1. When assessing an institution’s compliance with the requirements set out in Article 325bh(1), point (h), of Regulation (EU) No 575/2013 in relation to capturing vega risk for any given broad risk factor category, competent authorities shall:
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(a)
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require the institution to provide a list of all the volatility surfaces towards which the institution’s portfolio is sensitive;
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(b)
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require the institution to provide a sensitivity analysis of its portfolio towards each of the surfaces referred to in point (a);
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(c)
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verify, based on the information referred to in points (a) and (b), whether any material basis risk between any two given surfaces is either implicitly captured by the fact that two surfaces are modelled directly, or by the fact that a basis surface representing the difference between those two curves is modelled;
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(d)
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verify, in relation to volatility surfaces whose points are risk factors as referred to in Article 4 of Delegated Regulation (EU) 2022/2060, whether:
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(i)
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the institution’s internal policies have established criteria to decide on the numbers of risk factors to be used to model a surface, and whether such criteria are based on the liquidity and materiality of the positions exposed to that surface;
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(ii)
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the criteria referred to in point (i) are accompanied by an analysis showing that the number of risk factors used allows for a comprehensive representation of the risk across the surface;
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(e)
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verify, in relation to surfaces that have been modelled by means of function parameters as referred to in Article 6 of Delegated Regulation (EU) 2022/2060, whether the institution’s internal policies include an analysis showing that shocking functions parameters allow for a comprehensive representation of the risk across the surface;
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(f)
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assess whether interpolation and extrapolation techniques used by the institution to build a surface are sound and where part of the surface is derived by extrapolating its two outer points, verify whether the volatility of the returns observed in the market for the extrapolated part of the surface does not significantly differ from that resulting from the extrapolation.
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For the purposes of point (a), the institution shall for each of the surfaces referred in that point specify whether it is modelled in its entirety directly, or whether it is modelled as a sum of a base surface and a basis surface.
For the purposes of point (d)(ii), competent authorities may, where appropriate, complement their assessment by using the assessment method referred to in paragraph 2.
For the purposes of point (e), competent authorities may, where appropriate, complement their assessment by using the assessment method referred to in paragraph 3.
For the purposes of point (f), competent authorities may apply the assessment method referred to in paragraphs 2 and 3 by picking a point in the surface obtained via extrapolation when applying points (b) of those paragraphs.