(1)

The assessment of the modellability of risk factors referred to in Article 325be(1) of Regulation (EU) No 575/2013 should determine the appropriate risk measure to be used by institutions to calculate the own funds requirements for market risk of every risk factor included, or which is in the process of being included, in the institutions’ alternative internal model approach set out in Part Three, Title IV, Chapter 1b, of Regulation (EU) No 575/2013. Modellable risk factors should be subject to the expected shortfall risk measure calculated in accordance with Article 325bb of Regulation (EU) No 575/2013, while non-modellable risk factors should be subject to the stress scenario risk measure, calculated in accordance with Article 325bk of that Regulation.

(2)

The expected shortfall risk measure should capture the probability distribution of risk factors over a sufficiently long historical period in which the relevant market data for those risk factors are observable. Therefore, a risk factor should be considered modellable where a sufficient number of observable verifiable prices that are representative of that risk factor are available. To perform that assessment, a 12-month observation period ending at the previous reporting reference date should be appropriate. However, to take into account possible delays in data availability, institutions should be allowed to replace that 12-month observation period with a shifted 12-month period. To ensure comparability of practices across the Union, such shift should be limited to one month. For the same reason, institutions should apply such shifted periods consistently across all risk factors of the same type and provide their competent authority with detailed documentation as regards the application of such shifted periods.

(3)

It is expected that institutions may not have all price information required for the assessment of the modellability from their own trading activity. Therefore, when assessing whether risk factors are modellable, institutions should also be allowed to use price information obtained from third-party vendors, provided that those prices are verifiable and that those third-party vendors are subject to an independent audit regarding the validity of their price information.

(4)

A key step in the assessment of whether risk factors are modellable is assessing the representativeness of identified verifiable prices for those risk factors. A verifiable price should be considered representative of a risk factor of an institution where the institution is able to extract the value of the risk factor from the value of the verifiable price using commonly used quantitative methodologies. A number of those methodologies need additional input data in order for institutions to be able to extract the value of a risk factor, making it more complex to demonstrate the representativeness of the verifiable prices. Therefore, those methodologies, as well as the additional input data, where needed, should be based on objective and properly documented information, thus preventing institutions from using unsound assumptions. Due to their lack of verifiability and representativeness, in line with international standards, collateral reconciliations or valuations should not be considered eligible sources of verifiable prices.

(5)

Where risk factors are points of a curve, a surface or a cube, the modellability of those risk factors should be assessed following the modellability of each bucket of that curve, surface or cube, due to shared characteristics of risk factors belonging to a given bucket. The modellability of that bucket should thus be assessed by reference to all the verifiable prices that are allocated to that bucket, while the verifiable prices representative of one risk factor in a bucket should be considered as being representative of all risk factors belonging to the same bucket. In addition, institutions should be allowed to choose standard buckets, or, where deemed more appropriate for a specific curve, surface or cube, alternative buckets developed by themselves.

(6)

Furthermore, the criteria for the modellability of risk factors should cover cases where an institution uses a parametric function to represent a curve, a surface or a cube and sets the function parameters as the risk factors in its risk-measurement model. In those cases, those criteria should specify how the modellability assessment should be performed, taking into consideration the specificities of those parametric functions and of the function parameters.

(7)

To help competent authorities assess compliance with this Regulation, it is necessary to specify how the general documentation requirement provided for in Article 325bi(1), point (e), of Regulation (EU) No 575/2013 is to be applied by institutions when assessing whether a risk factor is modellable.

(8)

This Regulation is based on the draft regulatory technical standards submitted to the Commission by the European Banking Authority.

(9)

The European Banking Authority has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the advice of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council (2),