Joint AFME – ISDA Response to the European Commission’s Consultation on CRR3 Implementation December 2019 Contents Introduction ............................................................................................................................................................................... 4 Executive Summary ................................................................................................................................................................ 4 Trade Association Contacts .................................................................................. Error! Bookmark not defined. 1. Credit risk............................................................................................................................................................................. 12 1.1 Standardised Approach (SA-CR) ......................................................................................................................... 12 1.2 Internal Ratings Based Approaches (IRBA) ................................................................................................... 35 1.3 Credit Risk Mitigation – SA-CR ............................................................................................................................ 50 1.4 Credit Risk Mitigation – IRBA ............................................................................................................................... 53 2. Securities financing transactions (SFTs)................................................................................................................. 59 Annex A: Examples of anomalous outcomes resulting from the application of the Minimum SFT Haircuts formula ............................................................................................................................................................... 64 3. Operational Risk ................................................................................................................................................................ 66 4. Market risk .......................................................................................................................................................................... 77 Executive Summary ......................................................................................................................................................... 77 4.1. Converting the reporting requirement into an own funds Requirement ......................................... 81 4.2. Introduction of the simplified standardised approach .......................................................................... 104 4.3. Treatment of investments in collective investment undertakings (CIUs) ..................................... 105 4.4. Date of application of new own funds requirements for market risk ............................................. 116 4.5. Other provisions .................................................................................................................................................... 117 4.6. Implementation challenges and administrative burden ....................................................................... 119 Appendix A: CTP ............................................................................................................................................................. 123 5. Credit valuation adjustment (CVA) risk ............................................................................................................... 130 Executive Summary ...................................................................................................................................................... 130 5.1. Revised CVA framework ..................................................................................................................................... 132 5.2. Exemptions under the CRR ............................................................................................................................... 140 5.3. Proportionality in the CVA framework ........................................................................................................ 143 5.4. Internal CVA under the SA-CVA ....................................................................................................................... 144 5.5. Fair-value SFTs under the CVA framework ................................................................................................ 144 5.6. Other provisions .................................................................................................................................................... 146 5.7. Implementation challenges and administrative burden ....................................................................... 148 6. Output Floor ..................................................................................................................................................................... 149 6.1 Scope of Application .............................................................................................................................................. 149 6.2 Level of Application ............................................................................................................................................... 150 2 6.3 Transitional Measures .......................................................................................................................................... 153 6.4 Other provisions ..................................................................................................................................................... 153 6.5 Implementation challenges and administrative burden: ...................................................................... 156 7. Centralised supervisory reporting and Pillar 3 ................................................................................................. 158 8. Sustainable Finance ...................................................................................................................................................... 160 9. Fit and Proper ................................................................................................................................................................. 162 9.1. Key function holders ............................................................................................................................................ 162 9.2 Competent Authorities’ assessment of the suitability of members of the management body ............................................................................................................................................................................................... 165 Annex – Financial innovation and Regulation for consideration in CRR ..................................................... 172 Introduction and Background .................................................................................................................................. 172 Possible Alternatives .................................................................................................................................................... 172 3 Introduction The Association for Financial Markets in Europe (AFME) and the International Swaps and Derivatives Association (ISDA), collectively ‘the industry’, welcome the opportunity to comment on the European Commission’s consultation on CRR3. About AFME AFME represents a broad array of European and global participants in the wholesale financial markets. Its members comprise pan-EU and global banks as well as key regional banks, brokers, law firms, investors and other financial market participants. We advocate stable, competitive, sustainable European financial markets that support economic growth and benefit society. AFME is the European member of the Global Financial Markets Association (GFMA) a global alliance with the Securities Industry and Financial Markets Association (SIFMA) in the US, and the Asia Securities Industry and Financial Markets Association (ASIFMA) in Asia. AFME is listed on the EU Register of Interest Representatives, registration number 65110063986-76. Information about AFME and its activities is available on the Association's website: www.afme.eu. About ISDA Since 1985, the International Swaps and Derivatives Association has worked to make the global derivatives markets safer and more efficient. ISDA’s pioneering work in developing the ISDA Master Agreement and a wide range of related documentation materials, and in ensuring the enforceability of their netting and collateral provisions, has helped to significantly reduce credit and legal risk. The Association has been a leader in promoting sound risk management practices and processes, and engages constructively with policymakers and legislators around the world to advance the understanding and treatment of derivatives as a risk management tool. ISDA has over 900 member institutions from 71 countries. These members comprise a broad range of derivatives market participants, including corporations, investment managers, government and supranational entities, insurance companies, energy and commodities firms, and international and regional banks. In addition to market participants, members also include key components of the derivatives market infrastructure, such as exchanges, intermediaries, clearing houses and repositories, as well as law firms, accounting firms and other service providers. ISDA is listed on