Document ID: chunk:federal_register_of_legislation:F2022L01578:front:0:p11
Version: federal_register_of_legislation:F2022L01578
Segment Type: other
Provision Reference: 
Character Range: 28558–31549

or the standardised schedule is adopted:
(a)          If a model approach is adopted, then the model does not need to incorporate the risk associated with the fixed physically settled FX transactions associated with the exchange of principal. All other risks of the cross-currency swap must be considered in the calculation.[15]
(b)          If the standardised schedule is adopted, then the initial margin only needs to be calculated with reference to the relevant row in the interest rates section of the standardised schedule outlined in Attachment A to this Prudential Standard.

Model approach to initial margin for non-centrally cleared derivatives
35.         An APRA covered entity may apply to APRA for approval to use a model for the calculation of initial margin for some or all of its portfolio. An APRA covered entity need not restrict itself to a model approach or the standardised schedule for its whole portfolio. APRA may approve an application made under this paragraph.
36.         The initial margin calculated by the model approach must be sufficiently conservative even during periods of low market volatility. Calculation of the initial margin amount must be consistent with at least a one-tailed 99 per cent confidence interval over a 10-day time horizon,[16] based on historical data that includes a period of significant financial stress and does not exceed an historical period of five years. The historical data must be equally weighted for calibration purposes.
37.         The period of financial stress used for calibration must be identified and applied separately for each asset class.
38.         Transactions that are not subject to the same legally enforceable netting agreement must not be considered in the same initial margin model calculation.
39.         A model may allow for diversification, hedging and risk offsets within an asset class provided these transactions are covered by the same legally enforceable netting agreement. Any such allowance requires approval by APRA as part of an initial margin model approval.
40.         Initial margin calculations by a model for derivatives in distinct asset classes must be performed without regard to derivatives in other asset classes. That is, initial margin amounts calculated for each asset class must not account for diversification benefits across asset classes[17] and must be summed to calculate the initial margin amount for a netting agreement.
41.         A model used for initial margin calculations must be subject to an independent internal governance process that:
(a)          continuously monitors and assesses the value of the model's risk assessments;
(b)          tests the model against realised data and experience;
(c)          validates the applicability of the model to the derivatives for which it is used;
(d)          regularly reviews the model in line with developments in global industry standards for initial margin models; and
(e)          accounts for the complexity