Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p47
Version: federal_register_of_legislation:F2024L01519
Segment Type: other
Provision Reference: 
Character Range: 130149–133097

the average of the comprehensive risk measures over 12 weeks; and

        2.           the most recent comprehensive risk measure.

Framework for the use of back-testing
 1.          An ADI's back-testing program must consist of a periodic comparison of its daily VaR measure (based on a one-day holding period) with the realised daily profit or loss ('trading outcome'). The program must include a formal evaluation of instances where trading outcomes are not covered by the risk measures (termed 'exceptions') on at least a quarterly basis, using the most recent twelve months of VaR and profit data. The ADI must document all of the exceptions generated from its ongoing back-testing program, including an explanation for the exceptions. An ADI must have the capacity to perform back-testing analysis both at the level of the whole portfolio and at the level of sub-portfolios or books or that contain material risk.
 2.          An ADI must perform back-tests using both actual trading outcomes and hypothetical trading outcomes. Hypothetical trading outcomes are calculated by applying the day's price movements to the previous day's end-of-day portfolio. When performing back-tests using actual trading outcomes, an ADI must use clean trading outcomes, i.e. actual trading outcomes adjusted to remove the impact of income arising from factors other than market movements alone, such as fees and commissions, brokerage, additions to and releases from reserves which are not directly related to market risk (e.g. administration reserves).
 3.          An ADI must calculate the number of exceptions for use by APRA in developing its supervisory response. For this purpose, the ADI must use either the hypothetical trading outcomes or clean trading outcomes as determined, in writing, by APRA. The plus factor to be added to the multiplication factor will be based on the number of exceptions out of the most recent 250 trading days. These plus factors are outlined in Table 11.
    Table 11: Plus factors

    Zone         Number of exceptions      Plus factor
Green Zone       4 or less                 0.00
Yellow Zone      5                         0.40
    6            0.50
    7            0.65
    8            0.75
    9            0.85
Red Zone         10 or more                1.00

 1.          If the results of an ADI's back-testing fall within zero to four exceptions (the green zone), the ADI is not required to add a plus factor to the multiplication factor.
 2.          If the results of the ADI's back-testing fall within five to nine exceptions (the yellow zone), APRA may, in writing, require the ADI to add a plus factor in accordance with Table 11.
 3.          If an ADI's back-testing results in 10 or more exceptions (the red zone), the ADI must submit to APRA analysis which identifies the causes for each of the exceptions, and must also add a plus factor of one to the multiplication factor, unless otherwise