Minimum Capital Requirements for Counterparty Credit Risk (CCR) and Credit Valuation Adjustment (CVA)

(Alpha) above. Only those banks in full compliance with the qualitative criteria will be eligible for application of the minimum multiplication factor. The qualitative criteria include: (1) The bank must conduct a regular program of backtesting, i.e. an ex-post comparison of the risk measures generated by the model against realized risk measures, as well as comparing hypothetical changes based on static positions with realized measures. “Risk measures” in this context, refers not only to Effective EPE, the risk measure used to derive regulatory capital, but also to the other risk measures used in the calculation of Effective EPE such as the exposure distribution at a series of future dates, the positive exposure distribution at a series of future dates, the market risk factors used to derive those exposures and the values of the constituent trades of a portfolio. (2) The bank must carry out an initial validation and an on-going periodic review of its IMM model and the risk measures generated by it. The validation and review must be independent of the model developers. (3) The board of directors and senior management should be actively involved in the risk control process and must regard credit and counterparty credit risk control as an essential aspect of the business to which significant resources need to be devoted. In this regard, the daily reports prepared by the independent risk control unit must be reviewed by a level of management with sufficient seniority and authority to enforce both reductions of positions taken by individual traders and reductions in the bank’s overall risk exposure. (4) The bank’s internal risk measurement exposure model must be closely integrated into the day-to-day risk management process of the bank. Its output should accordingly be an integral part of the process of planning, monitoring and controlling the bank’s counterparty credit risk profile. (5) The risk measurement system should be used in conjunction with internal trading and exposure limits. In this regard, exposure limits should be related to the bank’s risk measurement model in a manner that is consistent over time and that is well understood by traders, the credit function and senior management. (6) Banks should have a routine in place for ensuring compliance with a documented set of internal policies, controls and procedures concerning the operation of the risk measurement system. The bank’s risk measurement system must be well documented, for example, through a risk management manual that describes the basic principles of the risk management system and that provides an explanation of the empirical techniques used to measure counterparty credit risk. (7) An independent review of the risk measurement system should be carried out regularly in the bank’s own internal auditing process. This review should include both the activities of the business trading units and of the independent risk control unit. A review of the overall risk management process should take place at regular intervals (ideally no less than once a year) and should specifically address, at a minimum: (a) The adequacy of the documentation of the risk management system and process; (b) The organization of the risk control unit; (c) The integration of counterparty credit risk measures into daily risk management; (d) The approval process for counterparty credit risk models used in the calculation of counterparty credit risk used by front office and back office personnel; (e) The validation of any significant change in the risk measurement process; (f) The scope of counterparty credit risks captured by the risk measurement model; (g) The integrity of the management information system; (h) The accuracy and completeness of position data; (i) The verification of the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources; (j) The accuracy and appropriateness of volatility and correlation assumptions;