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  • CA-9.1 CA-9.1 Introduction

    • CA-9.1.1

      As stated in chapter CA-1, as an alternative to the standardised approach to the measurement of market risks (which is described in chapters CA-4 through CA-8), and subject to the explicit prior approval of the Agency, banks will be allowed to use risk measures derived from their own internal models.

    • CA-9.1.2

      This chapter describes the seven sets of conditions that should be met before a bank is allowed to use the internal models approach, namely:

      (a) general criteria regarding the adequacy of the risk management system;
      (b) qualitative standards for internal oversight of the use of models, notably by senior management;
      (c) guidelines for specifying an appropriate set of market risk factors (i.e., the market rates and prices that affect the value of a bank's positions);
      (d) quantitative standards setting out the use of common minimum statistical parameters for measuring risk;
      (e) guidelines for stress testing;
      (f) validation procedures for external oversight of the use of models; and
      (g) rules for banks which use a mixture of the internal models approach and the standardised approach.

    • CA-9.1.3

      The standardised methodology, described in chapters CA-4 through CA-8, uses a "building-block" approach in which the specific risk and the general market risk arising from debt and equity positions are calculated separately. The focus of most internal models is a bank's general market risk exposure, typically leaving specific risk (i.e., exposures to specific issuers of debt securities and equities) to be measured largely through separate credit risk measurement systems. Banks using models are subject to separate capital charges for the specific risk not captured by their models, which shall be calculated by the standardised methodology. The capital charge for banks which are modelling specific risk is set out in section CA-9.10.

    • CA-9.1.4

      While the models recognition criteria described in this chapter are primarily intended for comprehensive Value-at-Risk (VaR) models, nevertheless, the same set of criteria will be applied, to the extent that it is appropriate, to other pre-processing or valuation models the output of which is fed into the standardised measurement system, e.g., interest rate sensitivity models (from which the residual positions are fed into the duration ladders) and option pricing models (for the calculation of the delta, gamma and vega sensitivities).

    • CA-9.1.5

      As a number of strict conditions are required to be met before internal models can be recognised by the Agency, including external validation, banks which are contemplating using internal models should submit their detailed written proposals for the Agency's approval, immediately upon receipt of these regulations.

    • CA-9.1.6

      As the model approval process will encompass a review of both the model and its operating environment, it is not the case that a commercially produced model which is recognised for one bank will automatically be recognised for another bank.