Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p43
Version: federal_register_of_legislation:F2024L01519
Segment Type: other
Provision Reference: 
Character Range: 119005–122088

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, under stressed market conditions.
Correlations and diversification

Correlations between defaults and migrations

 1.          An ADI's IRC model must include the impact of clustering of default and migration events that may arise as a result of correlations between default and migration events among obligors.
Correlations between default or migration risks and other market factors

 1.          An ADI may not include the impact of diversification between default or migration events and other market variables in the computation of capital for incremental risk. Accordingly, the capital charge for incremental default and migration losses is added to the VaR-based capital charge for market risk.
Concentration

 1.          An ADI's IRC model must appropriately reflect issuer and market concentrations. Thus, other things being equal, a concentrated portfolio should attract a higher capital charge than a more granular portfolio (refer to paragraph 64). Concentrations that can arise within and across product classes under stressed conditions must also be reflected.
Risk mitigation and diversification effects

 1.          Within an ADI's IRC model, exposure amounts may be netted only when long and short positions refer to the same financial instrument. Otherwise, exposure amounts must be captured on a gross (i.e. non-netted) basis. Thus, hedging or diversification effects associated with long and short positions involving different instruments or different securities of the same obligor ('intra-obligor hedges'), as well as long and short positions in different issuers ('inter-obligor hedges'), may not be recognised through netting of exposure amounts. Rather, such effects may only be recognised by capturing and modelling separately the gross long and short positions in the different instruments or securities.
 2.          An ADI's IRC model must include the impact of significant basis risks by product, seniority in the capital structure, internal or external rating, maturity, vintage for offsetting positions as well as differences between offsetting instruments, such as different payout triggers and procedures.
 3.          If an instrument has a maturity shorter than the liquidity horizon or if a maturity longer than the liquidity horizon is not contractually assured, an ADI's IRC model must, where material, include the impact of potential risks that could occur during the interval between the maturity of the instrument and the liquidity horizon.
 4.          For trading book risk positions that are typically hedged via dynamic hedging strategies, a rebalancing of the hedge within the liquidity horizon of the hedged position may also be recognised. Such recognition is only admissible if the ADI (i) chooses to model rebalancing of the hedge consistently over the relevant set of