Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p42
Version: federal_register_of_legislation:F2024L01519
Segment Type: other
Provision Reference: 
Character Range: 116282–119260

one-year capital horizon.
 2.          This constant level of risk assumption implies that an ADI rebalances, or rolls over, its trading positions over the one-year capital horizon in a manner that maintains the initial risk level, as indicated by a metric such as VaR or the profile of exposure by credit rating and concentration. This means incorporating the effect of replacing positions whose credit characteristics have improved or deteriorated over the liquidity horizon with positions that have risk characteristics equivalent to those that the original position had at the start of the liquidity horizon. The frequency of the assumed rebalancing must be governed by the liquidity horizon for a given position.
 3.          Rebalancing positions does not imply, as the IRB approach for the banking book does, that the same positions will be maintained throughout the capital horizon. However, an ADI may elect to use a one-year constant position assumption, as long as it does so consistently across all portfolios.
Liquidity horizon

 1.          The liquidity horizon represents the time required to sell the position or to hedge all material risks covered by the IRC model in a stressed market. The liquidity horizon must be measured under conservative assumptions and should be sufficiently long that the act of selling or hedging, in itself, does not materially affect market prices. The determination of the appropriate liquidity horizon for a position or set of positions may take into account an ADI's internal policies relating to, for example, prudent valuation (as per the prudent valuation guidance of Attachment A to APS 111), valuation adjustments[45] and the management of stale positions.
 2.          The liquidity horizon for a position or set of positions has a floor of three months.
 3.          An ADI must use conservative assumptions regarding the liquidity horizon for non-investment-grade positions until further evidence is gained regarding the market's liquidity during systematic and idiosyncratic stress situations. An ADI must also apply conservative liquidity horizon assumptions for products, regardless of rating, where either (i) secondary market liquidity is not deep, particularly during periods of financial market volatility and investor risk aversion; or (ii) the product is from a rapidly growing class that has not been tested in a downturn.
 4.          An ADI can assess liquidity by position or on an aggregated basis ('buckets'). If an aggregated basis is used[46], the aggregation criteria would be defined in a way that meaningfully reflects differences in liquidity.
 5.          The liquidity horizon must be greater for positions that are concentrated, reflecting the longer period needed to liquidate such positions.
 6.          The liquidity horizon for a securitisation warehouse must be longer than three months, and reflect the time to build, sell and securitise the assets, or to hedge the material risk factors,