Article 40 Assessment of the capability of the internal risk-measurement model to capture non-linearities

(a)

the internal risk-measurement model captures at least the material first- and second-order terms of Taylor series approximations to reflect the change in the prices due to changes in relevant risk factors, including the cross-gamma risk represented by material joint-moves in risk factors;

(b)

the sensitivity-based approach leads to appropriate results, including where severe shocks are applied to the risk factors.

(a)

identify products for which competent authorities want to test the materiality of the order terms of a Taylor series approximation, and the appropriateness of the sensitivity-based approach under severe shock;

(b)

identify a business day in the stress period where the returns observed for the risk factors in those products were particularly high, where positive, or particularly low, where negative;

(c)

require the institution to calculate the hypothetical and theoretical changes in the values of those products in accordance with Delegated Regulation (EU) 2022/2059, under the scenario identified by the returns on the business day identified in accordance with point (b);

(d)

based on the results of the calculation referred to in point (c), assess whether the sensitivity-based approach leads to appropriate results.