1. When assessing whether the institution’s internal model is implemented with integrity as required by Article 325bi(1) of Regulation (EU) No 575/2013 in relation to the back-testing referred to in Article 325bj(3), point (b), of that Regulation, competent authorities shall verify whether, as part of such back-testing programmes, the institution:
(a)
runs the back-testing programme referred to in paragraph 2 or another internal back-testing programme that enables the institution to identify the contribution of modellable and non-modellable risk factors to the back-testing results;
(b)
applies direct expected shortfall back-testing approaches to its portfolios.
For the purposes of point (b), competent authorities shall verify how the institution motivates the choice of the applied direct expected shortfall back-testing methodology, and analyse whether that methodology is conceptually sound.
The institution may use the back-testing programmes referred to in the first subparagraph as an element to detect and monitor potential deficiencies in the calculation of the excepted shortfall measures. Where a competent authority decides on the permission to use the internal model approach to compute the own funds requirement for market risk in accordance with Article 325az, those back-testing programmes shall not supersede the outcomes of the regulatory back-testing referred to in Article 325bf of Regulation (EU) No 575/2013 and the profit and loss attribution requirements referred to in Article 325bg of that Regulation.
2. For the purposes of paragraph 1, first subparagraph, point (a), the institution may run a back-testing programme that applies the following principles:
(a)
an overshooting is identified as a one-day change in HPLMRF or in
(b)
APLMRF that exceeds the value-at-risk number referred to in Article 325bf(6), point (a), of Regulation (EU) No 575/2013;
(c)
HPLMRF and APLMRF are calculated as follows:
Where:
—
HPL are the hypothetical changes in the portfolio’s value;
—
APL are the actual changes in the portfolio’s value;
—
RTPL are the risk-theoretical changes in the institution’s portfolio’s value;
—
RTPLMRF are the risk-theoretical changes in the institution’s portfolio’s value considering only changes to modellable risk factors;
(d)
the institution identifies potential weaknesses in its risk-measurement model by counting the overshootings, as identified in accordance with point (a), that occurred over the last 250 business days, and by comparing the amount of the identified overshootings against the thresholds referred to in Article 325bf(3), points (a) and (b), of Regulation (EU) No 575/2013.
