12- Internal Models Approach: Backtesting and P&L Attribution Test Requirements
No: 44047144
Date(g): 27/12/2022 | Date(h): 4/6/1444
Status: In-Force
12.1
As set out in [10.4], a bank that intends to use the internal models approach (IMA) to determine market risk capital requirements for a trading desk must conduct and successfully pass backtesting at the bank-wide level and both the backtesting and profit and loss (P&L) attribution (PLA) test at the trading desk level as identified in [10.4](2).
12.2
For a bank to remain eligible to use the IMA to determine market risk capital requirements, a minimum of 10% of the bank’s aggregated market risk capital requirement must be based on positions held in trading desks that qualify for use of the bank’s internal models for market risk capital requirements by satisfying the backtesting and PLA test as set out in this chapter. This 10% criterion must be assessed by the bank on a quarterly basis when calculating the aggregate capital requirement for market risk according to [13.43].
12.3
The implementation of the backtesting programme and the PLA test must begin on the date that the internal models capital requirement becomes effective.
(1)
For SAMA approval of a model, the bank must provide a one-year backtesting and PLA test report to confirm the quality of the model.
(2)
SAMA may require backtesting and PLA test results prior to that date.
(3)
SAMA will determine any necessary response to backtesting results based on the number of exceptions over the course of 12 months (ie 250 trading days) generated by the bank’s model.
(a)
Based on the assessment on the significance of exceptions, SAMA may initiate a dialogue with the bank to determine if there is a problem with a bank’s model.
(b)
In the most serious cases, SAMA will impose an additional increase in a bank’s capital requirement or disallow use of the model.
