Document ID: chunk:federal_register_of_legislation:F2024L01182:body:0:p18
Version: federal_register_of_legislation:F2024L01182
Segment Type: other
Provision Reference: 
Character Range: 47091–49015

material, the ADI must extend its approved IRRBB model to determine a capital charge for those losses, which is the optionality capital charge. That capital charge must meet a soundness standard whereby it is no less than the 97.5 per cent expected shortfall from all such sources over a one-year period. An ADI must also assess new products and variations of existing products as to whether they introduce material additional optionality risk.
 2.          For each independent review conducted in accordance with paragraph 61 of this Prudential Standard, an ADI must assess the materiality of its exposure to sources of optionality risk that are not covered by its approved IRRBB model.
[1]  The IRRBB profile includes the profile of spread risk.
[2]  The IRRBB profile includes the profile of spread risk.
[3]  In most cases, the independent reviews could be facilitated by an ADI's internal audit function, but it may require the engagement of independent parties outside of this function.
[4]  In this context "securities" do not include derivatives.
[5]  All banking book derivatives are to be designated as market related items. However, if an ADI reasonably considers a banking book item is in an effective hedge relationship with a non-market-related item, it may designate a banking book item as a non-market-related item.
[6]  The 97.5 per cent expected shortfall is the expected loss conditional on the loss being in the worst 2.5 per cent of potential losses.
[7]  An economic adjustment on early repayment (prepayment) of principal restores the ADI's position to what it would have been if the principal prepaid had remained unpaid until contractually scheduled. A behavioural repricing profile is intended to reflect the interest-rate sensitivity of the item, given expected payment behaviour. Hence prepayments that are economically adjusted are effectively ignored by treating them as if they did not occur.