(1)

Whether institutions obtain permission from their competent authorities to use the alternative internal model approach laid down in Title IV, Chapter 1b, of Regulation (EU) No 575/2013 depends on whether those institutions comply with the requirements set out in Part Three, Title IV, Chapter 1b of that Regulation, including requirements as regards methods, processes, controls, data collection, organisation of the risk control unit and internal validation function, and IT systems. Institutions are allowed to modify the methods, processes, controls, data collection, organisation of the risk control unit and internal validation function, and IT systems, as approved by their competent authorities, provided that such modifications have been notified to their competent authority or have been approved by their competent authority, depending on the nature of the modifications, in accordance with Article 325az(7) of Regulation (EU) No 575/2013. That also applies to modifications triggered by the application of regulatory requirements, where those modifications encompass the use of methods or approaches that are not part of the existing competent authority’s permission.

(2)

The choice of the subset of the modellable risk factors referred to in Article 325bc(2) of Regulation (EU) No 575/2013 is a part of the institution’s approved and documented set of internal policies and procedures. Where the institution modifies its policies and procedures related to the choice of modellable risk factors, that modification should be approved by or notified to the competent authority, as it constitutes a change to the choice of the subset of the modellable risk factors. By contrast, changes to the composition of the list of risk factors included in the subset of modellable risk factors referred to in Article 325bc(2) of that Regulation, which take place within the approved policies and procedures, including in the case of a reduction in data availability, should not be considered as changes to the institution’s choice of the subset of modellable risk factors.

(3)

The permission from the competent authority relates to the methods, processes, controls, data collection and IT systems of the alternative internal model approach. Therefore institutions should not be required to notify their competent authority of ongoing alignments of the alternative internal models they use to the data sources used, of the correction of errors, or of minor adjustments that are necessary for the day-to-day maintenance of the models, that occur within the already approved methods, processes, controls, data collection and IT systems and are recorded accordingly.

(4)

Extensions and changes to the use of alternative internal models, or changes to the subset of the modellable risk factors, should be classified as ‘material’, and thus as requiring prior permission by competent authorities, or ‘non-material’ and thus requiring notification to competent authorities, on the basis of both qualitative and quantitative criteria. Some extensions and changes, including organisational changes, internal process changes, or risk management process changes, may not have a direct quantitative impact on the alternative internal models, but may influence the accuracy, soundness and use of the that alternative internal model. In those cases, given the difficulty of determining a quantitative impact, institutions and competent authorities should use only the qualitative criteria for the assessment of the materiality of those changes.

(5)

To ensure a prudent approach and enable competent authorities to review extensions of, and changes to, the use of alternative internal models, or changes to the subset of the modellable risk factors, before they are implemented, institutions should notify their competent authority of such non-material extensions and changes at least four weeks before implementation. However, that notice period should not apply to cases where institutions fail to meet the condition set out in Article 325bc(2), point (a), of Regulation (EU) No 575/2013. In such cases, institutions should have the possibility to take immediate action to restore compliance with the regulatory requirements, but should also duly and promptly notify competent authorities before implementing this change.

(6)

Competent authorities can only review extensions of, and changes to, the use of alternative internal models, and changes to the subset of the modellable risk factors, where they receive from the institutions concerned all information necessary for such a review. It is therefore necessary to specify the content of the information that institutions are to provide for that purpose.

(7)

The quantitative metrics and related thresholds used to identify material changes and extensions should be designed in a way that they take into account the impact on some relevant risk numbers and on the combined market risk capital requirements. To facilitate the computation of those quantitative metrics and ensure the most informative results, only the most recent risk numbers should be considered.

(8)

To take into account the effect of possible large changes to trading book positions, which typically happen on a daily basis, institutions should calculate the required risk numbers on the basis of an observation period of 15 consecutive business days, rather than on the basis of a single point in time. However, to include a certain degree of proportionality in the assessment of whether changes to the use of alternative internal models and changes to the subset of the modellable risk factors are material, that observation period of 15 consecutive business days should be subject to exemptions where the assessed quantitative impact is very minor on the first testing date and where there is a presumption that the quantitative thresholds will not be breached during that 15 consecutive business days period.

(9)

Competent authorities should not require institutions to calculate the required risk numbers when they grant institutions the initial permission to calculate their own funds requirements by using alternative internal models. However, to justify and substantiate the materiality assessment of those changes and extensions, institutions should calculate the required risk numbers when they extend or change their alternative internal models and change the subset of the modellable risk factors.

(10)

To ensure that competent authorities take, at any time, appropriate supervisory measures with regard to extensions and changes to the alternative internal models and changes to the institution’s choice of the subset of the modellable risk factors, they should consider a group of related extensions or changes to an alternative internal model notified separately by an institution as a single extension or change. In such a case, competent authorities should assess whether extensions and changes to the use of the alternative internal models are material at the level of that single extension or change.

(11)

This Regulation is based on the draft regulatory technical standards submitted to the Commission by the European Banking Authority.

(12)

The European Banking Authority has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the advice of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council (2),