Integrity of the modelling process
An institution shall ensure the integrity of modelling process as set out in Article 284 by adopting at least the following measures:
the model shall reflect transaction terms and specifications in a timely, complete, and conservative fashion;
those terms shall include at least contract notional amounts, maturity, reference assets, margining arrangements and netting arrangements;
those terms and specifications shall be maintained in a database that is subject to formal and periodic audit;
a process for recognising netting arrangements that requires legal staff to verify that netting under those arrangements is legally enforceable;
the verification required under point (d) shall be entered into the database mentioned in point (c) by an independent unit;
the transmission of transaction terms and specification data to the EPE model shall be subject to internal audit;
there shall be processes for formal reconciliation between the model and source data systems to verify on an ongoing basis that transaction terms and specifications are being reflected in EPE correctly or at least conservatively.
To calculate the Effective EPE using a stress calibration, an institution shall calibrate Effective EPE using either three years of data that includes a period of stress to the credit default spreads of its counterparties or market implied data from such a period of stress.
The requirements in paragraphs 3, 4 and 5 shall be applied by the institution for that purpose.
The competent authorities shall require an institution to adjust the stress calibration if the exposures of those benchmark portfolios deviate substantially from each other.
An institution shall subject the model to a validation process that is clearly articulated in the institutions' policies and procedures. That validation process shall:
specify the kind of testing needed to ensure model integrity and identify conditions under which the assumptions underlying the model are inappropriate and may therefore result in an understatement of EPE;
include a review of the comprehensiveness of the model.
An institution shall monitor the relevant risks and have processes in place to adjust its estimation of Effective EPE when those risks become significant. In complying with this paragraph, the institution shall:
for exposures with a residual maturity below one year, compare on a regular basis the replacement cost (current exposure) and the realised exposure profile, and store data that would allow such a comparison.