4.2 Appropriateness of the data inputs

The data inputs referred to in Article 325bc of Regulation (EU) No 575/2013 should capture both of the following, where relevant:

• (a) general market risks, as further specified in Section 4.2.1;
• (b) specific market risks, as further specified in Section 4.2.2.

Institutions should perform analyses supported by convincing empirical evidence and objective data to show that the data inputs used for a given risk factor capture all material general and specific market risks embedded in that risk factor, as applicable. As part of the records kept by the institutions to demonstrate their compliance with the requirements of these Guidelines, institutions should document such analyses.

4.2.1 Data inputs capturing general market risks

Where historical data from market indices or other historical data representing characteristics shared by different instruments are used to calibrate the data inputs referred to in Article 325bc of Regulation (EU) No 575/2013, with a view to representing general market risks, the choice of such historical data should be conceptually sound and consistently used across those instruments.

Where institutions use Beta approximations or other random data-generating approaches for the purpose of determining the scenarios of future shocks, they should show with empirical evidence that general market risks are properly captured by the data inputs used to determine the values of the Beta coefficients or the parameters of the random data-generating approaches. Such empirical evidence should include statistical measures expressing the goodness-of-fit of the Beta approximations or the other random data-generating approaches. As part of the records kept by the institutions to demonstrate their compliance with the requirements of these Guidelines, institutions should document the analyses performed to comply with this paragraph.

4.2.2 Data inputs capturing specific market risks

The data inputs referred to in Article 325bc of Regulation (EU) No 575/2013 should allow the capturing of material specific risks, including name-related basis risks and material idiosyncratic differences between similar but not identical positions.

Where institutions use Beta approximations or other random data-generating approaches for the purpose of determining the scenarios of future shocks, they should show with empirical evidence that specific market risks are properly captured by the data inputs used to determine the values of the Beta coefficients or the parameters of the random data-generating approaches. Where assumptions are made that residuals from Beta approximations or other random data-generating approaches are uncorrelated to each other, the empirical evidence referred to in the previous sentence should include a justification of those assumptions. As part of the records kept by the institutions to demonstrate their compliance with the requirements of these Guidelines, institutions should document the analyses performed to comply with this paragraph.