22. Market Risk

Market risk under the internal models approach (IMA): Table MRB: Qualitative disclosures for banks using the IMA Purpose: Provide the scope, main characteristics and key modelling choices of the different models used for the capital requirement computation of market risks using the IMA. Scope of application: The table is mandatory for all banks using the IMA to calculate the market risk capital requirements. To provide meaningful information to users on a bank’s use of internal models, the bank must describe the main characteristics of the models used at the group-wide level (according to the scope of regulatory consolidation) and explain the extent to which they represent all the models used at the group-wide level. The commentary must include the percentage of capital requirements covered by the models described for each of the regulatory models (expected shortfall (ES), default risk capital (DRC) requirement and stressed expected shortfall (SES) for non-modellable risk factors (NMRFs)). Content: Quantitative information. Frequency: Annual. Format: Flexible. (A) Banks must provide a general description of the trading desk structure (as defined in SMAR4 ) and types of instruments included in the IMA trading desks. (B) For ES models, banks must provide the following information: (a) A description of trading desks covered by the ES models. Where applicable, banks must also describe the main trading desks not included in ES regulatory calculations (due to lack of historical data or model constraints) and treated under other measures (such as specific treatments allowed in some jurisdictions). (b) The soundness criteria on which the internal capital adequacy assessment is based (eg forward-looking stress testing) and a description of the methodologies used to achieve a capital adequacy assessment that is consistent with the soundness standards. (c) A general description of the ES model(s). For example, banks may describe whether the model(s) is (are) based on historical simulation, Monte Carlo simulations or other appropriate analytical methods and the observation period for ES based on stressed observations (ES R,S ). (d) The frequency by which model data is updated. (e) A description of the ES calculation based on current and stressed observations. For example, banks should describe the reduced set of risk factors used to calibrate the period of stress the share of the variations in the full ES that is explained by the reduced set of risk factors, and the observation period used to identify the most stressful 12 months. (C) SES (a) A general description of each methodology used to achieve a capital assessment for categories of NMRFs that is consistent with the required soundness standard. (D) Banks using internal models to determine the DRC must provide the following information: (a) A general description of the methodology: Information about the characteristics and scope of the value-at-risk (VaR) and whether different models are used for different exposure classes. For example, banks may describe the range of probability of default (PD) by obligors on the different types of positions, the approaches used to correct market-implied PDs as applicable, the treatment of netting, basis risk between long and short exposures of different obligors, mismatch between a position and its hedge and concentrations that can arise within and across product classes during stressed conditions. (b) The methodology used to achieve a capital assessment that is consistent with both the required soundness standard and SMAR13.18 to SMAR13.39 . (E) Validation of models and modelling processes (a) The approaches used in the validation of the models and modelling processes, describing general approaches used and the types of assumptions and benchmarks on which they rely. Table MR2: Market risk for banks using the IMA Purpose: Provide the components of the capital requirement under the IMA for market risk. Scope of application: The template is mandatory