Assessment of the technical elements to be included in the actual and hypothetical changes in the portfolio’s value for the back-testing requirements
Article 36
1. When verifying whether an institution complies with Article 325bi(1), point (e), of Regulation (EU) No 575/2013 in relation to requirements on the technical elements to be included in the actual and hypothetical changes in the portfolio’s value, competent authorities shall verify whether the internal policies referred to in that point: (a) specify all the elements referred to in Article 5 of Delegated Regulation (EU) 2022/2059 and, where applicable, all the elements referred to in Article 1(5), point (c), of that Regulation; (b) require the production of a periodic report, and, where the different elements contributing to the changes in the portfolio’s value are disentangled, daily figures, including: (i) the changes related to elements that are removed from the end-of-day value to obtain the actual and hypothetical changes in accordance with Articles 1 to 4 of Delegated Regulation (EU) 2022/2059, including those relating to intraday trading activities; (ii) the changes related to adjustments that are included in the end-of-day of value but that are not in the calculation of the actual and hypothetical changes in accordance with Articles 1 to 4 Delegated Regulation (EU) 2022/2059; (iii) the changes related to adjustments that are included in the end-of-day of value and in the calculation of the actual and hypothetical changes in accordance with Articles 1 to 4 Delegated Regulation (EU) 2022/2059; (iv) the changes related to adjustments resulting from the independent price verification process referred to in Article 1(1) and 2(1) of Delegated Regulation (EU) 2022/2059; (c) require the production of the report referred to in point (b) both at the level of each trading desk subject to trading desk’s back-testing requirements in accordance with Articles 1 and 3 of Delegated Regulation (EU) 2022/2059, and at the level of the portfolio subject to back-testing requirements in accordance with Articles 2 and 4 of Delegated Regulation (EU) 2022/2059; (d) specify the rectification processes to follow in the calculation of the actual and hypothetical changes in case of contingencies, exceptions, errors, and pricing failures. 2. When assessing whether an institution’s internal model is implemented with integrity as required by Article 325bi(1) of Regulation (EU) No 575/2013 in relation to requirements on the technical elements to be included in the actual and hypothetical changes in the portfolio’s value, competent authorities shall: (a) in relation to the calculation of the actual changes in the trading desk portfolio’s value as referred to in Article 1(1) of Delegated Regulation (EU) 2022/2059: (i) by using the reports referred to in paragraph 1, points (b) and (c) of this Article and the outline of the differences referred to in Article 5, point (a), of Delegated Regulation (EU) 2022/2059: (1) identify the elements that differ between the changes in the end-of-day portfolio values produced by the end-of-day valuation process and the actual changes; (2) verify whether the elements identified in accordance with point (1) are limited to fees and commissions as referred to in Article 325bf(4), point (b), of Regulation (EU) No 575/2013, and are limited to those adjustments that must or may be excluded from the actual changes, as laid down in Article 1(3) and (5) of Delegated Regulation (EU) 2022/2059; (ii) by using the reports referred to in paragraph 1, points (b) and (c) of this Article, verify whether, the adjustments resulting from the independent price verification are included in the actual changes in the trading desk portfolio’s value, as required by Article 1(1) of Delegated Regulation (EU) 2022/2059; (iii) verify whether the passage of time as referred to in Article 1(2) of Delegated Regulation (EU) 2022/2059 is reflected in the calculation of the actual changes, and whether that passage of time is reflected in the same way as in the calculation of the end-of-day portfolio values produced by the end-of-day valuation process; (iv) assess how the institution evaluates whether an adjustment is market-risk related, as referred to in Article 1(3) of Delegated Regulation (EU) 2022/2059 and, by using the reports referred to in paragraph 1, points (b) and (c) of this Article, verify whether those adjustments that are not market-risk related are excluded from the calculation of the actual changes; (v) by comparing the reports referred to in paragraph 1, points (b) and (c) of this Article at different dates, verify whether, the institution reflects changes in adjustments’ values only on the dates at which the adjustment is calculated, as required by Article 1(4) of Delegated Regulation (EU) 2022/2059; (vi) verify whether the scope of positions on which the adjustment is calculated includes only positions assigned to the trading desk, as required by Article 1(4) of Delegated Regulation (EU) 2022/2059; (vii) verify whether the adjustments that may be excluded from the actual changes pursuant to Article 1(5) of Delegated Regulation (EU) 2022/2059 are non-additive; (viii) verify whether the information referred to in Article 5(c) of Delegated Regulation (EU) 2022/2059 is consistent with the evidence resulting from the reports referred to in paragraph 1, points (b) and (c) of this Article; (b) in relation to the calculation of the actual changes in the portfolio’s value as referred to in Article 2 of Delegated Regulation (EU) 2022/2059: (i) by using the reports referred to in paragraph 1, points (b) and (c), of this Article and the outline of the differences referred to in Article 5(a) of Delegated Regulation (EU) 2022/2059: (1) identify the elements that differ between the changes in the end-of-day portfolio values produced by the end-of-day valuation process and the actual changes; (2) verify whether the elements referred to in point (1) are limited to fees and commissions as referred to in Article 325bf(4), point (b), of Regulation (EU) No 575/2013, and to those adjustments that must or may be excluded from the actual changes pursuant to Article 2 of Delegated Regulation (EU) 2022/2059; (ii) by using the reports referred to in paragraph 1, points (b) and (c) of this Article, verify whether the adjustments resulting from the independent price verification are included in the actual changes in the portfolio’s value, as required by Article 2(1) of Delegated Regulation (EU) 2022/2059; (iii) verify whether the passage of time referred to in Article 2(2) of Delegated Regulation (EU) 2022/2059 is reflected in the calculation of the actual changes, and whether that passage of time is reflected in the same way as in the calculation of the end-of-day portfolio values produced by the end-of-day valuation process; (iv) assess how the institution evaluates whether an adjustment is market-risk related as referred to in Article 2(3) of Delegated Regulation (EU) 2022/2059 and, by using the reports referred to in paragraph 1, points (b) and (c) of this Article, verify whether those that are not market-risk related are excluded from the calculation of the actual changes; (v) verify whether, as required by Article 2(4) of Delegated Regulation (EU) 2022/2059, the scope of positions on which an adjustment is calculated is either made of: (1) positions assigned to trading desks for which the institution calculates its own funds requirements for market risk in accordance with Part Three, Title IV, Chapter 1b of Regulation (EU) No 575/2013; (2) all positions subject to own funds requirements for market risk; (vi) by comparing the reports referred to in paragraph 1, points (b) and (c) of this Article at different dates, verify whether, the institution reflects changes in adjustments’ values only on the dates at which the adjustment is recomputed in accordance with Article 2(5) of Delegated Regulation (EU) 2022/2059; (vii) verify whether the information referred to in Article 5, point (c), of Delegated Regulation (EU) 2022/2059 is consistent with the evidence resulting from the reports referred to in paragraph 1, point (b) and (c) of this Article; (c) in relation to the calculation of the hypothetical changes in the trading desk portfolio’s value as referred to in Article 3 of Delegated Regulation (EU) 2022/2059: (i) identify, by using the reports referred to in paragraph 1, point (b) and (c) of this Article, the elements that differ between the changes in the end-of-day portfolio values produced by the end-of-day valuation process and the hypothetical changes, and verify whether those elements are limited to: (1) fees and commissions; (2) those elements that are not captured due to the assumption that positions are unchanged as referred to in Article 325bf(4), point (a), of Regulation (EU) No 575/2013; (3) those adjustments that must or may be excluded from the hypothetical changes as laid down in Article 3(3) and (5) of Delegated Regulation (EU) 2022/2059; (ii) verify whether the effect of the passage of time is reflected in the hypothetical changes consistently with the treatment the institution applies for such effect in the calculation of the expected shortfall risk measure as referred to in Article 325bb of Regulation (EU) No 575/2013 and in the calculation of the stress scenario risk measure referred to in Article 325bk of that Regulation, as required by Article 3(2) of Delegated Regulation (EU) 2022/2059; (iii) assess how the institution evaluates whether an adjustment is market-risk related as referred to in Article 3(3) of Delegated Regulation (EU) 2022/2059 and, by using the reports referred to in paragraph 1, point (b) and (c) of this Article, verify whether those adjustments that are not market-risk related are excluded from the calculation of the hypothetical changes; (iv) by using the reports referred to in paragraph 1, point (b) and (c) of this Article, verify that only adjustments that are calculated daily and that are included in the institution’s risk measurement model are included as part of the hypothetical changes, as required by Article 3(3) of Delegated Regulation (EU) 2022/2059; (v) verify that the scope of positions on which the adjustment is calculated includes only positions assigned to the trading desk, as required by Article 3(4) of Delegated Regulation (EU) 2022/2059; (vi) verify whether the adjustments that are excluded from the hypothetical changes pursuant to Article 3(5) of Delegated Regulation (EU) 2022/2059 are non-additive; (vii) by using the outline referred to in Article 5, point (c)(viii) of Delegated Regulation (EU) 2022/2059, verify whether the methodology used by the institution to calculate changes in the value of an adjustment assuming that positions are unchanged as referred to in Article 325bf(4), point (a), of Regulation (EU) No 575/2013 is appropriate; (viii) verify whether the information referred to in Article 5, point (c), of Delegated Regulation (EU) 2022/2059 is consistent with the evidence resulting from the reports referred to in paragraph 1, point (b) and (c) of this Article; (d) in relation to the calculation of the hypothetical changes in the portfolio’s value as referred to in Article 4 of Delegated Regulation (EU) 2022/2059: (i) by using the reports referred to in paragraph 1, point (b) and (c) of this Article: (1) identify the elements that differ between the changes in the end-of-day portfolio values produced by the end-of-day valuation process and the hypothetical changes; (2) verify whether the elements referred to in point (1) are limited to fees and commission, to those elements that are not captured due to the assumption that positions are unchanged as referred to in Article 325bf(4), point (a), of Regulation (EU) No 575/2013, and to those adjustments that must or may be excluded from the hypothetical changes in accordance with Article 4 of Delegated Regulation (EU) 2022/2059; (ii) verify whether, the effect of the passage of time is reflected in the hypothetical changes consistently with the treatment the institution applies for such effect in the calculation of the expected shortfall risk measure as referred to in Article 325bb of Regulation (EU) No 575/2013 and in the calculation of the stress scenario risk measure referred to in Article 325bk of that Regulation, as required by Article 4(2) of Delegated Regulation (EU) 2022/2059; (iii) assess how the institution evaluates whether an adjustment is market-risk related as referred to in Article 4(3) of Delegated Regulation (EU) 2022/2059 and, by using the reports referred to in paragraph 1, point (b) and (c) of this Article, verify that those that are not market-risk related are excluded from the calculation of the hypothetical changes; (iv) by using the reports referred to in paragraph 1, point (b) and (c) of this Article, verify that, only adjustments that are calculated daily and that are included in the institution’s risk measurement model are included as part of the hypothetical changes, as required by Article 4(3) of Delegated Regulation (EU) 2022/2059; (v) verify whether, as required by Article 4(4) of Delegated Regulation (EU) 2022/2059, the scope of positions on which an adjustment is calculated is either made of: (1) positions assigned to trading desks for which the institution calculates its own funds requirements for market risk in accordance with Part Three, Title IV, Chapter 1b of Regulation (EU) No 575/2013; (2) all positions subject to own funds requirements for market risk; (vi) by using the outline referred to in Article 5, point (c)(viii), of Delegated Regulation (EU) 2022/2059, verify whether the methodology used by the institution to calculate changes in the value of an adjustment assuming that positions are unchanged as referred to in Article 325bf(4), point (a), of Regulation (EU) No 575/2013 is appropriate; (vii) verify whether the information referred to in Article 5(c) of Delegated Regulation (EU) 2022/2059 is consistent with the evidence resulting from the reports referred to in paragraph 1, point (b) and (c) of this Article; (e) in relation to the processes followed by the institution to calculate actual and hypothetical changes: (i) verify whether the process to map a position to one trading desk only is robust; (ii) verify whether the rectification processes referred to in paragraph 1, point (d) are robust, and whether they are followed in practice whenever contingencies, exceptions, errors, and pricing failures occur; (iii) verify how illiquid positions are treated in the end-of-day valuation process and in the independent price verification process. For the purposes of points (a)(vi), (b)(v)(1), (c)(v) and (d)(v)(1), competent authorities shall verify whether the institution does not derive the adjustment applicable to the trading desk from a broader scope of positions than those assigned to the trading desk. For the purposes of point (a)(vii), competent authorities shall evaluate how the institution risk-manages those adjustments. For the purposes of points (b)(v)(2) and (d)(v)(2), competent authorities shall verify whether the whole adjustment calculated on that scope is included in the actual changes in the portfolio’s value. For the purposes of point (c)(vi), competent authorities shall evaluate how the institution risk-manages those adjustments. For the purposes of point (e)(ii), competent authorities shall review the history of contingencies, exceptions, errors, and pricing failures in the calculations of the changes in the portfolios’ values, assess how they have been remediated and, where relevant, the impact of those errors on the back-testing and profit-and-loss attribution test results. For the purposes of point (e)(iii), competent authorities shall, where, due to stale data, those positions lead to no changes in the end-of-day valuation and in the actual and hypothetical changes in the portfolio’s value, assess whether, despite the lack of data, the risk-measurement model is reasonably accurate in measuring risks of those positions as referred to in Article 325bi(1), point (f), of Regulation (EU) No 575/2013. 3. For the purposes of paragraph 2, points (a) to (d), competent authorities may apply any of the following assessment methods: (a) on a sample of transactions, require the institution to calculate and reconcile the changes in the end-of-day value as resulting from the end-of-day valuation process, the actual changes, and the hypothetical changes; (b) on a sample of transactions, require the institution to calculate the hypothetical changes and the risk-theoretical changes, and verify whether the effect of the passage of time is captured consistently; (c) compare the profile of the cumulative hypothetical changes to the portfolio’s value over a given period of time and the corresponding cumulative actual changes over the same period to assess the plausibility of the calculations performed by the institution.