Key requirements
CA-9.6.2
The contents of this paper lay down recommendations for carrying out backtesting procedures in order to determine the accuracy and robustness of bank's internal models for measuring market risk capital requirements. These backtesting procedures typically consist of a periodic comparison of the bank's daily
value-at-risk measures with the subsequent daily profit or loss ('trading outcome'). The procedure involves calculating and identifying the number of times over the prior 250 business days that observed daily trading losses exceed the bank's one-day, 99% confidence levelVaR estimate (so-called 'exceptions').October 07CA-9.6.3
Based on the number of exceptions identified from the backtesting procedures, the banks will be classified into three exception categories for the determination of the 'scaling factor' to be applied to the banks' market risk measure generated by its internal models. The three categories, termed as zones and distinguished by colours into a hierarchy of responses, are listed below:
(a) Green zone(b) Yellow zone(c) Red zoneOctober 07CA-9.6.4
The green zone corresponds to backtesting results that do not themselves suggest a problem with the quality or accuracy of a bank's internal model. The yellow zone encompasses results that do raise questions in this regard, but where such a conclusion is not definitive. The red zone indicates a backtesting result that almost certainly indicates a problem with a bank's risk model.
October 07CA-9.6.5
The corresponding 'scaling factors' applicable to banks falling into respective zones based on their backtesting results are shown in Table 2 of the paper mentioned in Paragraph CA-9.6.1.
October 07
