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  • CA-14.6 CA-14.6 Back-Testing

    • CA-14.6.1

      The contents of this Section outline the key requirements as set out in Appendix 15. The appendix presents in detail the approach to be followed for back-testing by the conventional bank licensees.

      January 2015

    • Key Requirements

      • CA-14.6.2

        The contents of this Section lay down recommendations for carrying out back-testing procedures in order to determine the accuracy and robustness of conventional bank licensee's internal models for measuring market risk capital requirements. These back-testing procedures typically consist of a periodic comparison of the conventional bank licensee'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 conventional bank licensee's one-day, 99% confidence level VaR estimate (so-called "exceptions").

        January 2015

      • CA-14.6.3

        Based on the number of exceptions identified from the back-testing procedures, the conventional bank licensees will be classified into three exception categories for the determination of the "scaling factor" to be applied to the conventional bank licensees' 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; and
        (c) Red zone.
        January 2015

      • CA-14.6.4

        The green zone corresponds to back-testing results that do not themselves suggest a problem with the quality or accuracy of a conventional bank licensee'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 back-testing result that almost certainly indicates a problem with a conventional bank licensee's risk model.

        January 2015

      • CA-14.6.5

        The corresponding "scaling factors" applicable to conventional bank licensees falling into respective zones based on their back-testing results are shown in Table 2 of Appendix CA-15.

        January 2015