Article 42
Assessment of the calculation of the partial expected shortfall measures
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 the calculation of the partial expected shortfall measures referred to in Article 325bc of that Regulation, competent authorities shall:
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(a) |
verify whether the estimator used by the institution to estimate the expected shortfall risk measures is conceptually sound and reasonably accurate; |
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(b) |
verify whether, when calculating partial expected shortfall measures
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(c) |
verify whether, as part of the internal policies referred to in Article 325bi(1), point (e), of Regulation (EU) No 575/2013, the institution has established objective criteria that are appropriate for choosing the risk factors forming the subset of modellable risk factors referred to in Article 325bc(2), point (a), of that Regulation; |
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(d) |
verify whether risk factors that are not part of the subset of modellable risk factors chosen by the institution in accordance with Article 325bc(2), point (a), of Regulation (EU) No 575/2013 are kept constant when computing
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(e) |
verify whether the techniques used to calculate
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(f) |
verify whether, when calculating the
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(g) |
in relation to the identification of the stress period, verify whether the 12-month rolling windows tested to determine the stress period starts at least from 1 January 2007 as referred to in Article 325bc(2), point (c), of Regulation (EU) No 575/2013 and that the internal policies of the institution specify the frequency of update of the stress period for the calculation of the partial expected shortfall measures, and the other applicable criteria triggering its update. |
For the purposes of point (e), competent authorities shall obtain an overview of the differences in the techniques employed by the institution when calculating the partial expected shortfall measures calibrated on the recent 12-month period and on the stress period, and verify whether those differences do not go beyond what is needed to achieve compliance with the requirements set out in Regulation (EU) No 575/2013.
For the purposes of point (g), competent authorities shall verify, also on the basis of past updates, whether the stress period is updated at least with a quarterly frequency and that the institution has followed any possible criteria specified in the internal policies.
2. For the purposes of paragraph 1, point (a), competent authorities:
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(a) |
shall verify how the institution choses the estimator it uses and the analysis made to support such choice; |
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(b) |
verify whether the expected shortfall estimator corresponds either to the integral of the estimator for the Value-at-Risk numbers referred to in Article 325bf of Regulation (EU) No 575/2013 understood as a function of the tail probability from zero to one minus the relevant confidence level, and dividing by one minus the relevant confidence level, or to a more conservative choice; |
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(c) |
may compare the Value-at-Risk and expected-shortfall estimators used by the institution against the estimators included in Table 1. Table 1
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(d) |
where the calculation of the expected shortfall risk measures is based on Monte Carlo simulations, verify whether the number of simulations ensures convergence towards stable results. |
For the purposes of point (d), competent authorities shall review the tests performed by the institution to set the number of simulations, and the statistical tests ensuring that the randomness properties of the sequences used to generate the simulation are appropriate. Where the competent authority deems those tests insufficient, it may use the assessment method referred to in paragraph 4.
3. For the purposes of paragraph 1, point (b), competent authorities shall:
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(a) |
require the institution to provide the Monte Carlo statistical error at 95 % confidence level, and verify whether the method employed to measure such statistical error is sound; |
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(b) |
require the institution to calculate the expected shortfall risk measures with several different seeds, all other assumptions being equal; |
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(c) |
assess whether the differences in the expected shortfall risk measures with a different seed resulting from the calculation in accordance with point (b) are compatible with the statistical error referred to in point (a). |
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(d) |
where competent authorities deem the results referred to in point (c) incompatible, assess the root cause of such incompatibility, and assess the number of simulations needed to ensure that the statistical error is below 5 %. |
4. For the purposes of paragraph 1, point (c), competent authorities shall:
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(a) |
obtain an overview of the risk factors chosen by the institution and verify:
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(b) |
verify whether, where the position has a maturity of less than 10 days, the effective liquidity horizon of all risk factors is set to 10 days, and that such position does not impact the calculation of
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(c) |
where the position has a maturity of Mat days, with
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(d) |
verify whether, where the position has a maturity of Mat days, with
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(e) |
verify whether, when computing
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For the purposes of point (a)(ii), competent authority shall assess by which margin the institution exceeded the threshold in the previous quarters.
For the purposes of point (a)(iii), competent authorities may, where they deem insufficient the testing of alternative subsets carried out by the institution, require the institution to test alternative subsets and assess whether alternative choices lead to material differences in terms of own funds requirements.