Related provisions for IFPRU 6.3.5

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

In accordance with article 363(3) of the EU CRR (Permission to use internal models), the FCA expects a firm to provide and discuss with us details of any significant planned changes to the VaR model before those changes are implemented. These details must include detailed information about the nature of the change, including an estimate of the impact on VaR numbers and the incremental risk charge.
The use of overlapping intervals of 10-day holding periods for article 365 of the EU CRR (VaR and stressed VaR calculation) introduces an autocorrelation into the data that would not exist should truly independent 10-day periods be used. This may give rise to an under-estimation of the volatility and the VaR at the 99% confidence level. To obtain clarity on the materiality of the bias, a firm should measure the bias arising from the use of overlapping intervals for 10-day VaR
Article 365 of the EU CRR requires a firm that uses an internal model for calculating its own funds requirement to calculate, at least weekly, a stressed VaR (sVaR) of their current portfolio. When the FCA considers a firm's application to use a sVaR internal model it would expect the features in IFPRU 6.3.20 G to IFPRU 6.3.24 G to be present prior to permission being granted, as indicative that the conditions for granting permission have been met.
Article 372 of the EU CRR (Requirement to have an internal IRC model) requires a firm that use an internal model for calculating own funds requirements for specific risk of traded debt instruments to also have an internal incremental default and migration risk (IRC) model in place to capture the default and migration risk of its trading book positions that are incremental to the risks captured by its VaR model. When the FCA considers a firm's application to use an IRC internal
The FCA expects that firms will not be compliant with the calibration requirements relating to use of a long-run default rate, unless it can demonstrate that:(1) the internal data series is the longest relevant and accurate data series, on a EU CRR compliant definition of default, that is available;(2) the determination of long-run default rate includes reference to an appropriate source of downturn data (this may require the use of external data);(3) the relevance of any external
IFPRU 4.11.11GRP
Under article 144(1) of the EU CRR, all models, including those constructed from a theoretical basis without reference to any empirical default data (such as Monte-Carlo cash-flow simulation models), must meet the IRB requirements that are set out in Title II Chapter 3 of Part Three of the EU CRR (IRB approach).
IFPRU 4.11.14GRP
Because assumptions in the model build process are likely to materially impact the resulting PDs, the FCA would expect these choices to be clearly justified in the model documentation and to have been independently reviewed. To be satisfied that a firm is complying with article 176(1)(d) of the EU CRR, the FCA expects a firm to support justification for all assumptions with analysis of the sensitivity of the model outputs to changes in the assumptions.
The FCA expects a firm to estimate PD for a rating system in line with this section where the firm's internal experience of defaults for that rating system was 20 defaults or fewer, and reliable estimates of PD cannot be derived from external sources of default data, including the use of market price-related data. In PD estimation for all exposures covered by the rating system, the FCA expects the firm to:(1) use a statistical technique to derive the distribution of defaults implied
A significant IFPRU firm should consider developing internal specific risk assessment capacity and to increase use of internal models for calculating own funds requirements for specific risk of debt instruments in the trading book, together with internal models to calculate own funds requirements for default and migration risk where its exposures to specific risk are material in absolute terms and where it holds a large number of material positions in debt instruments of different
Article 331(2) of the EU CRR (Interest rate risk in derivative instruments) states conditions that must be met before a firm not using interest rate pre-processing models can fully offset interest-rate risk on derivative instruments. One of the conditions is that the reference rate (for floating-rate positions) or coupon (for fixed-rate positions) should be 'closely matched'. The FCA will normally consider a difference of less than 15 basis points as indicative of the reference
(1) The FCA's starting assumption is that all overshootings should be taken into account for the purpose of the calculation of addends. If a firm believes that an overshooting should not count for that purpose, then it should seek a variation of its VaR model permission under article 363 of the EU CRR (Permission to use internal models) in order to exclude that particular overshooting. The FCA would then decide whether to agree to such a variation. (2) One example of when a firm's
(1) This guidance sets out the FCA's expectations for permitting a firm with the permission to use the Internal Model Method set out in Part Three, Title II, Chapter 6, Section 6 (Internal model method) and the permission to use an internal VaR model for specific risk set out in Part Three, Title IV, Chapter 5 (Use of internal models) associated with traded debt instruments to set to 1 the maturity factor "M" defined in article 162 of the EU CRR.(2) In the context of counterparty
For purposes of repurchase transactions and securities lending or borrowing transactions, the FCA does not consider that there are any core market participants apart from those entities listed in article 227(3) of the EU CRR.