Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p35
Version: federal_register_of_legislation:F2024L01519
Segment Type: other
Provision Reference: 
Character Range: 96955–100194

The results of stress testing exercises must be used in the internal assessment of capital adequacy and reflected in the policies and limits set by management and the Board, or Board committee. The results of stress testing must be routinely communicated to senior management and, periodically, to the ADI's Board, or a Board committee.
 7.          An ADI's risk measurement system must be well documented. An ADI must have a routine for ensuring compliance with a documented set of internal policies, controls and procedures concerning the operation of the risk measurement system.
 8.          An ADI must ensure that an independent review of the risk measurement system and overall risk management process is carried out initially (i.e. at the time when model approval is sought) and then regularly as part of the ADI's internal audit process. This review must be conducted by functionally independent, appropriately trained and competent personnel, and must take place at least once every three years or when a material change is made to the framework. The review must cover the activities of both the business trading units and the independent risk control unit and must, at a minimum, specifically address the:
        1.           scope of market risks captured by the risk measurement model;

        2.           integrity of the management information system;

        3.           accuracy and completeness of position data;

        4.           verification of the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources;

        5.           accuracy and appropriateness of volatility and correlation assumptions, proxy assumptions and (if using the historical simulation approach) calculations of historical rate movements;

        6.            accuracy of valuation and risk sensitivity calculations;

        7.           verification of the model's accuracy through frequent back-testing;

        8.           approval process for risk pricing models and valuation systems used by front- and back‑office personnel;

        9.             validation of any significant change in the risk measurement process;

       10.             adequacy of the documentation of the risk management system and process;

       11.           organisation of the risk control unit;

       12.             integration of market risk measures into daily risk management; and

       13.         process used to produce the calculation of market risk capital.

Specification of market risk factors
 1.          An ADI must specify, in its risk management system, an appropriate set of market risk factors (market rates and prices that affect the value of the ADI's market‑related positions) that are sufficient to capture the risks inherent in the ADI's portfolio of on-balance sheet and off-balance sheet trading positions.
 2.          The VaR model must capture nonlinearities beyond those inherent in options and other relevant products (e.g. mortgage-backed securities, tranched exposures or nth loss positions), as well as correlation risk and basis risk (e.g. between credit default swaps and bonds).
 3.          Where a risk factor is