Technical elements to be included in the theoretical changes in the trading desk portfolio’s value
1. For the purposes of Article 325bg of Regulation (EU) No 575/2013, institutions shall calculate the theoretical changes in a trading desk portfolio value based on a comparison between the portfolio’s end-of-day value and, assuming unchanged positions in the trading desk portfolio, the value of that portfolio at the end of the subsequent day.
2. Institutions shall calculate the theoretical changes in a trading desk portfolio by using the same techniques, including the same pricing methods, model parametrisations and market data as those used in the risk measurement model.
3. Theoretical changes in a trading desk portfolio value shall only include the changes in the value of all risk factors included in the risk-measurement model to which institutions apply the scenarios of future shocks.
Technical elements to be included in the hypothetical changes in a trading desk portfolio’s value for the profit and loss attribution requirement
For the purposes of Article 325bg of Regulation (EU) No 575/2013, institutions shall calculate hypothetical changes in a trading desk portfolio’s value in accordance with Article 3 of this Regulation.
Alignment of data for the profit and loss attribution requirements
1. For the purposes of Article 325bg of Regulation (EU) No 575/2013, institutions may replace the value of input data for a given risk factor used in the calculation of the theoretical changes in the trading desk portfolio’s value with the value of the input data of the same nature for the same risk factor used in the calculation of the hypothetical changes in the trading desk portfolio’s value, provided either of the following conditions is met:
(a)
differences in the input data are due to the fact that the data are sourced from different data providers;
(b)
differences in the input data are due to the fact that the input data are extracted from the market data source at different times during the same business day.
2. For the purposes of Article 325bg of Regulation (EU) No 575/2013, institutions may replace the value of a risk factor used in the calculation of the theoretical changes in the trading desk portfolio’s value with the value of the same risk factor used in the calculation of the hypothetical changes in the trading desk portfolio’s value where all of the following conditions are met:
(a)
the risk factor used in the calculation of the hypothetical changes in the trading desk portfolio’s value does not directly correspond to the input data;
(b)
the risk factor has been derived from the input data using techniques of the valuation systems used for the hypothetical changes in the trading desk portfolio’s value;
(c)
none of the techniques of the valuation systems referred to in point (b) have been rebuilt in the valuation systems used in the risk measurement model in order to derive the value of the risk factor which is used in the calculation of the theoretical changes in the trading desk portfolio’s value.
Documentation requirements
1. Institutions shall have in place policies and procedures setting out how they calculate the theoretical changes in accordance with Articles 12 and 14 of this Regulation, which shall contain an explanation of how the theoretical changes in the trading desk portfolio’s value are calculated for modellable and non-modellable risk factors.
2. When designing the procedures for aligning the data as referred to in Article 14 of this Regulation, institutions shall apply both of the following:
(a)
they shall compare the theoretical changes in the trading desk portfolio’s value without the alignments referred to in Article 14 of this Regulation with the theoretical changes in the trading desk portfolio’s value with the alignments referred to in Article 14 of this Regulation, and they shall document that comparison;
(b)
they shall assess the effect of the alignments on the metrics of the tests used for assessing compliance with the profit and loss attribution requirement referred to in Articles 7 and 8 of this Regulation and document that assessment.
3. Institutions shall document any adjustments, performed in accordance with Article 14 of this Regulation, to the input data for the risk factors within the calculation of the theoretical changes in the trading desk portfolio, as well as the rationale for such adjustments.
Source: EUR-Lex (Publications Office of the EU), © European Union, reuse permitted under Commission Decision 2011/833/EU.
