The model used by the institution for that purpose shall:
specify the forecasting distribution for changes in the market value of the netting set attributable to joint changes in relevant market variables, such as interest rates, foreign exchange rates;
calculate the exposure value for the netting set at each of the future dates on the basis of the joint changes in the market variables.
The own funds requirement for counterparty credit risk with respect to the CCR exposures to which an institution applies the IMM, shall be the higher of the following:
the own funds requirement for those exposures calculated on the basis of Effective EPE using current market data;
the own funds requirement for those exposures calculated on the basis of Effective EPE using a single consistent stress calibration for all CCR exposures to which they apply the IMM.
Except for counterparties identified as having Specific Wrong-Way risk that fall within the scope of Article 291(4) and (5), institutions shall calculate the exposure value as the product of alpha (α) times Effective EPE, as follows:
Exposure value = α · Effective EPE
1.4, unless competent authorities require a higher α or permit institutions to use their own estimates in accordance with paragraph 9;
Effective EPE shall be calculated by estimating expected exposure (EEt) as the average exposure at future date t, where the average is taken across possible future values of relevant market risk factors.
The model shall estimate EE at a series of future dates t1, t2, t3, etc.
Effective EE shall be calculated recursively as:
Effective EPE is the average Effective EE during the first year of future exposure. If all contracts in the netting set mature within less than one year, EPE shall be the average of EE until all contracts in the netting set mature. Effective EPE shall be calculated as a weighted average of Effective EE:
where the weights
allow for the case when future exposure is calculated at dates that are not equally spaced over time.
Notwithstanding paragraph 4, competent authorities may permit institutions to use their own estimates of alpha, where:
alpha shall equal the ratio of internal capital from a full simulation of CCR exposure across counterparties (numerator) and internal capital based on EPE (denominator);
in the denominator, EPE shall be used as if it were a fixed outstanding amount.
When estimated in accordance with this paragraph, alpha shall be no lower than 1,2.