| 10.1 | The use of internal models for the purposes of determining market risk capital requirements is conditional upon the explicit approval from SAMA
| | |
| 10.2 | SAMA will only approve a bank’s use of internal models to determine market risk capital requirements if, at a minimum:
| | |
| | (1) | SAMA is satisfied that the bank’s risk management system is conceptually sound and is implemented with integrity;
| |
| | (2) | the bank has, in SAMA view, a sufficient number of staff skilled in the use of sophisticated models not only in the trading area but also in the risk control, audit and, if necessary, back office areas;
| |
| | (3) | the bank’s trading desk risk management model has, in SAMA judgement, a proven track record of reasonable accuracy in measuring risk;
| |
| | (4) | the bank regularly conducts stress tests along the lines set out in [10.19] to [10.23]; and
| |
| | (5) | the positions included in the bank’s internal trading desk risk management models for determining minimum market risk capital requirements are held in trading desks that have been approved for the use of those models and that have passed the required tests described in [10.17].
| |
| | (6) | A bank must also be able to participate in testing exercises to provide any additional information required to satisfy SAMA of the adequacy of the internal model (both prior to model approval and subsequently, if SAMA wishes to review the internal model).
| |
| 10.3 | SAMA may insist on a period of initial monitoring and live testing of a bank’s internal trading desk risk management model before it is used for the purposes of determining the bank’s market risk capital requirements.
| | |
| 10.4 | The scope of trading portfolios that are eligible to use internal models to determine market risk capital requirements is determined based on a three-prong approach as follows:
| | |
| | (1) | The bank must satisfy SAMA that both the bank’s organisational infrastructure (including the definition and structure of trading desks) and its bank-wide internal risk management model meet qualitative evaluation criteria, as set out in [10.5] to [10.16].
| |
| | (2) | The bank must nominate individual trading desks, as defined in [4.1] to [4.6], for which the bank seeks model approval in order to use the internal models approach (IMA).
| |
| | | (a) | The bank must nominate trading desks that it intends to be in-scope for model approval and trading desks that are out-of-scope for the use of the IMA. The bank must specify in writing the basis for these nominations.
|
| | | (b) | The bank must not nominate trading desks to be out-of-scope for model approval due to capital requirements for a particular trading desk determined using the standardised approach being lower than those determined using the IMA.
|
| | | (c) | The bank must use the standardised approach to determine the market risk capital requirements for trading desks that are out-of-scope for model approval. The positions in these out-of-scope trading desks are to be combined with all other positions that are subject to the standardised approach in order to determine the bank’s standardised approach capital requirements.
|
| | | (d) | Trading desks that the bank does not nominate for model approval at the time of model approval will be ineligible to use the IMA for a period of at least one year from the date of the latest internal model approval.
|
| | (3) | The bank must receive SAMA approval to use the IMA on individual trading desks. Following the identification of eligible trading desks, this step determines which trading desks will be in-scope to use the IMA and which risk factors within in-scope trading desks are eligible to be included in the bank’s internal expected shortfall (ES) models to determine market risk capital requirements as set out in [13].
| |
| | | (a) | Each trading desk must satisfy profit and loss (P&L) attribution (PLA) tests on an ongoing basis to be eligible to use the IMA to determine market risk capital requirements. In order to conduct the PLA test, the bank must identify the set of risk factors to be used to determine its market risk capital requirements.
|
| | | (b) | Each trading desk also must satisfy backtesting requirements on an ongoing basis to be eligible to use the IMA to determine market risk capital requirements as set out in [12.4] to [12.19].
|
| | | (c) | Banks must conduct PLA tests and backtesting on a quarterly basis to update the eligibility and trading desk classification in PLA for trading desks in-scope to use the IMA.
|
| | | (d) | The market risk capital requirements for risk factors that satisfy the risk factor eligibility test as set out in [11.12] to [11.24] must be determined using ES models as specified in [13.1] to [13.15].
|
| | | (e) | The market risk capital requirements for risk factors that do not satisfy the risk factor eligibility test must be determined using stressed expected shortfall (SES) models as specified in [13.16] to [13.17]
|
The model approval process requires an overall assessment of a bank’s bank-wide internal risk capital model. The term “bank-wide” is defined as pertaining to the group of trading desks that the bank nominates as in-scope in their application for the IMA.
| | |
Securitisation positions are out of scope for IMA regulatory capital treatment, and as a result they are not taken into account for the model eligibility tests. This implies that banks are not allowed to include securitisations in trading desks for which they determine market risk capital requirements using the IMA. Securitisations must be included in trading desks for which capital requirements are determined using the standardised approach. Banks are allowed to also include hedging instruments in trading desks which include securitisations and are capitalised using the standardised approach.
| | |
