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ARTICLE · 28 NOVEMBER 2016

European Banking Authority Publishes Final Guidelines On Corrections To Duration For Debt Instruments

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On October 14, 2016, the EBA published final Guidelines on the correction required for the calculation of Modified Duration for debt instruments subject to prepayment risk under the CRR.

European UnionFinance and Banking
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On October 14, 2016, the EBA published final Guidelines on the correction required for the calculation of Modified Duration for debt instruments subject to prepayment risk under the CRR. The CRR establishes two methods to calculate capital requirements for general interest rate risk. The relevant methods are the Maturity-Based calculation and the Duration-Based calculation of general risk. The final Guidelines apply to the Duration-Based calculation. The Duration-Based calculation uses the concept of Modified Duration pursuant to the formulae outlined in the CRR.

This method is only valid for instruments that are not subject to repayment risk. The EBA is mandated to issue guidelines establishing how to correct the Modified Duration calculation to reflect prepayment risk. The EBA has proposed two approaches to correct the calculation. One option is to treat the debt instrument with prepayment risk as if it is a combination of a plain vanilla bond and an embedded

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