1. When assessing an institution’s compliance with Article 325bh(1), point (b), of Regulation (EU) No 575/2013 in relation to requirements on the effectiveness and capability of the internal-risk measurement model to capture non-linearities of options and other products for an institution using a sensitivity-based approach, competent authorities shall verify whether:
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(a)
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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;
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(b)
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the sensitivity-based approach leads to appropriate results, including where severe shocks are applied to the risk factors.
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