Requirements for modelling specific risk
An internal model used for calculating own funds requirements for specific risk and an internal model for correlation trading shall meet the following additional requirements:
it explains the historical price variation in the portfolio;
it captures concentration in terms of magnitude and changes of composition of the portfolio;
it is robust to an adverse environment;
it is validated through back-testing aimed at assessing whether specific risk is being accurately captured. If the institution performs such back-testing on the basis of relevant sub-portfolios, these shall be chosen in a consistent manner;
it captures name-related basis risk and shall in particular be sensitive to material idiosyncratic differences between similar but not identical positions;
it captures event risk.