1.   When assessing the methodology used by an institution to determine the default correlation between different issuers as required by Article 325bn(1), point (c), of Regulation (EU) No 575/2013, competent authorities shall:

(a)	verify whether only listed equity and credit spreads are used as data inputs for determining the correlation between different issuers;

(b)

where the institution uses copulas to model default correlations, assess the internal validation of the copula assumptions performed by the institution and verify whether there is compatibility between the historical data used for the calibration of the correlations and the issuers included in the institution’s portfolio;

(c)

identify whether the correlation among issuers is based on absolute or relative returns, and assess whether the rationale behind the choice of the return type is: (i) sound; (ii) consistent with the choices made by the institutions in relation to other aspects of the internal risk-measurement model;

(d)	assess whether the method that the institution uses to obtain a correlation on the applicable time-horizon from returns calculated on a shorter time horizon is sound;

(e)	assess how the institution determines the calibration period referred to in Article 325bn(1), point (c), of Regulation (EU) No 575/2013.

For the purposes of point (a), competent authorities may, where appropriate, require the institution to provide data used to model the correlation between a sample of issuers selected by competent authorities, and verify whether those data only relate to listed equities and credit spreads.

For the purposes of point (d), competent authorities shall verify whether, where the institution applies the derogation referred to in Article 325bn(3) of Regulation (EU) No 575/2013, a correlation of 60 business days is used only between equity positions for which that derogation is used, and that the correlation is otherwise measured over a one-year time horizon.

For the purposes of point (e), competent authorities shall verify whether the approach that the institution uses to select the period, including its length, is:

(a)

sound;

(b)	documented in the institution’s internal policies;

(c)	reviewed to account for any changes in the stress period referred to in Article 325bc(2) of Regulation (EU) No 575/2013.

2.   For the purposes of paragraph 1, point (b), competent authorities shall, on a sample of issuers for which the institution has positions subject to the own funds requirements for default risk, verify whether the pairwise issuer correlations derived from the correlation modelling are compatible to the pairwise issuer correlations derived from observable market data.