Risk weights for commodity risk Risk weights for sensitivities to commodity risk factors shall be specified for each bucket in Table 9 pursuant to the delegated act referred to in Article 461a: Table 9 Bucket number Bucket name 1 Energy - solid combustibles 2 Energy - liquid combustibles 3 Energy - electricity and carbon trading 4 Freight 5 Metals – non-precious 6 Gaseous combustibles 7 Precious metals (including gold) 8 Grains and oilseed 9 Livestock and dairy 10 Softs and other agricultural commodities 11 Other commodity

Article 325at

Intra-bucket correlations for commodity risk

l between two sensitivities WSk and WSl within the same bucket shall be set as follows: ρkl = ρkl ^(commodity) · ρkl ^(tenor) · ρkl ^(basis) where: ρkl ^(commodity) shall be equal to 1 where the two commodities of sensitivities k and l are identical, otherwise it shall be equal to the intra-bucket correlations in Table 10; ρkl ^(tenor) shall be equal to 1 where the two vertices of the sensitivities k and l are identical, otherwise it shall be equal to 99 %; and ρkl ^(basis) shall be equal to 1 where the two sensitivities are identical in the delivery location of a commodity, otherwise it shall be equal to 99,90 %.

^(commodity) are:

Table 10 Bucket number Bucket name Correlation ρkl (commodity) 1 Energy - solid combustibles 55 % 2 Energy - liquid combustibles 95 % 3 Energy - electricity and carbon trading 40 % 4 Freight 80 % 5 Metals – non-precious 60 % 6 Gaseous combustibles 65 % 7 Precious metals (including gold) 55 % 8 Grains and oilseed 45 % 9 Livestock and dairy 15 % 10 Softs and other agricultural commodities 40 % 11 Other commodity 15 %

(a) two risk factors that are allocated to bucket 3 in Table 10 and that concern electricity which is generated in different regions or is delivered at different periods under the contractual agreement shall be considered distinct commodity risk factors; (b) two risk factors that are allocated to bucket 4 in Table 10 and that concern freight where the freight route or week of delivery differ shall be considered distinct commodity risk factors.

Article 325au

Correlations across buckets for commodity risk The correlation parameter γb c applying to the aggregation of sensitivities between different buckets shall be set at: (a) 20 % where the two buckets fall within bucket numbers 1 to 10; (b) 0 % where either of the two buckets is bucket number 11.

Article 325av

Risk weights for foreign exchange risk

(a) the risk weight referred to in paragraph 1, divided by 3; (b) the maximum fluctuation within the fluctuation band formally agreed by the Member State and the European Central Bank, if that fluctuation band is narrower than the fluctuation band defined under ERM II.

Article 325aw

Correlations for foreign exchange risk A uniform correlation parameter γb c equal to 60 % shall apply to the aggregation of sensitivities to foreign exchange risk factors. Subsection 2 Vega and curvature risk weights and correlations

Article 325ax

Vega and curvature risk weights

where: RWk = the risk weight for a given vega risk factor k; RWσ shall be set at 55 %; and LHrisk class is the regulatory liquidity horizon to be prescribed in the determination of each vega risk factor k. LHrisk class is determined in accordance with the following table: Table 11 Risk class LHrisk class GIRR 60 CSR non-securitisations 120 CSR securitisations (ACTP) 120 CSR securitisations (non-ACTP) 120 Equity (large cap) 20 Equity (small cap) 60 Commodity 120 Foreign exchange 40

Article 325ay

Vega and curvature risk correlations

where: shall be equal to where α shall be set at 1 %, Tk and Tl shall be equal to the maturities of the options for which the vega sensitivities are derived, expressed as a number of years; and is equal to , where α is set at 1 %, and shall be equal to the maturities of the underlyings of the options for which the vega sensitivities are derived, minus the maturities of the corresponding options, expressed in both cases as a number of years.

where: shall be equal to the delta intra-bucket correlation corresponding to the bucket to which vega risk factors k and l would be allocated; and shall be set in accordance with paragraph 1.

CHAPTER 1b Alternative internal model approach Section 1 Permission and own funds requirements

Article 325az

Alternative internal model approach and permission to use alternative internal models

(a) the trading desks were established in accordance with Article 104b; (b) the institution has provided to the competent authority a rationale for the inclusion of the trading desks in the scope of the alternative internal model approach; (c) the trading desks have met the back-testing requirements referred to in Article 325bf(3) for the preceding year; (d) the institution has reported to its competent authorities the results of the profit and loss attribution (‘P&L attribution’) requirement for the trading desks set out in Article 325bg; (e) for trading desks that have been assigned at least one of those trading book positions referred to in Article 325bl, the trading desks fulfil the requirements set out in Article 325bm for the internal default risk model; (f) no securitisation or re-securitisation positions have been assigned to the trading desks. For the purposes of point (b) of the first subparagraph of this paragraph, not including a trading desk in the scope of the alternative internal model approach shall not be motivated by the fact that the own funds requirement calculated under the alternative standardised approach set out in point (a) of Article 325(3) would be lower than the own funds requirement calculated under the alternative internal model approach.

Institutions shall notify the competent authorities of all other extensions and changes to the use of the alternative internal models for which the institution has received permission.

(a) the conditions for assessing the materiality of extensions and changes to the use of alternative internal models and changes to the subset of the modellable risk factors referred to in Article 325bc; (b) the assessment methodology under which competent authorities verify an institution's compliance with the requirements set out in Articles 325bh, 325bi, 325bn, 325bo and 325bp. EBA shall submit those draft regulatory technical standards to the Commission by 28 June 2024. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

(a) to continue using its alternative internal models for the purpose of calculating the own funds requirements for the market risk of a trading desk that no longer meets the conditions referred to in point (c) of paragraph 2 of this Article and in Article 325bg(1); (b) to limit the add-on to the one resulting from overshootings under back-testing hypothetical changes. EBA shall submit those draft regulatory technical standards to the Commission by 28 June 2024. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

Article 325ba

Own funds requirements when using alternative internal models

(a) the sum of the following values: (i) the institution's previous day's expected shortfall risk measure, calculated in accordance with Article 325bb (ESt-1), and (ii) the institution's previous day's stress scenario risk measure, calculated in accordance with Section 5 (SSt-1); or (b) the sum of the following values: (i) the average of the institution's daily expected shortfall risk measure, calculated in accordance with Article 325bb for each of the preceding sixty business days (ES^avg), multiplied by the multiplication factor (mc); and (ii) the average of the institution's daily stress scenario risk measure, calculated in accordance with Section 5 for each of the preceding sixty business days (SS^avg).

(a) the most recent own funds requirement for default risk, calculated in accordance with Section 3; (b) the average of the amount referred to in point (a) over the preceding 12 weeks. Section 2 General requirements

Article 325bb

Expected shortfall risk measure

where: ESt = the expected shortfall risk measure; i = the index that denotes the five broad categories of risk factors listed in the first column of Table 2 of Article 325bd; UESt = the unconstrained expected shortfall measure calculated as follows: = the unconstrained expected shortfall measure for broad risk factor category i and calculated as follows:

ρ

the supervisory correlation factor across broad categories of risk; ρ = 50 %;

the partial expected shortfall measure that shall be calculated for all the positions in the portfolio in accordance with Article 325bc(2);

the partial expected shortfall measure that shall be calculated for all the positions in the portfolio in accordance with Article 325bc(3);

the partial expected shortfall measure that shall be calculated for all the positions in the portfolio in accordance with Article 325bc(4);

the partial expected shortfall measure for broad risk factor category i that shall be calculated for all the positions in the portfolio in accordance with Article 325bc(2);

the partial expected shortfall measure for broad risk factor category i that shall be calculated for all the positions in the portfolio in accordance with Article 325bc(3); and

the partial expected shortfall measure for broad risk factor category i that shall be calculated for all the positions in the portfolio in accordance with of Article 325bc(4).

(b) the institution is able to increase the frequency of calculation of , , and from weekly to daily where required by its competent authority.

Article 325bc

Partial expected shortfall calculations

(a) daily calculations of the partial expected shortfall measures; (b) at 97,5th percentile, one tailed confidence interval;

(c) for a given portfolio of trading book positions and non-trading book positions that are subject to foreign exchange or commodity risk, institutions shall calculate the partial expected shortfall measure at time ‘t’ in accordance with the following formula:

where: PESt = the partial expected shortfall measure at time t; j = the index that denotes the five liquidity horizons listed in the first column of Table 1; LHj = the length of liquidity horizons j as expressed in days in Table 1; T = the base time horizon, where T = 10 days; PESt(T) = the partial expected shortfall measure that is determined by applying scenarios of future shocks with a 10-day time horizon only to the specific set of modellable risk factors of the positions in the portfolio set out in paragraphs 2, 3 and 4 for each partial expected shortfall measure referred to in Article 325bb(1); and PESt(T, j) = the partial expected shortfall measure that is determined by applying scenarios of future shocks with a 10-day time horizon only to the specific set of modellable risk factors of the positions in the portfolio set out in paragraphs 2, 3 and 4 for each partial expected shortfall measure referred to in Article 325bb(1) and of which the effective liquidity horizon, as determined in accordance with Article 325bd(2), is equal or longer than LHj.

Table 1 Liquidity horizon j Length of liquidity horizon j (in days) 1 10 2 20 3 40 4 60 5 120

An institution that no longer meets the requirement referred to in the first paragraph of this point shall immediately notify the competent authorities thereof and shall update the subset of the modellable risk factors within two weeks in order to meet that requirement; where, after two weeks, that institution has failed to meet that requirement, the institution shall revert to the approach set out in Chapter 1a to calculate the own funds requirements for market risk for some trading desks, until that institution is able to demonstrate to the competent authority that it is meeting the requirement set out in the first subparagraph of this point; (b) in calculating , institutions shall only apply scenarios of future shocks to the subset of the modellable risk factors of the positions in the portfolio chosen by the institution for the purposes of point (a) of this paragraph and which have been mapped to the broad risk factor category ‘i’ in accordance with Article 325bd; (c) the data inputs used to determine the scenarios of future shocks applied to the modellable risk factors referred to in points (a) and (b) shall be calibrated to historical data from a continuous 12-month period of financial stress that shall be identified by the institution in order to maximise the value of ; for the purpose of identifying that stress period, institutions shall use an observation period starting at least from 1 January 2007, to the satisfaction of the competent authorities; and (d) the data inputs of shall be calibrated to the 12-month stress period that has been identified by the institution for the purposes of point (c).

(b) in calculating , institutions shall only apply scenarios of future shocks to the subset of the modellable risk factors of the positions in the portfolio referred to in point (b) of paragraph 2; (c) the data inputs used to determine the scenarios of future shocks applied to the modellable risk factors referred to in points (a) and (b) of this paragraph shall be calibrated to historical data referred to in point (c) of paragraph 4; those data shall be updated on at least a monthly basis.

(b) in calculating , institutions shall apply scenarios of future shocks to all the modellable risk factors of the positions in the portfolio which have been mapped to the broad risk factor category i in accordance with Article 325bd; (c) the data inputs used to determine the scenarios of future shocks applied to the modellable risk factors referred to in points (a) and (b) shall be calibrated to historical data from the preceding 12-month period; where there is a significant upsurge in the price volatility of a material number of modellable risks factors of an institution's portfolio which are not in the subset of the risk factors referred to in point (a) of paragraph 2, competent authorities may require an institution to use historical data for a period shorter than the preceding 12-months, but such a shorter period shall not be shorter than the preceding six-months; competent authorities shall notify EBA of any decision to require an institution to use historical data from a shorter period than 12 months and shall substantiate that decision.

Article 325bd

Liquidity horizons

An institution shall notify the competent authorities of the trading desks and the broad sub-categories of risk factors to which it decides to apply the treatment referred to in the first subparagraph.

EffectiveLH =

SubCatLH if Mat > LH5 min (SubCatLH, minj{LHj/LHj ≥ Mat}) if LH1 ≤ Mat ≤ LH5 LH1 if Mat < LH1 where: EffectiveLH = the effective liquidity horizon; Mat = the maturity of the trading book position; SubCatLH = the length of liquidity horizon of the modellable risk factor determined in accordance with paragraph 1; and minj {LHj/LHj ≥ Mat} = the length of one of the liquidity horizons listed in Table 1 of Article 325bc which is the nearest liquidity horizon above the maturity of the trading book position.

(a) how institutions are to map the risk factors of the positions referred to in paragraph 1 to broad categories of risk factors and broad sub-categories of risk factors for the purposes of paragraph 1; (b) which currencies constitute the most liquid currencies sub-category of the broad category of interest rate risk factor of Table 2; (c) which currency pairs constitute the most liquid currency pairs sub-category of the broad category of foreign exchange risk factor of Table 2; (d) the definitions of small market capitalisation and large market capitalisation for the purposes of the equity price and volatility sub-category of the broad category of equity risk factor of Table 2. EBA shall submit those draft regulatory technical standards to the Commission by 28 March 2020. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. Table 2 Broad categories of risk factors Broad sub-categories of risk factors Liquidity horizons Length of the liquidity horizon (in days) Interest rate Most liquid currencies and domestic currency 1 10 Other currencies (excluding most liquid currencies) 2 20 Volatility 4 60 Other types 4 60 Credit spread Central government, including central banks, of Member States 2 20 Covered bonds issued by credit institutions in Member States (Investment Grade) 2 20 Sovereign (Investment grade) 2 20 Sovereign (High yield) 3 40 Corporate (Investment grade) 3 40 Corporate (High yield) 4 60 Volatility 5 120 Other types 5 120 Equity Equity price (Large market capitalisation) 1 10 Equity price (Small market capitalisation) 2 20 Volatility (Large market capitalisation) 2 20 Volatility (Small market capitalisation) 4 60 Other types 4 60 Foreign exchange Most liquid currency pairs 1 10 Other currency pairs (excluding most liquid currency pairs) 2 20 Volatility 3 40 Other types 3 40 Commodity Energy price and carbon emissions price 2 20 Precious metal price and non-ferrous metal price 2 20 Other commodity prices (excluding energy price, carbon emissions price, precious metal price and non-ferrous metal price) 4 60 Energy volatility and carbon emissions volatility 4 60 Precious metal volatility and non-ferrous metal volatility 4 60 Other commodity volatilities (excluding energy volatility, carbon emissions volatility, precious metal volatility and non-ferrous metal volatility) 5 120 Other types 5 120

Article 325be

Assessment of the modellability of risk factors

EBA shall submit those draft regulatory technical standards to the Commission by 28 March 2020. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

Article 325bf

Regulatory back-testing requirements and multiplication factors

(a) the calculation of the value at risk shall be subject to a one-day holding period; (b) scenarios of future shocks shall apply to the risk factors of the trading desk's positions referred to in Article 325bg(3) and which are considered modellable in accordance with Article 325be; (c) data inputs used to determine the scenarios of future shocks applied to the modellable risk factors shall be calibrated to historical data referred to in point (c) of Article 325bc(4); (d) unless stated otherwise in this Article, the institution's alternative internal model shall be based on the same modelling assumptions as those used for the calculation of the expected shortfall risk measure referred to in point (a) of Article 325ba(1).

(a) 12 overshootings for the value-at-risk number, calculated at a 99th percentile one tailed-confidence interval on the basis of back-testing of the hypothetical changes in the value of the portfolio; (b) 12 overshootings for the value-at-risk number, calculated at a 99th percentile one tailed-confidence interval on the basis of back-testing of the actual changes in the value of the portfolio; (c) 30 overshootings for the value-at-risk number, calculated at a 97,5th percentile one tailed-confidence interval on the basis of back-testing of the hypothetical changes in the value of the portfolio; (d) 30 overshootings for the value-at-risk number, calculated at a 97,5th percentile one tailed-confidence interval on the basis of back-testing of the actual changes in the value of the portfolio.

(a) the back-testing of hypothetical changes in the value of the portfolio shall be based on a comparison between the end-of-day value of the portfolio and, assuming unchanged positions, the value of the portfolio at the end of the subsequent day; (b) the back-testing of actual changes in the value of the portfolio shall be based on a comparison between the end-of-day value of the portfolio and its actual value at the end of the subsequent day, excluding fees and commissions; (c) an overshooting shall be counted for each business day for which the institution is not able to assess the value of the portfolio or is not able to calculate the value-at-risk number referred to in paragraph 3.

(a) an overshooting shall be a one-day change in the portfolio's value that exceeds the related value-at-risk number calculated by the institution's internal model in accordance with the following: (i) a one-day holding period; (ii) a 99th percentile, one tailed confidence interval; (iii) scenarios of future shocks shall apply to the risk factors of the trading desks' positions referred to in Article 325bg(3) and which are considered modellable in accordance with Article 325be; (iv) the data inputs used to determine the scenarios of future shocks applied to the modellable risk factors shall be calibrated to historical data referred to in point (c) of Article 325bc(4); (v) unless stated otherwise in this Article, the institution's internal model shall be based on the same modelling assumptions as those used for the calculation of the expected shortfall risk measure referred to in point (a) of Article 325ba(1); (b) the number of overshootings shall be equal to the greater of the number of overshootings under hypothetical and the actual changes in the value of the portfolio.

Table 3 Number of overshootings Add-on Fewer than 5 0,00 5 0,20 6 0,26 7 0,33 8 0,38 9 0,42 More than 9 0,50 In extraordinary circumstances, competent authorities may limit the add-on to that resulting from overshootings under back-testing hypothetical changes where the number of overshootings under back-testing actual changes does not result from deficiencies in the internal model.

EBA shall submit those draft regulatory technical standards to the Commission by 28 March 2020. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

Article 325bg

Profit and loss attribution requirement

(a) the criteria necessary to ensure that the theoretical changes in the value of a trading desk's portfolio is sufficiently close to the hypothetical changes in the value of a trading desk's portfolio for the purposes of paragraph 2, taking into account international regulatory developments; (b) the consequences for an institution where the theoretical changes in the value of a trading desk's portfolio are not sufficiently close to the hypothetical changes in the value of a trading desk's portfolio for the purposes of paragraph 2; (c) the frequency at which the P&L attribution is to be performed by an institution; (d) the technical elements to be included in the theoretical and hypothetical changes in the value of a trading desk's portfolio for the purposes of this Article; (e) the manner in which institutions that use the internal model are to aggregate the total own funds requirement for market risk for all their trading book positions and non-trading book positions that are subject to foreign exchange risk or commodity risk, taking into account the consequences referred to in point (b). EBA shall submit those draft regulatory technical standards to the Commission by 28 March 2020. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

Article 325bh

Requirements on risk measurement

(a) the internal risk-measurement model shall capture a sufficient number of risk factors, which shall include at least the risk factors referred to in Subsection 1 of Section 3 of Chapter 1a unless the institution demonstrates to the competent authorities that the omission of those risk factors does not have a material impact on the results of the P&L attribution requirement referred to in Article 325bg; an institution shall be able to explain to the competent authorities why it has incorporated a risk factor in its pricing model but not in its internal risk-measurement model; (b) the internal risk-measurement model shall capture nonlinearities for options and other products as well as correlation risk and basis risk; (c) the internal risk-measurement model shall incorporate a set of risk factors that correspond to the interest rates in each currency in which the institution has interest rate sensitive on- or off-balance-sheet positions; the institution shall model the yield curves using one of the generally accepted approaches; the yield curve shall be divided into various maturity segments to capture the variations of volatility of rates along the yield curve; for material exposures to interest-rate risk in the major currencies and markets, the yield curve shall be modelled using a minimum of six maturity segments, and the number of risk factors used to model the yield curve shall be proportionate to the nature and complexity of the institution's trading strategies, the model shall also capture the risk spread of less than perfectly correlated movements between different yield curves or different financial instruments on the same underlying issuer; (d) the internal risk-measurement model shall incorporate risk factors corresponding to gold and to the individual foreign currencies in which the institution's positions are denominated; for CIUs, the actual foreign exchange positions of the CIU shall be taken into account; institutions may rely on third-party reporting of the foreign exchange position of the CIU, provided that the correctness of that report is adequately ensured; foreign exchange positions of a CIU of which an institution is not aware of shall be carved out from the internal models approach and treated in accordance with Chapter 1a; (e) the sophistication of the modelling technique shall be proportionate to the materiality of the institutions' activities in the equity markets; the internal risk-measurement model shall use a separate risk factor at least for each of the equity markets in which the institution holds significant positions and at least one risk factor that captures systemic movements in equity prices and the dependency of that risk factor on the individual risk factors for each equity market; (f) the internal risk-measurement model shall use a separate risk factor at least for each commodity in which the institution holds significant positions, unless the institution has a small aggregate commodity position compared to all its trading activities, in which case it may use a separate risk factor for each broad commodity type; for material exposures to commodity markets, the model shall capture the risk of less than perfectly correlated movements between commodities that are similar, but not identical, the exposure to changes in forward prices arising from maturity mismatches, and the convenience yield between derivative and cash positions; (g) the proxies used shall show a good track record for the actual position held, shall be appropriately conservative, and shall be used only where the available data are insufficient, such as during the period of stress referred to in point (c) of Article 325bc(2); (h) for material exposures to volatility risks in instruments with optionality, the internal risk-measurement model shall capture the dependency of implied volatilities across strike prices and options' maturities.

Article 325bi

Qualitative requirements

(a) any internal risk-measurement model used to calculate capital requirements for market risk shall be closely integrated into the daily risk management process of the institution and shall serve as the basis for reporting risk exposures to senior management; (b) an institution shall have a risk control unit that is independent from business trading units and that reports directly to senior management; that unit shall be responsible for designing and implementing any internal risk-measurement model; that unit shall conduct the initial and on-going validation of any internal model used for the purposes of this Chapter and shall be responsible for the overall risk management system; that unit shall produce and analyse daily reports on the output of any internal model used to calculate capital requirements for market risk, as well as reports on the appropriateness of measures to be taken in terms of trading limits; (c) the management body and senior management shall be actively involved in the risk-control process, and the daily reports produced by the risk control unit shall be reviewed at a level of management with sufficient authority to require the reduction of positions taken by individual traders and to require the reduction of the institution's overall risk exposure; (d) the institution shall have a sufficient number of staff with a level of skills that is appropriate to the sophistication of the internal risk-measurement models, and a sufficient number of staff with skills in the trading, risk control, audit and back-office areas; (e) the institution shall have in place a documented set of internal policies, procedures and controls for monitoring and ensuring compliance with the overall operation of its internal risk-measurement models; (f) any internal risk-measurement model, including any pricing model, shall have a proven track record of being reasonably accurate in measuring risks, and shall not differ significantly from the models that the institution uses for its internal risk management; (g) the institution shall frequently conduct rigorous programmes of stress testing, including reverse stress tests, which shall encompass any internal risk-measurement model; the results of those stress tests shall be reviewed by senior management at least on a monthly basis and shall comply with the policies and limits approved by the management body; the institution shall take appropriate actions where the results of those stress tests show excessive losses arising from the trading's business of the institution under certain circumstances; (h) the institution shall conduct an independent review of its internal risk-measurement models, either as part of its regular internal auditing process, or by mandating a third-party undertaking to conduct that review, which shall be conducted to the satisfaction of the competent authorities. For the purposes of point (h) of the first subparagraph, a third-party undertaking means an undertaking that provides auditing or consulting services to institutions and that has staff who have sufficient skills in the area of market risk in trading activities.

(a) the adequacy of the documentation of the risk management system and process and the organisation of the risk control unit; (b) the integration of risk measures into daily risk management and the integrity of the management information system; (c) the processes the institution employs for approving the risk-pricing models and valuation systems that are used by front and back-office personnel; (d) the scope of risks captured by the model, the accuracy and appropriateness of the risk-measurement system, and the validation of any significant changes to the internal risk-measurement model; (e) the accuracy and completeness of position data, the accuracy and appropriateness of volatility and correlation assumptions, the accuracy of valuation and risk sensitivity calculations, and the accuracy and appropriateness for generating data proxies where the available data are insufficient to meet the requirement set out in this Chapter; (f) the verification process that the institution employs to evaluate the consistency, timeliness and reliability of the data sources used to run any of its internal risk-measurement models, including the independence of those data sources; (g) the verification process that the institution employs to evaluate back-testing requirements and P&L attribution requirements that are conducted in order to assess the accuracy of its internal risk-measurement models; (h) where the review is performed by a third-party undertaking in accordance with point (h) of paragraph 1 of this Article, the verification that the internal validation process set out in Article 325bj fulfils its objectives.

Article 325bj

Internal validation

(a) when any internal risk-measurement model is initially developed and when any significant changes are made to that model; (b) on a periodic basis, and where there have been significant structural changes in the market or changes to the composition of the portfolio which might lead to the internal risk-measurement model no longer being adequate.

(a) tests to verify whether the assumptions made in the internal model are appropriate and do not underestimate or overestimate the risk; (b) own internal model validation tests, including back-testing in addition to the regulatory back-testing programmes, in relation to the risks and structures of their portfolios; (c) the use of hypothetical portfolios to ensure that the internal risk-measurement model is able to account for particular structural features that may arise, for example, material basis risks and concentration risk, or the risks associated with the use of proxies.

Article 325bk

Calculation of stress scenario risk measure

(a) how institutions are to develop extreme scenarios of future shock applicable to non-modellable risk factors and how they are to apply those extreme scenarios of future shock to those risk factors; (b) a regulatory extreme scenario of future shock for each broad sub-category of risk factors listed in Table 2 of Article 325bd, which institutions may use when they are unable to develop an extreme scenario of future shock in accordance with point (a) of this subparagraph, or which competent authorities may require that institution apply if those authorities are not satisfied with the extreme scenario of future shock developed by the institution; (c) the circumstances under which institutions may calculate a stress scenario risk measure for more than one non-modellable risk factor; (d) how institutions are to aggregate the stress scenario risk measures of all non-modellable risk factors included in their trading book positions and non-trading book positions that are subject to foreign exchange risk or commodity risk. In developing those draft regulatory technical standards, EBA shall take into consideration the requirement that the level of own funds requirements for market risk of a non-modellable risk factor as set out in this Article shall be as high as the level of own funds requirements for market risk that would have been calculated under this Chapter if that risk factor were modellable. EBA shall submit those draft regulatory technical standards to the Commission by 28 September 2020. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. Section 3 Internal default risk model

Article 325bl

Scope of the internal default risk model

Article 325bm

Permission to use an internal default risk model

Article 325bn

Own funds requirements for default risk using an internal default risk model

(a) the own funds requirements shall be equal to a value-at-risk number measuring potential losses in the market value of the portfolio caused by the default of issuers related to those positions at the 99,9 % confidence interval over a one-year time horizon; (b) the potential loss referred to in point (a) means a direct or indirect loss in the market value of a position which was caused by the default of the issuers and which is incremental to any losses already taken into account in the current valuation of the position; the default of the issuers of equity positions shall be represented by the value for the issuers' equity prices being set to zero; (c) institutions shall determine default correlations between different issuers on the basis of a conceptually sound methodology, using objective historical data on market credit spreads or equity prices that cover at least a 10 year period that includes the stress period identified by the institution in accordance with Article 325bc(2); the calculation of default correlations between different issuers shall be calibrated to a one-year time horizon; (d) the internal default risk model shall be based on a one-year constant position assumption.

Article 325bo

Recognition of hedges in an internal default risk model

Article 325bp

Particular requirements for an internal default risk model

(a) the default probabilities shall be floored at 0,03 %; (b) the default probabilities shall be based on a one-year time horizon, unless stated otherwise in this Section; (c) the default probabilities shall be measured using, solely or in combination with current market prices, data observed during a historical period of at least five years of actual past defaults and extreme declines in market prices equivalent to default events; default probabilities shall not be inferred solely from current market prices; (d) an institution that has been granted permission to estimate default probabilities in accordance with Section 1 of Chapter 3 of Title II shall use the methodology set out therein to calculate default probabilities; (e) an institution that has not been granted permission to estimate default probabilities in accordance with Section 1 of Chapter 3 of Title II shall develop an internal methodology or use external sources to estimate default probabilities; in both situations, the estimates of default probabilities shall be consistent with the requirements set out in this Article.

(a) the loss given default estimates are floored at 0 %; (b) the loss given default estimates shall reflect the seniority of each position; (c) an institution that has been granted permission to estimate loss given default in accordance with Section 1 of Chapter 3 of Title II shall use the methodology set out therein to calculate loss given default estimates; (d) an institution that has not been granted permission to estimate loss given default in accordance with Section 1 of Chapter 3 of Title II shall develop an internal methodology or use external sources to estimate loss given default; in both situations, the estimates of loss given default shall be consistent with the requirements set out in this Article.

(a) verify that their approach for the modelling of correlations and price changes is appropriate for their portfolio, including the choice and weights of the systematic risk factors in the model; (b) perform a variety of stress tests, including sensitivity analyses and scenario analyses, to assess the qualitative and quantitative reasonableness of the internal default risk model, in particular with regard to the treatment of concentrations; and (c) apply appropriate quantitative validation including relevant internal modelling benchmarks. The tests referred to in point (b) shall not be limited to the range of past events experienced.

EBA shall submit those draft regulatory technical standards to the Commission by 28 September 2020. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.’;

(91) ‘

the total counterparty credit risk exposure value of counterparty ‘i’ (summed across its netting sets) including the effect of collateral in accordance with the methods set out in Sections 3 to 6 of Chapter 6 of Title II as applicable to the calculation of the own funds requirements for counterparty credit risk for that counterparty.’;

(92) Article 385 is replaced by the following: ‘Article 385 Alternative to using CVA methods for calculating own funds requirements As an alternative to Article 384, for instruments referred to in Article 382 and subject to the prior consent of the competent authority, institutions using the Original Exposure Method as laid down in Article 282 may apply a multiplication factor of 10 to the resulting risk-weighted exposure amounts for counterparty credit risk for those exposures instead of calculating the own funds requirements for CVA risk.’;

(93) Article 390 is replaced by the following: ‘Article 390 Calculation of the exposure value

(a) offset their long positions and short positions in the same financial instruments issued by a given client, with the net position in each of the different instruments being calculated in accordance with the methods laid down in Chapter 2 of Title IV of Part Three; (b) offset their long positions and short positions in different financial instruments issued by a given client, but only where the financial instrument underlying the short position is junior to the financial instrument underlying the long position or where the underlying instruments are of the same seniority. For the purposes of points (a) and (b), financial instruments may be allocated into buckets on the basis of different degrees of seniority in order to determine the relative seniority of positions.

When calculating the exposure value for the contracts referred to in the first subparagraph, where those contracts are allocated to the trading book, institutions shall also comply with the principles set out in Article 299. By way of derogation from the first subparagraph, institutions with permission to use the methods referred to in Section 4 of Chapter 4 of Title II of Part Three and Section 6 of Chapter 6 of Title II of Part Three may use those methods for calculating the exposure value for securities financing transactions.

(a) in the case of foreign exchange transactions, exposures incurred in the ordinary course of settlement during the two business days following payment; (b) in the case of transactions for the purchase or sale of securities, exposures incurred in the ordinary course of settlement during the five business days following payment or delivery of the securities, whichever is the earlier; (c) in the case of the provision of money transmission including the execution of payment services, clearing and settlement in any currency and correspondent banking or financial instruments clearing, settlement and custody services to clients, delayed receipts in funding and other exposures arising from client activity which do not last longer than the following business day; (d) in the case of the provision of money transmission including the execution of payment services, clearing and settlement in any currency and correspondent banking, intra-day exposures to institutions providing those services; (e) exposures deducted from Common Equity Tier 1 items or Additional Tier 1 items in accordance with Articles 36 and 56 or any other deduction from those items that reduces the solvency ratio.

(a) the conditions and methodologies to be used to determine the overall exposure to a client or a group of connected clients for the types of exposures referred to in paragraph 7; (b) the conditions under which the structure of the transactions referred to in paragraph 7 do not constitute an additional exposure. EBA shall submit those draft regulatory technical standards to the Commission by 1 January 2014. Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

EBA shall submit those draft regulatory technical standards to the Commission by 28 March 2020. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.’;

(94) in Article 391, the following paragraph is added: ‘For the purposes of the first paragraph, the Commission may adopt, by means of implementing acts, and subject to the examination procedure referred to in Article 464(2), decisions as to whether a third country applies prudential supervisory and regulatory requirements at least equivalent to those applied in the Union.’;

(95) Article 392 is replaced by the following: ‘Article 392 Definition of a large exposure An institution's exposure to a client or a group of connected clients shall be considered a large exposure where the value of the exposure is equal to or exceeds 10 % of its Tier 1 capital.’;

(96) Article 394 is replaced by the following: ‘Article 394 Reporting requirements

(a) the identity of the client or the group of connected clients to which the institution has a large exposure; (b) the exposure value before taking into account the effect of the credit risk mitigation, where applicable; (c) where used, the type of funded or unfunded credit protection; (d) the exposure value, after taking into account the effect of the credit risk mitigation calculated for the purposes of Article 395(1), where applicable. Institutions that are subject to Chapter 3 of Title II of Part Three shall report their 20 largest exposures to their competent authorities on a consolidated basis, excluding the exposures exempted from the application of Article 395(1). Institutions shall also report exposures of a value greater than or equal to EUR 300 million but less than 10 % of the institution's Tier 1 capital to their competent authorities on a consolidated basis.

(a) the identity of the client or the group of connected clients to which an institution has a large exposure; (b) the exposure value before taking into account the effect of the credit risk mitigation, where applicable; (c) where used, the type of funded or unfunded credit protection; (d) the exposure value after taking into account the effect of the credit risk mitigation calculated for the purposes of Article 395(1), where applicable.

In developing those draft regulatory technical standards, EBA shall take into account international developments and internationally agreed standards on shadow banking and shall consider whether: (a) the relation with an individual entity or a group of entities may carry risks to the institution's solvency or liquidity position; (b) entities that are subject to solvency or liquidity requirements similar to those imposed by this Regulation and Directive 2013/36/EU should be entirely or partially excluded from the obligation to be reported referred to in paragraph 2 on shadow banking entities. EBA shall submit those draft regulatory technical standards to the Commission by 28 June 2020. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.’;

(97) Article 395 is amended as follows: (a) paragraph 1 is replaced by the following: ‘1. An institution shall not incur an exposure, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403, to a client or a group of connected clients the value of which exceeds 25 % of its Tier 1 capital. Where that client is an institution or where a group of connected clients includes one or more institutions, that value shall not exceed 25 % of the institution's Tier 1 capital or EUR 150 million, whichever is higher, provided that the sum of exposure values, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403, to all connected clients that are not institutions does not exceed 25 % of the institution's Tier 1 capital. Where the amount of EUR 150 million is higher than 25 % of the institution's Tier 1 capital, the value of the exposure, after having taken into account the effect of credit risk mitigation in accordance with Articles 399 to 403 of this Regulation, shall not exceed a reasonable limit in terms of that institution's Tier 1 capital. That limit shall be determined by the institution in accordance with the policies and procedures referred to in Article 81 of Directive 2013/36/EU in order to address and control concentration risk. That limit shall not exceed 100 % of the institution's Tier 1 capital. Competent authorities may set a lower limit than EUR 150 million, in which case they shall inform EBA and the Commission thereof. By way of derogation from the first subparagraph of this paragraph, a G-SII shall not incur an exposure to another G-SII or a non-EU G-SII, the value of which, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403, exceeds 15 % of its Tier 1 capital. A G-SII shall comply with such limit no later than 12 months from the date on which it came to be identified as a G-SII. Where the G-SII has an exposure to another institution or group which comes to be identified as a G-SII or as a non-EU G-SII, it shall comply with such limit no later than 12 months from the date on which that other institution or group came to be identified as a G-SII or as a non-EU G-SII.’; (b) paragraph 5 is replaced by the following: ‘5. The limits laid down in this Article may be exceeded for the exposures in the institution's trading book, provided that all the following conditions are met: (a) the exposure in the non-trading book to the client or group of connected clients in question does not exceed the limit laid down in paragraph 1, this limit being calculated with reference to Tier 1 capital, so that the excess arises entirely in the trading book; (b) the institution meets an additional own funds requirement on the part of the exposure in excess of the limit laid down in paragraph 1 of this Article which is calculated in accordance with Articles 397 and 398; (c) where 10 days or less have elapsed since the excess referred to in point (b) occurred, the trading-book exposure to the client or group of connected clients in question does not exceed 500 % of the institution's Tier 1 capital; (d) any excesses that have persisted for more than 10 days do not, in aggregate, exceed 600 % of the institution's Tier 1 capital. Each time the limit has been exceeded, the institution shall report to the competent authorities without delay the amount of the excess and the name of the client concerned and, where applicable, the name of the group of connected clients concerned.’;

(98) Article 396 is amended as follows: (a) paragraph 1 is amended as follows: (i) the second subparagraph is replaced by the following: ‘Where the amount of EUR 150 million referred to in Article 395(1) is applicable, the competent authorities may allow the 100 % limit in terms of the institution's Tier 1 capital to be exceeded on a case-by-case basis.’; (ii) the following subparagraph is added: ‘Where, in the exceptional cases referred to in the first and second subparagraph of this paragraph, a competent authority allows an institution to exceed the limit set out in Article 395(1) for a period longer than three months, the institution shall present a plan for a timely return to compliance with that limit to the satisfaction of the competent authority and shall carry out that plan within the period agreed with the competent authority. The competent authority shall monitor the implementation of the plan and shall require a more rapid return to compliance if appropriate.’; (b) the following paragraph is added: ‘3. For the purposes of paragraph 1, EBA shall issue guidelines in accordance with Article 16 of Regulation (EU) No 1093/2010 to specify how the competent authorities may determine: (a) the exceptional cases referred to in paragraph 1 of this Article; (b) the time considered appropriate for returning to compliance; (c) the measures to be taken to ensure the timely return to compliance of the institution.’;

(99) in Article 397, in Column 1 of Table 1, the term ‘eligible capital’ is replaced by the term ‘Tier 1 capital’;

(100) Article 399 is amended as follows: (a) paragraph 1 is replaced by the following: ‘1. An institution shall use a credit risk mitigation technique in the calculation of an exposure where it has used that technique to calculate capital requirements for credit risk in accordance with Title II of Part Three, provided that the credit risk mitigation technique meets the conditions set out in this Article. For the purposes of Articles 400 to 403, the term ‘guarantee’ shall include credit derivatives recognised under Chapter 4 of Title II of Part Three other than credit linked notes.’; (b) paragraph 3 is replaced by the following: ‘3. Credit risk mitigation techniques which are available only to institutions using one of the IRB approaches shall not be used to reduce exposure values for large exposure purposes, except for exposures secured by immovable properties in accordance with Article 402.’;