AI Summary of Article 325bh Requirements on risk measurement
This document outlines the requirements for institutions employing internal risk-measurement models to calculate capital requirements for market risk, as specified in Article 325ba. Key stipulations include the necessity for capturing a comprehensive array of risk factors, including interest rates, equity, and commodity exposures. Institutions must model these factors according to their trading activities and ensure consistency and accuracy in their data collection processes.
Additionally, robust frameworks for assessing correlations among risk factors and daily monitoring of positions in Collective Investment Undertakings (CIUs) are mandated. Institutions can leverage third-party data subject to stringent controls and auditor verification, ensuring transparency and accountability in compliance with regulatory expectations.
Article 325bh Requirements on risk measurement
1. Institutions using an internal risk-measurement model that is used to calculate the own funds requirements for market risk as referred to in Article 325ba shall ensure that that model meets all the following requirements:
(a) the internal risk-measurement model shall capture a sufficient number of risk factors, which shall include at least the risk factors referred to in Subsection 1 of Section 3 of Chapter 1a unless the institution demonstrates to the competent authorities that the omission of those risk factors does not have a material impact on the results of the P&L attribution requirement referred to in Article 325bg; an institution shall be able to explain to the competent authorities why it has incorporated a risk factor in its pricing model but not in its internal risk-measurement model;
(b) the internal risk-measurement model shall capture nonlinearities for options and other products as well as correlation risk and basis risk;