CA-1.6.1

Banks which start to use internal models for one or more risk categories should, over a reasonable period of time, extend the models to all of their operations, subject to the exceptions mentioned in paragraph CA-1.6.4 below, and to move towards a comprehensive model (i.e., one which captures all market risk categories).

CA-1.6.2

On a transitional basis, banks will be allowed to use a combination of the standardised approach and the internal models approach to measure their market risks provided they should cover a complete risk category (e.g., interest rate risk or foreign exchange risk), i.e., a combination of the two methods will not be allowed within the same risk category¹. However, for banks that are, at present, still implementing or further improving their internal models, they will be allowed some flexibility, even within risk categories, in including all their operations on a worldwide basis. This flexibility shall be subject to the specific prior written approval of the Agency, and such approval will be given on a case-by-case basis and reviewed by the Agency from time to time.

¹ This does not, however, apply to pre-processing techniques which are used to simplify the calculation and whose results become subject to the standardised methodology.

CA-1.6.3

The Agency will closely monitor banks to ensure that there will be no "cherry-picking" between the standardised approach and the models approach within a risk category. Banks which adopt a model will not be permitted, save in exceptional circumstances, to revert to the standardised approach.

CA-1.6.4

The Agency recognises that even a bank which uses a comprehensive model may still incur risks in positions which are not captured by their internal models², for example, in remote locations, in minor currencies or in negligible business areas³. Any such risks that are not included in a model should be separately measured and reported using the standardised approach described in chapters CA-4 to CA-8.

² Banks may also incur interest rate and equity risks outside of their trading activities. However, there are no explicit capital charges for the price risk in such positions.

³ For example, if a bank is hardly engaged in commodities it will not necessarily be expected to model its commodities risk.

CA-1.6.5

Transitioning banks are required to move towards a comprehensive internal model approach.

CA-1.6.6

The Agency will closely monitor the risk management practices of banks moving towards the models approach, to ensure that they will be in a position to meet all the standards once they are applying a fully-fledged model for any risk category.