Article 38
Assessment of compliance with the profit and loss attribution requirements
1. 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 requirements on the technical elements to be included in the hypothetical changes in the trading desk portfolio’s value for the profit and loss attribution requirements referred to in Article 325bg of that Regulation, competent authorities shall verify whether, the time series of hypothetical changes in the trading desk portfolio’s value as used for the purpose of the back-testing requirements coincides with the time series of hypothetical changes in the trading desk portfolio’s value as used for the profit and loss attribution requirement, as required by Article 13 of Delegated Regulation (EU) 2022/2059.
2. When assessing an institution’s compliance with Article 325bi(1), point (e), of Regulation (EU) No 575/2013 in relation to requirements on the technical elements to be included in the theoretical changes in the portfolio’s value for the purpose of the profit and loss attribution requirements referred to in Article 325bg of that Regulation, competent authorities shall verify that the internal policies referred to in that point (e):
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(a) |
ensure that the business days used in the calculation of the theoretical changes in the portfolio’s value are the same as those used in both the calculation of the expected shortfall risk measure referred to in Article 325bb of Regulation (EU) No 575/2013 and the stress scenario risk measure referred to in Article 325bk of that Regulation; |
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(b) |
specify whether the institution aligns the snapshot time for which it calculates the theoretical changes in the trading desk portfolio’s value with the snapshot time for which it calculates the hypothetical changes in the trading desk portfolio’s value, as allowed by Article 6(2) of Delegated Regulation (EU) 2022/2059; |
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(c) |
specify whether there are risk factors for which the institution, uses input data or values used in the calculation of the hypothetical changes to calculate the theoretical changes, or whether there are no risk factors for which such treatment is used, as allowed by Article 14 of Delegated Regulation (EU) 2022/2059; |
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(d) |
cover all aspects referred to in Article 15(2) and (3) of Delegated Regulation (EU) 2022/2059 in relation to risk factors for which the institution uses input data or values used in calculating the hypothetical changes to calculate the theoretical changes, as allowed by Article 14 of that Delegated Regulation; |
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(e) |
specify the rectification processes to follow in the calculation of the theoretical changes in case of contingencies, exceptions, errors, and pricing failures; |
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(f) |
cover all aspects referred to in Article 15(1) of Delegated Regulation (EU) 2022/2059. |
For the purposes of point (c), where the treatment concerned is used for some, but not all, risk factors, competent authorities shall verify whether the internal policies specify objective criteria to select risk factors for which that treatment is applied.
For the purposes of point (d), competent authorities shall verify whether the institution uses quantitative criteria to assess the effect of the alignment referred to in Article 15(2), point (b), of Delegated Regulation (EU) 2022/2059.
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 profit and loss attribution requirements referred to in Article 325bg of that Regulation, competent authorities shall:
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(a) |
in relation to the calculation of the theoretical changes in the portfolio’s value:
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(b) |
in relation to the profit and loss attribution results:
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For the purposes of point (a)(ii), competent authorities shall evaluate whether the institution’s IT systems ensure the calculation of those changes on the same positions. To that effect, competent authorities may require the institution to provide the inventory of positions captured in the actual and theoretical changes, and compare those positions.
For the purposes of point (a)(iv), competent authorities shall verify whether the institutions’ systems ensure that the pricing functions used for calculating the theoretical changes are those used in the calculation of the expected shortfall risk measure referred to in Article 325bb of Regulation (EU) No 575/2013 and the stress scenario risk measure referred to in Article 325bk of that Regulation.
For the purposes of point (a)(v), competent authorities shall verify whether the institutions’ systems ensure that the value of other risk factors is kept constant when calculating the theoretical changes. Competent authorities may complement their assessment by using the assessment method referred to in paragraph 5.
For the purposes of point (a)(vi), competent authorities shall review the history of contingencies, exceptions, errors, and pricing failures in the calculations of the changes in the portfolios’ values, assess whether and how they have been remediated and, where relevant, assess the impact of those errors on the back-testing and profit-and-loss attribution test results.
4. For the purposes of paragraph 3, point (a)(iii), competent authorities shall use one or more of the following assessment methods:
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(a) |
to require the institution to provide the inventory, at a given day and at the subsequent day as referred to in Article 12(1) of Delegated Regulation (EU) 2022/2059, of the positions in the portfolio on which it calculates theoretical changes, and assess whether those inventories coincide; |
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(b) |
to verify that the risk theoretical changes are typically closer to the hypothetical than to the actual changes and, by using the reports referred to in Article 36, paragraph 1, points (b) and (c), identify those days in the time series where the actual and hypothetical changes differ the most due to a change in the trading desk’s portfolio composition, and verify that the theoretical changes in those days are not affected by such a change in the portfolio’s composition. |
5. For the purposes of paragraph 3, point (a)(v), competent authorities may:
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(a) |
when the institution calculates the excepted shortfall risk measure referred to in Article 325bb of Regulation (EU) No 575/2013 or the stress scenario risk measure referred to in Article 325bk of that Regulation, require the institution to provide a sample of financial instruments in its portfolio, the prices of which depend both on risk factors that are shocked and risk factors that are not shocked; |
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(b) |
when the institution calculates the theoretical changes related to the financial instruments referred to in point (a), verify whether, for a given reference date, the value of risk factors that are not shocked is kept constant. |
6. For the purposes of paragraph 3, point (b)(i), competent authorities shall, for the most material trading desks or all trading desks:
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(a) |
require the institution to provide the time series of hypothetical and theoretical changes in the trading desk’s portfolio’s value used for calculating the Spearman correlation coefficient and Kolmogorov-Smirnov test metric as referred to in Article 6 of Delegated Regulation (EU) 2022/2059; |
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(b) |
calculate the Spearman correlation coefficient in accordance with Article 7 of Delegated Regulation (EU) 2022/2059 and the Kolmogorov-Smirnov test metric in accordance with Article 8 of that Delegated Regulation; |
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(c) |
verify whether the Spearman correlation coefficient and Kolmogorov-Smirnov test metric resulting from point (b) coincide with those obtained by the institution; |
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(d) |
verify whether the classification of the trading desks to the zones referred to in Article 9 of Delegated Regulation (EU) 2022/2059 is correct. |
7. For the purposes of paragraph 3, point (b)(ii), competent authorities shall:
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(a) |
identify the most material risk factors for which the institution applied the treatment referred to in Article 14(1) of Delegated Regulation (EU) 2022/2059; |
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(b) |
verify whether the same risk factor is used in the calculation of the hypothetical and theoretical changes; |
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(c) |
verify whether the value of the risk factors referred to in point (a) differs only because of the different sources or extraction times of their input data. |
The intensity at which the competent authority performs the assessment shall be proportionate to the effect that the alignment of risk factors’ input data has on the theoretical changes and on the profit and loss attribution test results as referred to in Article 15(2) of Delegated Regulation (EU) 2022/2059.
8. For the purposes of paragraph 3, point (b)(iii), competent authorities shall:
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(a) |
identify the most material risk factors for which the institution applied the treatment referred to in Article 14(2) of Delegated Regulation (EU) 2022/2059; |
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(b) |
for the risk factors referred to in point (a), acquire a comprehensive understanding of the techniques of the valuation systems that are used to derive the value of the risk factor from the input data, as referred to in Article 14(2), point (b), of Delegated Regulation (EU) 2022/2059; |
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(c) |
on the basis of point (b) of this paragraph, assess whether the conditions referred to in Article 14(2) Delegated Regulation (EU) 2022/2059 are met, taking into account any rationale provided in accordance with Article 15(3) of that Regulation. |
The intensity at which the competent authority performs the assessment shall be proportionate to the effect that the alignment of risk factors’ values has on the theoretical changes and on the profit and loss attribution test results as referred to in Articles 15(2) of Delegated Regulation (EU) 2022/2059.