Commission Delegated Regulation (EU) 2016/101Show full title

Article 10 U.K. Calculation of close-out costs AVA

1. Close-out costs AVAs shall be calculated at valuation exposure level (‘individual close-out costs AVAs’).

2. When an institution has calculated a market price uncertainty AVA for a valuation exposure based on an exit price, the close-out cost AVA may be assessed to have zero value.

3. Where an institution applies the derogation referred to in paragraph 5 of Article 105 of Regulation (EU) No 575/2013, the close-out costs AVA may be assessed to have zero value, on the condition that the institution provides evidence that it is 90 % confident that sufficient liquidity exists to support the exit of the related valuation exposures at mid-price.

4. Where a valuation exposure cannot be shown to have a zero close-out costs AVA, institutions shall use the data sources defined in Article 3. In this case the calculation of the close-out costs AVA shall be performed as described in paragraphs 5 and 6 of this Article.

5. Institutions shall calculate close-out costs AVAs on valuation exposures related to each valuation input used in the relevant valuation model.

(a) The granularity at which those close-out costs AVAs shall be assessed shall be one of the following:

(i)

where decomposed, all valuation inputs required to calculate an exit price for the valuation position;

(ii)

the price of the instrument.

(b) Each of the valuation inputs each of the valuation inputs referred to in point (a)(i) shall be treated separately. Where a valuation input consists of a matrix of parameters, institutions shall assess the close-out cost AVA based on the valuation exposures related to each parameter within that matrix. Where a valuation input does not refer to tradable instruments, institutions shall explicitly map the valuation input and the related valuation exposure to a set of market tradable instruments. Institutions may reduce the number of parameters of the valuation input for the purpose of calculating AVAs using any appropriate methodology provided the reduced parameters satisfy all of the following requirements:

(i)

the total value of the reduced valuation exposure is the same as the total value of the original valuation exposure;

(ii)

the reduced set of parameters can be mapped to a set of market tradable instruments;

(iii)

the ratio of variance measure 2 over variance measure 1, based on historical data from the most recent 100 trading days, is less than 0,1.

For the purposes of this paragraph, variance measure 1 shall mean profit and loss variance of the valuation exposure based on the unreduced valuation input and variance measure 2 shall mean profit and loss variance of the valuation exposure based on the unreduced valuation input minus the valuation exposure based on the reduced valuation input.

(c) Where a reduced number of parameters is used for the purpose of calculating AVAs, the determination that the criteria set out in point (b) are met shall be subject to independent control function review and internal validation on at least an annual basis.

6. Close-out costs AVAs shall be determined as follows:

(a) where sufficient data exists to construct a range of plausible bid-offer spreads for a valuation input, institutions shall estimate a point within the range where they are 90 % confident that the spread they could achieve in exiting the valuation exposure would be at that price or better;

(b) where insufficient data exists to construct a plausible range of bid-offer spreads, institutions shall use an expert-based approach using qualitative and quantitative information available to achieve a level of certainty in the prudent value that is equivalent to that targeted where a range of plausible values is available. Institutions shall notify competent authorities of the valuation exposures for which this approach is applied, and the methodology used to determine the AVA;

(c) institutions shall calculate the close-out costs AVA by applying 50 % of the estimated bid-offer spread calculated in accordance with either point (a) or point (b) to the valuation exposures related to the valuation inputs defined in paragraph 5.

7. Institutions shall calculate the total category level AVA for close-out costs by applying to the individual close-out costs AVAs the formulae for either Method 1 or Method 2 laid down in the Annex.