Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p41
Version: federal_register_of_legislation:F2024L01519
Segment Type: other
Provision Reference: 
Character Range: 113654–116538

the standard method (refer to Attachments B and D).
 3.          The IRC encompasses all positions subject to a capital charge for specific interest rate risk according to the internal models approach to specific market risk but not subject to the treatment outlined in paragraphs 11 to 19 of Attachment B, regardless of their perceived liquidity.
 4.          With APRA approval, an ADI can choose consistently to include all listed equity, and derivatives positions based on listed equity, of a desk in its incremental risk model when such inclusion is consistent with how the ADI internally measures and manages this risk at the trading desk level. If equity securities are included in the computation of incremental risk, default is deemed to occur if the related debt defaults (as defined in paragraph 72 of Attachment D to APS 113).
 5.          An ADI is not permitted to incorporate into its IRC model any securitisation or re-securitisation positions, even when these positions are viewed as hedging underlying credit instruments held in the trading book.
 6.          For IRC-covered positions, the IRC captures:
        1.           Default risk. This means the potential for direct loss due to an obligor's default as well as the potential for indirect losses that may arise from a default event;

        2.           Credit migration risk. This means the potential for direct loss due to an internal/external rating downgrade or upgrade as well as the potential for indirect losses that may arise from a credit migration event.

IRC soundness standard comparable to IRB

 1.          For all IRC-covered positions, an ADI's IRC model must measure losses due to default and migration at the 99.9 per cent confidence interval over a capital horizon of one year, taking into account the liquidity horizons applicable to individual trading positions or sets of positions. Losses caused by broader market-wide events affecting multiple issues/issuers are encompassed by this definition.
 2.          For each IRC-covered position an ADI's IRC model must also capture the impact of rebalancing positions at the end of their liquidity horizons so as to achieve a constant level of risk over a one-year capital horizon. The model may incorporate correlation effects among the modelled risk factors, subject to validation standards set forth in APS 113. The trading portfolio's IRC equals the IRC model's estimate of losses at the 99.9 per cent confidence level.
 Constant level of risk over one-year capital horizon

 1.          An ADI's IRC model must be based on the assumption of a constant level of risk over the one-year capital horizon.
 2.          This constant level of risk assumption implies that an ADI rebalances, or rolls over, its trading positions over the one-year capital horizon in a manner that maintains the initial risk level, as indicated by a metric