Related provisions for BIPRU 7.9.4

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To access the FCA Handbook Archive choose a date between 1 January 2001 and 31 December 2004 (From field only).

The purpose of BIPRU 7.9 is to provide guidance on the appropriate regulator's policy for granting CAD 1 model waivers under section 138A of the Act (Modification or waiver of rules). The policy recognises that CAD 1 models may vary across firms but, as a minimum, the appropriate regulator will need to be satisfied:(1) about the quality of the internal controls and risk management relating to the model (see BIPRU 7.9.19G - BIPRU 7.9.23G for further details);(2) about the quality
Waivers permitting the use of models in the calculation of PRR will not be granted if that would be contrary to BIPRU. When granting any ‘waivers’ the FCA will have regard to the CAD.1 Accordingly, the only waivers permitting the use of models in calculating PRR that the appropriate regulator is likely to grant are CAD 1 model waivers and VaR model permissions.

Table: Types of CAD 1 model

This table belongs to BIPRU 7.9.6G

Options risk aggregation models

Interest rate pre-processing models

Brief description and eligible instruments

Analyse and aggregate options risks for:

May be used to calculate duration weighted positions for:

The output and how it is used in the PRR calculation

Depending on the type of model and the requirements in the CAD 1 model waiver granted, the outputs from an options risk aggregation model are used as an input to the market risk capital requirement calculation.

Depending on the type of model and the requirements in the CAD 1 model waiver granted, the individual sensitivity figures produced by this type of CAD 1 model are either input into the calculation of interest rate PRR under the interest rate duration method (see BIPRU 7.2.63R) or are converted into notional position and input into the calculation of interest rate PRR under the interest rate maturity method (see BIPRU 7.2.59R).

Details of the general waiver process are set out in SUP 8 (Waiver and modification of rules). Further details of the waiver process applicable to certain waivers relating to BIPRU (including CAD 1 model waivers) can be found in BIPRU 1.3 (Applications for advanced approaches). Because of the complexity of a CAD 1 model waiver, it is recommended that, as set out in SUP 8.3.4 G and BIPRU 1.3.21 G, a firm contact its usual contact at the appropriate regulator to discuss its proposed
In order to consider a CAD 1 model waiver request, the appropriate regulator may undertake a review to ensure that it is adequate and appropriate for the PRR calculation.
A review by a skilled person may be used before a CAD 1 model waiver is granted to supplement the waiver process or after the waiver has been granted to review the CAD 1 model.
If the appropriate regulator grants a CAD 1 model waiver, the waiver direction will specify the particular rule which has been modified, and set out the requirements subject to which the waiver has been granted. These requirements may include:(1) the details of the calculation of PRR;(2) the CAD 1 model waiver methodology to be employed;(3) the products covered by the model (e.g. option type, maturity, currency); and(4) any notification requirements relating to the CAD 1 model
No changes should be made to a CAD 1 model unless the change is not material. Material changes to a CAD 1 model will require a renewed waiver to be issued. Materiality is measured from the time that the waiver is granted or, if the waiver has been varied in accordance with section 138A of the Act, any later time that may be specified in the waiver for these purposes. If a firm is considering making material changes to its CAD 1 model, then it should notify the appropriate regulator
(1) A firm should have a conceptually sound risk management system which is implemented with integrity and should meet the minimum standards set out in this paragraph.(2) A firm should have a risk control unit that is independent of business trading units and reports directly to senior management. The unit should be responsible for designing and implementing the firm's risk management system. It should produce and analyse daily reports on the risks run by the business and on the
For a firm to obtain a CAD 1 model waiver for its options risk aggregation model, it should have in place an appropriate options valuation model.
(1) A different scenario matrix should be set up for each underlying asset type in accordance with this paragraph.(2) For equities (including single equities, baskets and indices) there should be a separate matrix for each national market or non-decomposed basket or non-decomposed multi-national index.(3) For foreign currency products there should be a separate matrix for each currency pair where appropriate.(4) For commodity products there should be a separate matrix for each
The values that have been obtained for the delta-equivalent positions of instruments included in the scenario matrix should then be treated in the same way as positions in the underlying. Where the delta obtained relates to interest rate position risk, the delta equivalent positions may be fed into the firm's interest rate pre-processing model to the extent that the positions fall within the scope of interest rate pre-processing models as set out in BIPRU 7.9.7G and provided that
In using the scenario matrix approach, none of the steps followed will take specific account of a firm's exposure to rho risk. Where a firm can demonstrate that for interest rate-related options the rho sensitivity is effectively included in the delta sensitivities produced, there is no separate capital requirement relating to rho. For all other options except commodity options, a firm should calculate a rho sensitivity ladder by currency using its CAD 1 model and either feed
To the extent that a firm'sCAD 1 model waiver is for the use of an interest rate pre-processing model the firm should use it for the pre-processing of the instruments set out in BIPRU 7.9.7G, from which the residual positions are fed into the interest rate maturity method or interest rate duration method calculation.
Where BIPRU 7.7 permits a firm to calculate the PRR charge for a position in a CIU using the rules in BIPRU 7 relating to the underlying investment, a firm that has:(1) a CAD 1 model waiver that covers positions in CIUs may use the rules as modified by that waiver; and(2) a VaR model permission that covers positions in CIUs may use its VaR model.
BIPRU 7.10.135RRP
To the extent that a position does not fall within the scope of a firm'sVaR model permission the firm must calculate the PRR under the standard market risk PRR rules1 or, as applicable, those provisions as modified by the firm'sCAD 1waiver.