Question
Model Risk FVAs taken due to market or product factors not captured by a valuation model can be either positive (resulting in a P&L loss) or negative (resulting in a P&L gain). Where the adjustment would result in a P&L gain, it should logically be populated with a negative value. However, validation rule v6575_s states that FVAs reported must be greater than or equal to zero. Please confirm if Model Risk FVAs resulting in a P&L gain should be reported with negative signage in column 0190 of the COREP C32.02 template.
Background on the question
Template C32.02 Prudent Valuation: Core Approach (PruVal 2) requires reporting of Fair Value Adjustments (FVA) that address the same source of valuation uncertainty as the relevant AVA. Annex II instructions (section 6.2.2) define Model Risk FVAs reported in col 0190 as “adjustments applied in the institution’s fair value to reflect market or product factors that are not captured by the model used to calculate daily position values and risks (‘valuation model’) or to reflect an appropriate level of prudence given the uncertainty arising from the existence of a range of alternative valid models and model calibrations, and thus that can be identified as addressing the same source of valuation uncertainty as the Model risk AVA.” Model Risk FVAs taken due to market or product factors not captured by a valuation model can be either positive (resulting in a P&L loss) or negative (resulting in a P&L gain). Where the adjustment would result in a P&L gain, it should logically be populated with a negative value. Per discussion in meetings held with On-site Inspection Team (OSIT) on May 23rd, 2024, ECB expect reporting with economically correct signage. However, validation rule v6575_s states that FVAs reported in columns 0170, 0180, 0190, 0200, 0230, 0240 and 0250 must be greater than or equal to zero. Could you please confirm if the scope of validation rule v6575 should be reduced to exclude Model Risk FVAs (col 0190)? Please note that this question is also applicable to Short Term Exercise (STE) for Supervisory Review and Evaluation Process (SREP) Market Risk Template “4_ PRR levelling“, columns 0110-0120, validation rule R.2.MKT049.
Answer
This question has been rejected because the matter it refers to has already been identified and will be considered for a forthcoming version of the Reporting framework / release of the respective validation rules.