Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p45
Version: federal_register_of_legislation:F2024L01519
Segment Type: other
Provision Reference: 
Character Range: 124629–127675

sensitivity analyses and scenario analyses, to assess its qualitative and quantitative reasonableness, particularly with regard to the model's treatment of concentrations. Such tests must not be limited to the range of events experienced historically. An ADI must agree its set of validation procedures with APRA.

Use of internal risk measurement models to compute the IRC

 1.          The approach that an ADI uses to measure the IRC is subject to the 'use test'. Specifically, the approach must be consistent with the ADI's internal risk management methodologies for identifying, measuring, and managing trading risks.
 2.          Where an ADI's internal approach for measuring the IRC does not satisfy all requirements of paragraphs 49 to 75 of this Attachment, the ADI must demonstrate that the resulting internal capital charge would deliver a charge at least as high as the charge produced by a model that directly applies the supervisory principles set out in this Attachment.
Comprehensive risk measure

 1.          An ADI that is active in buying and selling products that meet the criteria for inclusion in the correlation trading portfolio (refer to paragraph 15 of Attachment B) may apply to APRA to use an internal model to calculate its specific risk capital requirement for its correlation trading portfolio in an internally developed approach that adequately captures not only incremental default and migration risks, but all price risks ('the comprehensive risk approach'). The value of such products is subject in particular to the following risks which must be adequately captured:
        1.           the cumulative risk arising from multiple defaults, including the ordering of defaults, in tranched products;

        2.           credit spread risk, including the gamma and cross-gamma effects;

        3.           volatility of implied correlations, including the cross effect between spreads and correlations;

        4.           basis risk, including both:

            1.             the basis between the spread of an index and those of its constituent single names; and

            2.          the basis between the implied correlation of an index and that of bespoke portfolios;

        1.           recovery rate volatility, as it relates to the propensity for recovery rates to affect tranche prices; and

        2.            to the extent the comprehensive risk measure incorporates benefits from dynamic hedging, the risk of hedge slippage and the potential costs of rebalancing such hedges.

The approach must meet all of the requirements specified in paragraphs 55, 56, 78 and 79 of this Attachment. Exposures for which the ADI does not meet the due diligence requirements set out in paragraph 11 of Attachment B must be risk-weighted at 1250 per cent (i.e. a 100 per cent risk capital charge is applied) in accordance with that paragraph, and may not be included in the comprehensive risk approach. For the exposures that the ADI does incorporate in its comprehensive risk approach, the