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  • CA-14.1 CA-14.1 Introduction

    • CA-14.1.1

      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-9 through CA-13), and subject to the explicit prior approval of the CBB, conventional bank licensees will be allowed to use risk measures derived from their own internal models.

      January 2015

    • CA-14.1.2

      This Chapter describes the seven sets of conditions that should be met before a conventional bank licensee 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 conventional bank licensee'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 conventional bank licensees which use a mixture of the internal models approach and the standardised approach.
      January 2015

    • CA-14.1.3

      The standardised methodology, described in Chapters CA-9 through CA-13, 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 conventional bank licensee'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. Conventional bank licensees applying models are subject to separate capital charges for the specific risk not captured by their models, which must be calculated by the standardised methodology.

      January 2015

    • CA-14.1.4

      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).

      January 2015

    • CA-14.1.5

      As a number of strict conditions are required to be met before internal models can be recognised by the CBB, including external validation. Conventional bank licensees that are contemplating applying internal models must submit their detailed written proposals for the CBB's approval.

      January 2015

    • CA-14.1.6

      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 conventional bank licensee will automatically be recognised for another bank.

      January 2015