Commission Delegated Regulation (EU) 2022/439 of 20 October 2021 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards for the specification of the assessment methodology competent authorities are to follow when assessing the compliance of credit institutions and investment firms with the requirements to use the Internal Ratings Based Approach (Text with EEA relevance)

When assessing the adequacy of the models used to estimate the equity return distributions for the calculation of own funds requirements in accordance with Article 186 of Regulation (EU) No 575/2013, competent authorities shall verify that:

• (a) the model is appropriate for the risk profile and complexity of an institution's equity portfolio, and that where the institution has material holdings with values that are highly non-linear in nature, the model accounts for that in an appropriate manner;

• (b) the mapping of individual positions to proxies, market indices and risk factors is plausible, intuitive and conceptually sound;

• (c) the selected risk factors are appropriate and effectively cover both general and specific risk;

• (d) the model adequately explains the historical price variation;

• (e) the model captures both the magnitude of potential concentrations and changes in their composition.

Article 79

Comprehensiveness of the stress-testing programme

• (a) the alternative adverse scenarios are relevant to the specific holdings of the institution, reflect significant losses to the institution and capture effects which are not reflected in the outcomes of the model;

• (b) the outcomes of the model under the alternative adverse scenarios are used in the actual risk management for the equity portfolio and are periodically reported to senior management;

• (c) the alternative adverse scenarios are periodically reviewed and updated.

Article 80

Integrity of the model and modelling process

• (a) the internal model is fully integrated into the management of the non-trading book equity portfolio, the overall management information systems of the institution and the institution's risk management infrastructure and is used to monitor the investment limits and the risk of equity exposures;

• (b) the modelling unit is competent and independent from the unit responsible for managing the individual investments.

• (a) the institution’s management body and senior management are actively involved in the risk control process in the sense that they have, endorsed a set of investment limits based, among other factors, on the internal model’s results;

• (b) the reports produced by the risk control unit are reviewed by persons at a level of management with sufficient authority to enforce reductions of positions as well as reduction in the institution’s overall risk exposure;

• (c) action plans are in place for market crisis situations affecting activities within the model’s scope, describing the events that trigger them and the planned actions.

• (a) the staff and the senior management responsible for the modelling unit do not perform tasks relating to managing the individual investments;

• (b) the senior managers of modelling units and of units responsible for managing the individual investments have different reporting lines at the level of the management body of the institution or the committee designated by it;

• (c) the remuneration of the staff and of the senior management responsible for the modelling unit is not linked to the performance of the tasks relating to managing the individual investments.

Article 81

Adequacy of assignment of exposures to the internal models approach

When assessing the adequacy of the assignment of each exposure in the range of application of an approach for equity exposures to the internal models approach in accordance with Article 144(1)(h) of Regulation (EU) No 575/2013, competent authorities shall evaluate the definitions, processes and criteria for assigning or reviewing the assignment.

Article 82

Adequacy of the validation function

When assessing the adequacy of the validation function with regard to the requirements laid down in point (f) of Article 144(1) and Article 188 of Regulation (EU) No 575/2013, competent authorities shall apply Articles 10 to 13 and shall verify that:

• (a) the institution compares the first percentile of the actual equity returns with the modelled estimates at least on a quarterly basis;

• (b) the comparison referred to in point (a) makes use of an observation period equal at least to one year and of a time horizon that allows the computation of the first percentile based on non-overlapping observations;

• (c) where the percentage of observations below the estimated first percentile of equity returns is above 1 %, this is adequately justified and relevant remedial actions are taken by the institution.

CHAPTER 14 ASSESSMENT METHODOLOGY FOR MANAGEMENT OF CHANGES TO RATING SYSTEMS

Article 83

General

• (a) review the institution’s change policy;

• (b) review the relevant minutes of the institution’s internal bodies, including the management body, model committee, or other committees;

• (c) review the relevant reports on the management of changes to the rating systems and the recommendations by the credit risk control unit, validation function, internal audit function or any other control function of the institution;

• (d) review the relevant progress reports on the efforts made by the institution to correct shortcomings and mitigate risks detected during monitoring, validations and audits;

• (e) obtain written statements from or interview the relevant staff and the senior management of the institution.

Article 84

Change policy content

When assessing an institution’s change policy, competent authorities shall verify that the change policy implements the requirements of Regulation (EU) No 575/2013 as well as the criteria laid down in Articles 1 to 5, Article 8 and Annex I to Delegated Regulation (EU) No 529/2014 and that it provides for the practical application of those requirements and criteria taking into account the following:

• (a) responsibilities, reporting lines and procedures for the internal approval of changes, having regard to the institution’s organisational characteristics and approach specificities;

• (b) definitions, methods and, where applicable, metrics for the classification of changes;

• (c) procedures to identify, monitor, notify and apply for permission on changes to competent authorities;

• (d) procedures for the implementation of changes, including their documentation.

CHAPTER 15 FINAL PROVISION

Article 85

Entry into force

This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, 20 October 2021.

For the Commission

The President

Ursula VON DER LEYEN