Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p40
Version: federal_register_of_legislation:F2024L01519
Segment Type: other
Provision Reference: 
Character Range: 110946–113901

and general market risks are being accurately captured;

        5.           capture name-related basis risk; and

        6.            capture event risk[44].

 1.          An ADI's model must conservatively assess the risk arising from less liquid positions and/or positions with limited price transparency under realistic market scenarios. An ADI may only use proxies where available data are insufficient or do not reflect the true volatility of a position or portfolio, and only if the proxies are appropriately conservative.
Back-testing for specific risk models

 1.          An ADI using an internal model to measure specific risk must conduct back-testing to assess whether specific risk is being accurately captured. To validate its specific risk estimates, the ADI must perform separate back-tests using daily data on sub-portfolios subject to specific risk, being traded debt and equity positions. If an ADI decomposes its trading portfolio into finer categories (e.g. emerging markets and traded corporate debt), the ADI may retain these distinctions for sub-portfolio back-testing purposes. The ADI, however, is required to commit to a sub-portfolio structure; hence, changes to the sub-portfolio structure must be agreed with APRA and be made only where there is a business case for such a change.
 2.          An ADI must have a process to analyse exceptions identified through the back-testing of specific risk to ensure that it can correct its models of specific risk in the event that they become inaccurate.
 3.          An ADI with an unacceptable specific risk model (i.e. where the back-testing results fall within the red zone described in paragraph 86 of this Attachment) must take immediate action to improve the model and to ensure that there is a sufficient capital buffer to absorb the risk that the back-test showed had not been adequately captured.
Incremental risk charge

 1.          An ADI that uses an internal model to calculate regulatory capital for interest rate specific risk must have an approach to capture the regulatory capital default and migration risks in positions subject to a capital charge for specific interest rate risk, with the exception of securitisation positions and nth-to-default credit derivatives that are incremental to the risk captured by the VaR-based calculation, as specified in paragraph 1 of this Attachment.
 2.          An ADI using an internal model to calculate its incremental risk charge must comply with the criteria set out in paragraphs 51 to 76 and 80 of this Attachment. An ADI that does not capture the incremental default risk through an internally developed approach must use the specific risk capital charges under 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