restructuring, but for portfolio 21, 23 and 26, current market convention would use MM14.
        • EBA confirmed that banks should use the appropriate market standard ISDA (sub-)clauses.
      • (CREDIT SPREAD) Portfolio 27 – Short index put on iTraxx Europe Crossover on-the-run
        • The maturity date is given as 15th April 2017 which is a Saturday. Market convention for maturity date is usually the 3rd Wednesday of the month. Please confirm that the maturity date should be 19th April 2017.
        • EBA confirmed banks should use market standards
      • (CREDIT SPREAD) Portfolio 28 – Quanto CDS on Spain with delta hedge
        • The underlying termination date is stated as 18th Dec 2021 (Saturday). Please confirm that banks should use 20th Dec 2021 instead as the underlying termination date.
        • EBA confirmed banks should use market standards, which in this case means the first working day after the non-working day termination date

  • Portfolio Specification Questions

    • (EQUITY) Portfolio 5 – Equity spot and short call position (‘covered call’)
      • Two different ticker symbols are given for the Generali SPA share. Please confirm that the correct ticker symbol is G IM.
      • EBA responded that banks should use G IM for both equity and option
    • (CREDIT SPREAD) Portfolios 19-20 – Sovereign CDS portfolio; Sovereign bond/CDS portfolio
      • Please confirm that the Primary Reference Obligor ISIN the US bond is US91282FQ84.
      • EBA responded that for US Govt Bond, banks should use as reported in Portfolio 20 US912828D721, i.e. US TBOND 2% 31/AUG/2021
    • (CREDIT SPREAD) Portfolios 22, 23 and 25 – Diversified index portfolio, Diversified index portfolio (higher concentration) and Index basis
      • These portfolio specifications state “iTraxx 5-year Europe SF index on-the-run Series”. Please confirm this means iTraxx 5-year Europe Senior Financials index Series 26 (being the current on-the-run series for the Senior Financials index).
      • EBA confirmed
    • (CREDIT SPREAD) Portfolio 24 – Diversified corporate portfolio
      • Please confirm banks should book Roche Holdings Inc., not Roche Holdings AG.
      • EBA replied that banks should use Roche Holdings Inc.
    • (CREDIT SPREAD) Portfolio 27 – Short index put on Itraxx Europe Crossover on-the-run
      • Please confirm that the underlying is the iTraxx Crossover on the run 5 year.
      • Referring to the detail in Annex V, section 2.5, it is not clear who ‘we’ refers to in the Option type. An economically meaningful trade gives the counterparty the right to buy iTraxx from the bank at the strike price and is deep out of the money. If exercised, the bank would receive a fixed rate and sell protection. This implies that the trade will have negative sensitivity to an increase in index spread. Please confirm.
      • EBA responded that the bank is selling a payer option to the client. Therefore, the client has the right to buy protection on the underlying index at 500 bps at expiry.
    • (CREDIT SPREAD) Portfolio 28 – Quanto CDS on Spain with delta hedge
      • Although there is a termsheet provided, it seems it’s just a reference to the standard 5Y CDS. Please confirm that banks should use the standard 5Y CDS, expiring 20th Dec 2021.
      • EBA responded that banks should use standard 5y CDS with delta hedge. Follow market convention for the termination date.
    • (CTP) Portfolios 35-36
      • Please confirm that the running spread on 0-3 for iTraxx should be set to 100 bps as per market standard, not 500.
      • EBA responded that the running spreads to be used are indicated in Section 3 CTPs; i.e. 500 bps for equity tranche and mezzanine tranche, 100 bps for super senior tranche.
    • (CTP) Portfolios 36-37
      • Please confirm which detachment and attachment points for the iTraxx Europe tranches should be used: either 3-6 or 6-12 for Mezzanine, and 12-100 for super senior as per market standard.
      • EBA responded that the chosen attachment and detachment points are 0%-3% for equity tranche, 7%-10% per mezzanine tranche, 30%-100% for super senior tranche. Please, stick to them.
    • (CTP) Portfolios 35-37
      • Section 3 of Annex V specifies the risk metrics requested for the correlation trading portfolios and lists VaR, sVaR, IRC and IM for CTP. It is our understanding that IRC should not be required for correlation trading portfolios. Please confirm.
      • EBA responded that if a bank is authorized for regulatory capital purposes to compute also IRC on CTPs, it has to report IRC, otherwise not.
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