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CRR ToolDelegated Regulation 2024/1085
Article 32

Article 32 - Assessment of the modellability of risk factors

Article 32

Assessment of the modellability of risk factors

1.   When assessing an institution’s compliance with Article 325bi(1), point (e), of Regulation (EU) No 575/2013 in relation to requirements on the risk factors’ modellability, competent authorities shall verify whether the institution’s internal policies referred to in that point meet all of the following conditions:

(a)

the internal policies cover the aspects referred to in Article 7 of Delegated Regulation (EU) 2022/2060 for all documentation;

(b)

the internal policies require the production of an up-to-date inventory which specifies for each risk factor the following:

(i)

a description of the risk factor;

(ii)

whether the risk factor is modellable following the modellability assessment referred to in Article 325be of Regulation (EU) No 575/2013, and whether the risk factor has ever changed its modellability status in the previous year;

(iii)

the 12 month-period used for the modellability assessment;

(iv)

whether the risk factor is a systematic credit or equity risk factor, as referred to in Article 3(3) of Delegated Regulation (EU) 2022/2060;

(v)

whether the risk factor is a point of a curve, a surface, or a cube, as referred to in Article 4(1) of Delegated Regulation (EU) 2022/2060, the bucket used for assessing the modellability of that risk factor, and the results of the modellability assessment of that bucket;

(vi)

whether the risk factor is a function parameter used to represent a curve, a surface, or a cube, as referred to in Article 6(1) of Delegated Regulation (EU) 2022/2060, and:

(1)

the set of points of the curve, surface or cube that have been used to calibrate the parametric function as referred to in Article 6(1) of Delegated Regulation (EU) 2022/2060;

(2)

the set of buckets, and their modellability, as resulting from the application of the steps referred to in Article 6(1), points (b) and (c), of Delegated Regulation (EU) 2022/2060;

(3)

the set of points of the curve, surface or cube that have been used to calibrate the function parameter as referred to in Article 6(2) of Delegated Regulation (EU) 2022/2060;

(vii)

the number of verifiable prices that are representative for the risk factor over the period considered for the modellability assessment;

(viii)

whether there are 90-day periods with less than four verifiable and representative prices;

(c)

the internal policies set out:

(i)

criteria to identify risk factors for which the institution applies the shifted period referred to in Article 1(2) and Article 4(3) of Delegated Regulation (EU) 2022/2060;

(ii)

criteria to establish whether risk factors are to be considered to be of the same type, as referred to in Article 1(2), point (a), of that Regulation;

(d)

the internal policies set out criteria to determine whether the modellability assessment of a curve, surface, or cube is performed by using standard, pre-defined buckets as referred to in Article 5(2) of Delegated Regulation (EU) 2022/2060, or by using the institution’s own establishment of buckets as referred to in Article 5(4) of that Delegated Regulation;

(e)

the internal policies set out the rationale of the choice, where the standard pre-defined buckets referred to in Article 5(2) of Delegated Regulation (EU) 2022/2060 are subdivided into smaller buckets in accordance with Article 5(3) of that Regulation.

For the purposes of points (b)(vii) and (viii), where the institution performs the modellability assessment for a risk factor by assessing the modellability of a set of buckets first, competent authorities shall verify whether the number of verifiable and representative prices are specified at the level of each of those buckets.

2.   When assessing whether the institution’s internal risk-measurement model is implemented with integrity as required by Article 325bi(1) of Regulation (EU) No 575/2013 in relation to the modellability assessment of risk factors that are assessed as modellable in accordance with Article 1 of Delegated Regulation (EU) 2022/2060, competent authorities shall:

(a)

verify, in relation to the results of the modellability assessment:

(i)

by using the inventory referred to in paragraph 1, point (b), that those risk factors meet any of the two criteria referred to in Article 1(1), points (a) and (b) of Delegated Regulation (EU) 2022/2060;

(ii)

where applicable, by using the inventory referred to in paragraph 1, point (b), that the period used for the modellability assessment complies with Article 1(2) of Delegated Regulation (EU) 2022/2060;

(b)

in relation to the requirements for considering a price verifiable as referred to in Article 2 of Delegated Regulation (EU) 2022/2060:

(i)

verify whether:

(1)

the institution’s internal systems and policies, and its contractual agreements with third-party vendors, ensure that the conditions referred to in Article 2(1) of Delegated Regulation (EU) 2022/2060 are met;

(2)

there are any prices that meet the conditions referred to in Article 2(2) of Delegated Regulation (EU) 2022/2060 that are considered verifiable;

(ii)

by reviewing the audit reports, verify whether the independent audit referred to in Article 2(6) of Delegated Regulation (EU) 2022/2060 is robust and covers all the aspects referred to in that paragraph;

(iii)

where applicable, review the contractual arrangements referred to in Article 2(7) of Delegated Regulation (EU) 2022/2060;

(c)

in relation to the requirements for considering a verifiable price as representative of a risk factor as referred to in Article 3 of Delegated Regulation (EU) 2022/2060, verify whether the mapping process and the criteria used to determine the representativeness of a price for a risk factor as referred to in Article 7(1), point (d), of that Delegated Regulation are sound.

For the purposes of point (a)(ii), competent authorities shall verify whether the criteria referred to in paragraph 1, point (c) to identify whether risk factors are of the same type are sound and, by using the inventory referred to in paragraph 1, point (b), verify whether those criteria are applied correctly.

For the purposes of point (b)(i), competent authorities shall apply the assessment method referred to in paragraph 5.

For the purposes of point (c), competent authorities shall apply the assessment method referred to in paragraph 6.

3.   When assessing whether an institution’s internal model is implemented with integrity as required by Article 325bi(1) of Regulation (EU) No 575/2013 in relation to the modellability assessment of risk factors that belong to a curve, a surface or a cube and that are assessed as modellable in accordance with Article 4 of Delegated Regulation (EU) 2022/2060, competent authorities shall:

(a)

in relation to the results of the modellability assessment:

(i)

by using the inventory referred to in paragraph 1, point (b), verify whether the bucketing of curves, surfaces and cubes complies with the conditions referred to in Article 5(2) or Article 5(4) of Delegated Regulation (EU) 2022/2060, and that the institution correctly applies the criteria referred to in paragraph 1, point (d), of this Article to select the bucketing approach;

(ii)

where the institution uses the set of standard pre-defined buckets referred to in Article 5(2), point (d), of Delegated Regulation (EU) 2022/2060, verify whether any conversion of buckets into a different market-standard convention is appropriate;

(iii)

by using the inventory referred to in paragraph 1, point (b), verify whether the buckets that are assessed as modellable meet any of the two conditions referred to in Article 4(2), points (a) and (b), of Delegated Regulation (EU) 2022/2060;

(iv)

by using the inventory referred to in paragraph 1, point (b), verify whether the period used for the modellability assessment is the same for all buckets of a given curve, surface or cube;

(b)

in relation to the requirements for considering a price verifiable as referred to in Article 2 of Delegated Regulation (EU) 2022/2060:

(i)

by reviewing the institution’s internal systems and policies, and its contractual agreements with third-party vendors, ensure that:

(1)

the conditions referred to in Article 2(1) of Delegated Regulation (EU) 2022/2060 are met;

(2)

that no prices that meet the conditions referred to in Article 2(2) of that Delegated Regulation are considered verifiable;

(ii)

by reviewing the audit reports, verify whether the independent audit to which third-party vendors are subject is robust and covers all the aspects referred to Article 2(6) of Delegated Regulation (EU) 2022/2060;

(iii)

where applicable, review the contractual arrangements between the institution and the third-party vendors referred to in Article 2(7) of Delegated Regulation (EU) 2022/2060;

(c)

in relation to the requirements for allocating a verifiable price to a bucket as referred to in Article 4(4) of Delegated Regulation (EU) 2022/2060, verify whether the mapping process and the criteria referred to in Article 7(1), point (d), of that Regulation used to determine that a price is representative for a point in the bucket are sound;

(d)

in relation to the possibility of reallocating a verifiable price of a bucket to an adjacent bucket in accordance with Article 5(5) of Delegated Regulation (EU) 2022/2060, verify:

(i)

whether the approach documented in accordance with Article 7(1), point (f), of that Regulation used by the institution to perform such reallocation is appropriate;

(ii)

how the institution ensures that the conditions under which reallocation is allowed in accordance with Article 5(5) of Delegated Regulation (EU) 2022/2060 are fulfilled.

For the purposes of point (b)(i), competent authorities shall apply the assessment method referred to in paragraph 5.

For the purposes of point (c), competent authorities shall apply the assessment method referred to in paragraph 7.

4.   When assessing whether an institution’s internal model is implemented with integrity as required by Article 325bi(1) of Regulation (EU) No 575/2013 in relation to the modellability assessment of risk factors that are assessed as modellable in accordance with Article 6 of Delegated Regulation (EU) 2022/2060, competent authorities shall:

(a)

in relation to the results of the modellability assessment:

(i)

by using the inventory referred to in paragraph 1, point (b), verify whether the buckets of the curve, surface or cube modelled through a parametric function that are assessed as modellable meet any of the two conditions referred to in Article 4(2), points (a) and (b), of Delegated Regulation (EU) 2022/2060;

(ii)

by using the inventory referred to in paragraph 1, point (b), verify whether:

(1)

the institution uses the bucketing approach set out in Article 5(2) of Delegated Regulation (EU) 2022/2060;

(2)

any conversion of buckets into a different market-standard convention in accordance with Article 5(2), point (d), of that Regulation is appropriate;

(iii)

by using the inventory referred to in paragraph 1, point (b), verify whether the institution assesses the function parameter as modellable only where all points in the curve, surface or cube that are used to calibrate that function parameter belong to buckets that are modellable;

(b)

in relation to the requirements for considering a price verifiable as referred to in Article 2 of Delegated Regulation (EU) 2022/2060:

(i)

verify whether:

(1)

the institution’s internal systems and policies, and its contractual arrangements with third-party vendors, ensure that the conditions referred to in Article 2(1) of Delegated Regulation (EU) 2022/2060 are met;

(2)

there are no prices that meet the conditions referred to in Article 2(2) of Delegated Regulation (EU) 2022/2060 that are considered verifiable;

(ii)

by reviewing the audit reports, verify whether the independent audit to which third-party vendors are subject is robust and covers all aspects referred to in Article 2(6) of Delegated Regulation (EU) 2022/2060;

(iii)

where applicable, review the contractual arrangements between the institution and the third-party vendors referred to in Article 2(7) of Delegated Regulation (EU) 2022/2060;

(c)

in relation to the requirements for allocating a verifiable price to a bucket as referred to in Article 4(4) of Delegated Regulation (EU) 2022/2060, verify whether the mapping process and the criteria referred to in Article 7(1), point (d), of that Regulation used to determine that a price is representative for a point in the bucket are sound;

(d)

in relation to the possibility of reallocating a verifiable price of a bucket to an adjacent bucket in accordance with Article 5(5) of Delegated Regulation (EU) 2022/2060, verify:

(i)

whether the approach documented in accordance with Article 7(1), point (f), of that Regulation used by the institution in performing such reallocation is appropriate;

(ii)

how the institution ensures that the conditions under which reallocation is allowed in accordance with Article 5(5) of Delegated Regulation (EU) 2022/2060 are fulfilled.

For the purposes of point (b)(i), competent authorities shall apply the assessment method referred to in paragraph 5.

For the purposes of point (c), competent authorities shall apply the assessment method referred to in paragraph 7.

5.   For the purposes of paragraph 2, point (b)(i), paragraph 3, point (b)(i) and paragraph 4, point (b)(i), competent authorities shall apply the following assessment method:

(a)

require the institution to provide a sample of risk factors and buckets, with the corresponding verifiable and representative prices, including:

(i)

risk factors and buckets that narrowly met the conditions for being assessed as modellable;

(ii)

risk factors and buckets that changed their modellability status over the previous year;

(iii)

where applicable, risk factors and buckets for which verifiable prices are obtained solely by the institution, solely by third-party vendors, and by both the institution and third-party vendors;

(b)

require the institution to justify for the prices referred to in point (a), of this paragraph which of the conditions referred to in Article 2(1) of Delegated Regulation (EU) 2022/2060 are met, and verify the following:

(i)

where the condition referred to in Article 2(1), point (a), of Delegated Regulation (EU) 2022/2060 is met, how the institution assessed that the transaction was entered at arm’s length;

(ii)

where the condition referred to in Article 2(1), point (b), of Delegated Regulation (EU) 2022/2060 is met, how the institution or the third-party vendor assessed that the transaction was entered at arm’s length;

(iii)

where the condition referred to in Article 2(1), point (c), of Delegated Regulation (EU) 2022/2060 is met, how the institution or the third-party vendor identified both bid and offer quotations;

(c)

for the verifiable prices referred to in point (a), competent authorities shall verify:

(i)

whether the price is not a transaction or bid and offer quotation between two entities of the same group as referred to in Article 2(2), point (a), of Delegated Regulation (EU) 2022/2060, and whether the approach that the institution or the third-party vendor used to conclude that the two entities do not belong to the same group is sound;

(ii)

how the institution or the third-party vendor concluded that the volume of the transaction or committed quote associated with the verifiable price is non-negligible as referred to in Article 2(2), point (b), of Delegated Regulation (EU) 2022/2060, and whether the metrics employed to evaluate the negligibility are sound;

(iii)

where the verifiable price relates to committed quotes as referred to in Article 2(1), point (c), of Delegated Regulation (EU) 2022/2060:

(1)

how the institution or the third-party vendor concluded that the bid-offer spread does not deviate substantially from applicable market conditions as referred to in Article 2(2), point (c), of that Regulation;

(2)

whether the metrics employed to evaluate such potential deviation are sound;

(iv)

whether among those prices some may be considered to meet the conditions referred to in Article 2(2), point (b) or Article 2(2), point (c), of Delegated Regulation (EU) 2022/2060 because they are characterised by an unusually low volume or by an unusually large bid-offer spread;

(v)

whether the institution or the third-party vendor identified a time zone that is used consistently across all data sources to identify the observation date of the verifiable price as required by Article 2(3) of Delegated Regulation (EU) 2022/2060.

For the purposes of this paragraph, competent authorities shall require institutions or third-party vendors as applicable to provide them with all information that they need to perform that assessment comprehensively, in accordance with Article 2(5), point (b), of Delegated Regulation (EU) 2022/2060.

6.   For the purposes of paragraph 2, point (c), competent authorities shall:

(a)

require an institution to provide a sample of risk factors, and the corresponding verifiable and representative prices used to assess the conditions referred to in Article 1 of Delegated Regulation (EU) 2022/2060;

(b)

verify whether, where for the risk factor there are multiple verifiable prices on a given observation date, only one is considered when assessing whether the conditions referred to in Article 1 of Delegated Regulation (EU) 2022/2060 are met;

(c)

for those risk factors in the sample referred to in point (a) that are not systematic credit or equity risk factors capturing market-wide movements as referred to in Article 3(3) of Delegated Regulation (EU) 2022/2060, verify whether:

(i)

the risk factor is a strong driver of the price considered representative

(ii)

whether the method used by the institution to conclude that there is a close relationship between the risk factor and that price is sound;

(iii)

the methodology employed by the institution to extract the value of the risk factor from that price is sound;

(d)

for those risk factors in the sample referred to in point (a) that are systematic credit or equity risk factors capturing market-wide movements as referred to in Article 3(3) of Delegated Regulation (EU) 2022/2060, verify whether the verifiable prices used are representative of attributes of the systematic risk factors.

For the purposes of point (a), the sample of risk factors shall include, among others, risk factors that narrowly met the conditions for being assessed modellable and risk factors that changed their modellability status over the previous year. Where applicable, that sample shall contain risk factors for which verifiable prices are obtained solely by the institution, solely by third-party vendors, and by both the institution and third-party vendors.

7.   For the purposes of paragraph 3, point (c), and paragraph 4, point (c), competent authorities shall:

(a)

require the institution to provide a sample of buckets relating to a set of curves, surfaces or cubes, and the corresponding verifiable and representative prices;

(b)

for the verifiable prices referred to in point (a), verify, for the buckets for which there are multiple verifiable prices on a given observation date, that only one verifiable price per each date is considered when assessing whether the conditions referred to in Article 1 of Delegated Regulation (EU) 2022/2060 are met;

(c)

for the verifiable prices referred to in point (a), assess that the methodology employed by the institution to map a verifiable price to a given bucket is appropriate.

For the purposes of point (a), the sample of buckets shall include, among others, buckets that narrowly met the conditions for being assessed modellable and buckets that changed their modellability status over the previous year. Where applicable, that sample shall include buckets for which verifiable prices are obtained solely by the institution, solely by third-party vendors, and by both the institution and third-party vendors.

For the purposes of point (c), the competent authority shall verify whether:

(a)

the points in a bucket are a strong driver of the price considered representative,

(b)

the method used by the institution to conclude that there is a close relationship between any point in the bucket and that price is sound,

(c)

the methodology employed by the institution to extract the value of that point in the bucket from that price is sound.