Document ID: chunk:federal_register_of_legislation:F2024L01181:body:0:p15
Version: federal_register_of_legislation:F2024L01181
Segment Type: other
Provision Reference: 
Character Range: 39243–41954

the results of stress-testing exercises and these results must be communicated to relevant senior management and the ADI's Board, or Board committee, on a regular basis.

Validation

     1.          An ADI must have a robust and documented system in place to validate the accuracy and consistency of its internal model. The ADI must demonstrate to APRA that its internal validation process enables it to assess the performance of its internal model in a meaningful and consistent manner. As part of the validation of its internal model, the ADI must regularly compare actual loss experience against its estimates for those losses to ensure their reasonableness.
     2.          An ADI must have in place a robust process for validating changes to its internal model (including information that flows into that model). This would include a systematic process for reviewing the appropriateness of modelling assumptions and for making changes to those assumptions.
    [1]  An option provides the holder with the right but not the obligation to buy, sell, or in some manner alter the cash flow of an instrument or financial contract.
    [2] In the case of options embedded in customer products, losses from optionality risk will arise from customers exercising choices that cause the actual product repricing dates to deviate from those specified by the repricing assumptions.
    [3]  The repricing date of an ADI's asset, liability or other banking book item is the date on which the principal of that item is repaid (in whole or part) to, or by the ADI or on which the interest rate on that principal is reset, if earlier. The repricing profile of an asset, liability or other banking book item, or portfolio of items, is the set of all repricing dates and amounts repricing on those dates.
    [4]  For most purposes under this Prudential Standard, repricing risk and yield curve risk (refer to paragraphs 7(i) and 7(j)) are grouped together and, except where specifically required, need not be disaggregated for measurement purposes.
    [5]  The total book value of a banking book item less the total economic value of that item is the item's embedded loss (if positive) or embedded gain (if negative).
    [6]  In most cases, the independent reviews could be facilitated by an ADI's internal audit function but may require the engagement of independent parties outside of this function.
    [7] EV0 is a constant while EV1 is a random variable that is a function of the interest rates at the end of the holding period.
    [8]  Repricing or principal repayments of assets must be interpreted as positive cash flows and repricing or principal repayments of liabilities interpreted as negative cash flows.