AI Summary of Article 221 Using the internal models approach for master netting agreements
The internal model approach may be used to calculate the fully adjusted exposure value (E*) for securities financing and other capital‑market transactions (excluding derivatives covered by eligible master netting agreements) only where exposures are risk‑weighted under the IRB Approach and the institution has permission from its competent authority. Use must apply to all counterparties and securities except immaterial portfolios (for which the Supervisory Volatility Adjustments Approach may be used). Competent authorities shall permit the approach only where the institution’s system for managing risks arising from the master netting agreement is conceptually sound and implemented with integrity and where qualitative standards are met, including integration of the model into daily risk management and reporting, an independent risk‑control unit reporting to senior management, documented policies and controls, skilled staff, back‑testing, stress testing, independent internal audit and at least annual review; models must meet Articles 292(8) and (9) and 294.
The model must capture all material price risk factors and may employ empirical correlations if sound. Institutions shall calculate E* using Ei (the exposure value absent credit protection) and Ci (value of securities or cash received) and shall use the previous business day’s model output. Potential change in value must be calculated at least daily at the 99th percentile one‑tailed confidence level over a 5‑day liquidation period (10 days for transactions other than repos or securities lending), based on an effective historical observation period of at least one year (shorter only if justified by a significant upsurge in volatility) with quarterly data updates. Repurchase, securities/commodities lending and margin sets meeting Article 285 criteria shall align the minimum holding period with the applicable margin period of risk. EBA shall draft RTS on the definition of immaterial portfolio and criteria for model soundness and implementation by 31 December 2015 for Commission adoption.
Article 221 Using the internal models approach for master netting agreements
1.For the purpose of calculating risk-weighted exposure amounts and expected loss amounts for securities financing transactions or other capital market-driven transactions other than derivative transactions covered by an eligible master netting agreement that meets the requirements set out in Chapter 6, Section 7, an institution may calculate the fully adjusted exposure value (E*) of the agreement using the internal model approach, provided that the institution meets the conditions set out in paragraph 2.
2.An institution may use the internal model approach where all of the following conditions are met:
(a) the institution uses that approach only for exposures for which the risk-weighted exposures amounts are calculated under the IRB Approach set out in Chapter 3;
(b) the institution is granted the permission to use that approach by its competent authority.