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CRR ToolDelegated Regulation 2024/1085
Article 20

Article 20 - Assessment of reasonable accuracy of the internal risk-measurement model, including pricing model

Article 20

Assessment of reasonable accuracy of the internal risk-measurement model, including pricing model

1.   When assessing whether the internal risk-measurement model, including any pricing model, has a proven track record of being reasonably accurate in measuring risks, and does not differ significantly from the models that the institution uses for its internal risk-measurement models as referred to in Article 325bi(1), point (f), of Regulation (EU) No 575/2013, competent authorities shall:

(a)

verify whether the institution has inventories, whereby those inventories comprise:

(i)

the pricing functions or methods used in the internal-risk measurement model and the pricing functions or methods used to calculate the end-of-day value of the portfolio;

(ii)

for each of the pricing functions or methods referred to in point (i), a concise description, the main features, assumptions, key parameters of those pricing functions or methods, how those features, assumptions and parameters were calibrated, and how those pricing functions or methods are implemented;

(iii)

a description of the scope of financial instruments and commodities included in the internal-risk measurement model covered by each pricing function or method;

(iv)

a description of the scope of financial instruments and commodities covered by each pricing function or method in the calculation of the end-of-day-value of the portfolio;

(v)

one or more metrics to measure the materiality of positions priced with the corresponding pricing function or method in the internal risk-measurement model;

(vi)

one or more metrics to measure the materiality of positions priced with the corresponding pricing function and method in the calculation of the end-of-day-value of the portfolio;

(vii)

a comprehensive mapping between the pricing functions and methods used in the internal risk-measurement model and the pricing functions and methods used in the calculation of the end-of-day-value of the portfolio;

(b)

verify whether the inventories referred to in point (a) are updated at least annually, and whether the internal policies of the institution provide for a specific update whenever that would be necessary due to substantial changes in the information provided in the inventories;

(c)

verify whether all the differences between the pricing functions used to compute the end-of-day value and the pricing functions used in the internal risk-measurement model are validated as part of the internal validation referred to in Article 325bj of Regulation (EU) No 575/2013;

(d)

assess, on the basis of the profit and loss attribution results and the back-testing results, whether there are pricing functions that may present deficiencies;

(e)

analyse the conclusions in the most recent reports by the institution’s internal validation referred to in Article 325bj of Regulation (EU) No 575/2013 regarding the accuracy of the internal risk-measurement model;

(f)

analyse the conclusions laid down in the most recent reports about the institution’s internal review of the accuracy of the internal risk-measurement model, as referred to in Article 325bi(1), point (h), of Regulation (EU) No 575/2013;

(g)

verify whether the institution has documented the differences between the internal risk-measurement model and the models that the institution uses for its internal risk management for the same scope of positions, and whether the institution is able to explain those differences;

(h)

analyse the results of the tests performed by the institution as part of its internal validation to verify whether the assumptions made in the internal risk-measurement model are appropriate and do not underestimate or overestimate the risk, as referred to in Article 325bj(3), point (a), of Regulation (EU) No 575/2013, in particular for the trading desks with the highest differences between the own funds requirements calculated in accordance with the alternative standardised approach referred to in Part Three, Title IV, Chapter 1a of Regulation (EU) No 575/2013, and the own funds requirements calculated in accordance with the internal risk-measurement model.

For the purposes of point (d), competent authorities may, where appropriate, require the institution to calculate, on a set of instruments and commodities for which the competent authority wants to test the accuracy of the pricing functions, the risk-theoretical changes referred to in Chapter 2, Section 2, of Commission Delegated Regulation (EU) 2022/2059 (10) and the hypothetical changes referred to in Chapter 1, Section 2, of that Delegated Regulation, and require the institution to justify differences in outcome between the two measures.

2.   Where positions corresponding to product classes assigned to a trading desk are booked back-to-back with those of another entity of the group that is outside the scope of the highest level of consolidation within the Union, and the competent authority needs more evidence to verify that the internal risk-measurement model is reasonably accurate, the competent authority may require institutions to provide:

(a)

the actual, hypothetical, and risk theoretical changes over 60 business days in the trading desk portfolio’s value, without any hedges with the entity of the group being considered;

(b)

the value-at-risk numbers at trading desk level as referred to in Article 325bf of Regulation (EU) No 575/2013 over 60 business days, without any hedges with the entity of the group being considered;

(c)

an assessment of the profit and loss attribution results and back-testing results in light of the changes in the portfolio’s values referred to in point (a) and the value-at-risk numbers referred to in point (b).

3.   Where the market risk of positions corresponding to some product classes is transferred to another entity of the group that is outside the scope of the highest level of consolidation within the Union, and the effects of such transfer de facto resemble the effects of positions booked back-to-back, competent authorities may apply paragraph 2.

(10)  Commission Delegated Regulation (EU) 2022/2059 of 14 June 2022 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards specifying the technical details of back-testing and profit and loss attribution requirements under Articles 325bf and 325bg of Regulation (EU) No 575/2013 (OJ L 276, 26.10.2022, p. 47, ELI: http://data.europa.eu/eli/reg_del/2022/2059/oj).