4.1 Accuracy of the data inputs

Institutions should meet the requirements in paragraph 13, 14 and 15, in order for the data inputs referred to in Article 325bc of Regulation (EU) No 575/2013 to be accurate. In addition, all of the following should be met, where relevant:

• (a) the requirements for the data inputs from the current period, referred to in Article 325bc(3)(c) of Regulation (EU) No 575/2013, as further specified in Section 4.1.1;
• (b) the requirements for the data inputs from the identified period of financial stress, referred to in Article 325bc(2)(c) of Regulation (EU) No 575/2013, as further specified in Section 4.1.2;
• (c) the requirements for the data inputs used in Beta approximations or other random data-generating approaches for the purpose of determining the scenarios of future shocks, as further specified in Section 4.1.3;
• (d) the requirements for the data inputs used for a given risk factor obtained by combining two or more risk factors that may or may not be incorporated in the institution’s internal model, as further specified in Section 4.1.4.

The historical data used to calibrate the data inputs referred to in Article 325bc of Regulation (EU) No 575/2013 should be accurately reflective of prices observed or quoted in the market.

The data inputs referred to in Article 325bc of Regulation (EU) No 575/2013 should be accurately reflective of the properties of the distribution of the risk factors to which the scenarios of future shocks are applied.

The data inputs referred to in Article 325bc of Regulation (EU) No 575/2013 should be accurately reflective of the dependency structure between the distributions of the risk factors to which the scenarios of future shocks are applied.

4.1.1 Data inputs from the current period

In order to fulfil the requirement referred to in paragraph 12 for the data inputs from the current period, referred to in 325bc(3)(c) of Regulation (EU) No 575/2013, institutions should comply with either the approach set out in paragraph 17 or the approach set out in paragraph 18.

Under the first approach, institutions should reconcile the data inputs from the current period, referred to in Article 325bc(3)(c) of Regulation (EU) No 575/2013, with one of the following:

• (a) the corresponding data inferred from verifiable prices, as defined in the regulatory technical standards to be adopted pursuant to Article 325be of Regulation (EU) No 575/2013;
• (b) the corresponding data used by the institutions’ front -office or back-office systems.

Under the second approach, institutions should reconcile prices produced by their internal risk-measurement model and based on the data inputs from the current period, referred to in Article 325bc(3)(c) of Regulation (EU) No 575/2013, with one of the following:

• (a) verifiable prices as defined in the regulatory technical standards to be adopted pursuant to Article 325be of Regulation (EU) No 575/2013;
• (b) pri ces produced by the institutions’ front -office or back-office systems.

In order to perform the reconciliation referred to in this paragraph, the outcome of that reconciliation should be reasonably aligned to the outcome that would have been obtained by performing the reconciliation in paragraph 17.

Where it is not possible to perform the reconciliations referred to in paragraphs 17 and 18 using data inputs, institutions should use the historical data used to calibrate those data inputs for the purposes of paragraph 17, and the prices resulting from those historical data for the purposes of paragraph 18.

As part of the records kept by the institutions to demonstrate their compliance with the requirements of these Guidelines, institutions should document their approaches to the reconciliations referred to in paragraphs 17 to 19, including the reasons for applying paragraph 19 where relevant.

In order to fulfil the requirement referred to in paragraph 14 for the data inputs from the current period, referred to in 325bc(3)(c) of Regulation (EU) No 575/2013, institutions should assess that there is no material difference between the volatility of a risk factor as estimated on the basis of those data inputs and the volatility of that risk factor as estimated on the basis of one of the following:

• (a) the verifiable prices as defined in the regulatory technical standards to be adopted pursuant to Article 325be of Regulation (EU) No 575/2013;
• (b) the prices used by the institutions’ front -office or back-office systems.

In order to fulfil the requirement referred to in paragraph 15 for the data inputs from the current period, referred to in 325bc(3)(c) of Regulation (EU) No 575/2013, institutions should assess that there is no material difference between the correlations between risk factors as estimated on the basis of those data inputs and the correlations between those risk factors as estimated on the basis of one of the following:

• (a) the verifiable prices as defined in the regulatory technical standards to be adopted pursuant to Article 325be of Regulation (EU) No 575/2013;
• (b) the prices used by the institutions’ front -office or back-office systems.

For the purposes of the reconciliations and assessments in paragraphs 17, 18, 21 and 22, institutions should use the data or verifiable prices referred to in point (a) of paragraph 17, point (a) of paragraph 18, point (a) of paragraph 21 and point (a) of paragraph 22, where the number of verifiable prices with a value of the price available to the institution is sufficient to perform those reconciliations and assessments with accuracy. Where no verifiable prices are available, or the number of verifiable prices with a value of the price available to the institution is not sufficient to perform those reconciliations and assessments with accuracy, institutions should use the data or prices used or produced by the institutions’ front -office or back-office systems, as referred to in point (b) of paragraph 17, point (b) of paragraph 18, point (b) of paragraph 21 and point (b) of paragraph 22.

Institutions should carry out the assessment referred to in paragraph 17, 18, 21 and 22 at least quarterly, or more frequently where extensions and changes to the internal models require to do so.

4.1.2 Data inputs from the identified period of financial stress

The data inputs from the identified period of financial stress, referred to in Article 325bc(2)(c) of Regulation (EU) No 575/2013, should be calibrated to historical data from a continuous 12-month period of financial stress identified by the institution in accordance with that Article. Where, in exceptional cases, institutions use proxy data from the identified period of financial stress for the purpose of the calibration of those data inputs, in order to reflect the effect of fundamental changes that occurred in the characteristics of financial instruments compared to the characteristics that prevailed during the identified period of financial stress, the data inputs obtained as a result of this approach should be considered accurate only where all of the following conditions are met:

• (a) this approach is supported by convincing empirical evidence and objective data to justify the use of proxy data for the calibration of those data inputs;
• (b) those data inputs accurately reflect changes in prices of similar instruments during the identified period of financial stress;
• (c) those data inputs do not underestimate risk.

4.1.3 Data inputs used in Beta approximations or other random data-generating approaches

Where an institution uses Beta approximations or other random data-generating approaches for the purpose of determining the scenarios of future shocks, in order for the data inputs used in those Beta approximations or other random data-generating approaches to be accurate, the values of the Beta coefficients or the parameters of the random data-generating approaches should be determined exclusively on the basis of the data inputs calibrated to historical data referred to in Article 325bc of Regulation (EU) No 575/2013. Where, in exceptional cases, the institution does not determine the values of the Beta coefficients or the parameters of the random data-generating approaches exclusively on the basis of those data inputs, but adjustments are made to the values of those Beta coefficients or parameters, the data inputs used in those Beta approximations or other random data-generating approaches should be considered accurate only where all of the following conditions are met:

• (a) the Beta coefficients or parameters of the random data-generating approaches cannot be determined exclusively on the basis of the data inputs calibrated to historical data referred to in Article 325bc of Regulation (EU) No 575/2013;
• (b) the institution describes in its policies the methodology used in this case to obtain the values of the Beta coefficients or parameters of the random data-generating approaches, including any adjustments made to the values of the Beta coefficients or parameters determined exclusively on the basis of the data inputs calibrated to historical data referred to in Article 325bc of Regulation (EU) No 575/2013;
• (c) the choice of the values for the Beta coefficients or parameters of the random data-generating approaches does not underestimate risk. 4.1.4 Data inputs used for combinations of risk factors

Where a given risk factor in the institution’s internal model has been obtained by combining two or more risk factors that may or may not be incorporated in the institution’s internal model, and the institution combines the data inputs corresponding to those risk factors so as to obtain data inputs that are suitable for the given risk factor in the internal model, the obtained data inputs should be considered accurate only where the data inputs that are combined correspond to risk factors that have passed or would pass the modellability assessment referred to in Article 325be of Regulation (EU) No 575/2013.

Where a given risk factor in the institution’s internal model has been obtained by extrapolating from risk factors that may or may not be incorporated in the institution’s internal model, and the data inputs for the given risk factor in the internal model are obtained by extrapolating from data inputs corresponding to those risk factors, the obtained data inputs should be considered accurate only if all the following conditions are met:

• (a) the extrapolation is based on data inputs of the closest modellable risk factor in each dimension of the given risk factor;
• (b) the extrapolation is based on data inputs of at least two modellable risk factors for each dimension of the given risk factor;
• (c) the data inputs corresponding to the two modellable risk factors referred to in point (b), including the data inputs of the closest modellable risk factor, should not have been obtained by extrapolation themselves.

For the purpose of paragraph 28, closest risk factor means a risk factor that is mapped to one of the following buckets, in accordance with the regulatory technical standards to be adopted pursuant to Article 325be of Regulation (EU) No 575/2013:

• (a) the same bucket as the extrapolated risk factor, where the extrapolated risk factor is not the only risk factor in a bucket;
• (b) a bucket adjacent to the bucket of the extrapolated risk factor, where the extrapolated risk factor is the only risk factor in a bucket.