Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p34
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
Provision Reference: 
Character Range: 92415–95539

definition of what constitutes a rating override;
        5.           parties that have the authority to approve overrides;
        6.            frequency of rating reviews; and
        7.           management oversight of the rating process.
 2.          An ADI must document the rationale for its choice of internal rating criteria and must be able to provide analysis demonstrating that its rating criteria and procedures are likely to result in ratings that meaningfully differentiate risk. These rating criteria and procedures must be periodically reviewed to determine whether they remain fully applicable to the current portfolio and to external conditions.
 3.          An ADI must document the history of major changes in its credit risk rating process and such documentation must support identification of changes made to the rating process.
 4.          The organisation of rating assignment, including the internal control structure, must be documented.
 5.          An ADI must document the specific definitions of default and loss that are used internally and ensure consistency with the reference definitions set out in this Attachment.
 6.          Where an ADI employs statistical models in its rating process, it must document its methodologies. This documentation must include:
        1.           a detailed outline of the theory, assumptions or mathematical and empirical basis of the assignment of estimates to grades, individual borrowers, exposures or pools, and the data sources used to estimate the model;
        2.           details of the statistical process (including out-of-time and out-of-sample performance tests) for validating the model; and
        3.           any circumstances under which the model does not work effectively.
 7.          Where an ADI uses a third-party vendor model, the ADI must still comply with all of the requirements detailed in this Attachment, irrespective of any claims of proprietary technology or information by the third-party vendor.

Rating system operations

Rating coverage
 1.          For corporate, sovereign and financial institution exposures, each borrower and eligible guarantor or credit protection provider must be assigned a borrower grade and each exposure must be associated with a facility grade as part of the loan approval process. Similarly, for retail exposures, each exposure must be assigned to a pool as part of the loan approval process.
 2.          Each separate legal entity to which an ADI is exposed must be separately rated. The ADI must have documented policies regarding the treatment of individual entities in a connected group, including the circumstances under which the same rating may or may not be assigned to some or all related entities. Those policies must include a process to identify, monitor and control specific wrong-way risk for each legal entity to which the ADI is exposed.[11] An ADI must treat transactions in which it has identified specific wrong way risk differently when calculating EAD.

Integrity of the rating process

Requirements for corporate, sovereign and financial institution exposures