§ 217.209 Comprehensive risk. ( a ) *General requirement.* ( 1 ) Subject to the prior approval of the Board, a Board-regulated institution may use the method in this section to measure comprehensive risk, that is, all price risk, for one or more portfolios of correlation trading positions.
( 2 ) A Board-regulated institution that measures the price risk of a portfolio of correlation trading positions using internal models must calculate at least weekly a comprehensive risk measure that captures all price risk according to the requirements of this section. The comprehensive risk measure is either: ( i ) The sum of: ( A ) The Board-regulated institution's modeled measure of all price risk determined according to the requirements in paragraph (b) of this section; and
( B ) A surcharge for the Board-regulated institution's modeled correlation trading positions equal to the total specific risk add-on for such positions as calculated under section 210 of this subpart multiplied by 8.0 percent; or
( ii ) With approval of the Board and provided the Board-regulated institution has met the requirements of this section for a period of at least one year and can demonstrate the effectiveness of the model through the results of ongoing model validation efforts including robust benchmarking, the greater of: ( A ) The Board-regulated institution's modeled measure of all price risk determined according to the requirements in paragraph (b) of this section; or
( B ) The total specific risk add-on that would apply to the bank's modeled correlation trading positions as calculated under section 210 of this subpart multiplied by 8.0 percent.
( b ) *Requirements for modeling all price risk.* If a Board-regulated institution uses an internal model to measure the price risk of a portfolio of correlation trading positions: ( 1 ) The internal model must measure comprehensive risk over a one-year time horizon at a one-tail, 99.9 percent confidence level, either under the assumption of a constant level of risk, or under the assumption of constant positions.
( 2 ) The model must capture all material price risk, including but not limited to the following: ( i ) The risks associated with the contractual structure of cash flows of the position, its issuer, and its underlying exposures;
( ii ) Credit spread risk, including nonlinear price risks;
( iii ) The volatility of implied correlations, including nonlinear price risks such as the cross-effect between spreads and correlations;
( iv ) Basis risk;
( v ) Recovery rate volatility as it relates to the propensity for recovery rates to affect tranche prices; and
( vi ) To the extent the comprehensive risk measure incorporates the benefits of dynamic hedging, the static nature of the hedge over the liquidity horizon must be recognized. In such cases, a Board-regulated institution must: ( A ) Choose to model the rebalancing of the hedge consistently over the relevant set of trading positions;
( B ) Demonstrate that the inclusion of rebalancing results in a more appropriate risk measurement;
( C ) Demonstrate that the market for the hedge is sufficiently liquid to permit rebalancing during periods of stress; and
( D ) Capture in the comprehensive risk model any residual risks arising from such hedging strategies;
( 3 ) The Board-regulated institution must use market data that are relevant in representing the risk profile of the Board-regulated institution's correlation trading positions in order to ensure that the Board-regulated institution fully captures the material risks of the correlation trading positions in its comprehensive risk measure in accordance with this section; and
( 4 ) The Board-regulated institution must be able to demonstrate that its model is an appropriate representation of comprehensive risk in light of the historical price variation of its correlation trading positions.
( c ) *Requirements for stress testing.* ( 1 ) A Board-regulated institution must at least weekly apply specific, supervisory stress scenarios to its portfolio of correlation trading positions that capture changes in: ( i ) Default rates;
( ii ) Recovery rates;
( iii ) Credit spreads;
( iv ) Correlations of underlying exposures; and
( v ) Correlations of a correlation trading position and its hedge.
( 2 ) *Other requirements.* ( i ) A Board-regulated institution must retain and make available to the Board the results of the supervisory stress testing, including comparisons with the capital requirements generated by the Board-regulated institution's comprehensive risk model.
( ii ) A Board-regulated institution must report to the Board promptly any instances where the stress tests indicate any material deficiencies in the comprehensive risk model.
( d ) *Calculation of comprehensive risk capital requirement.* The comprehensive risk capital requirement is the greater of: ( 1 ) The average of the comprehensive risk measures over the previous 12 weeks; or
( 2 ) The most recent comprehensive risk measure.