Financial Services (Investment and Fiduciary Services)
FINANCIAL SERVICES (CAPITAL ADEQUACY OF INVESTMENT FIRMS) REGULATIONS 2007
the accuracy and completeness of position data, the accuracy and appropriateness of volatility and correlation assumptions, and the accuracy of valuation and risk sensitivity calculations;
the verification process the investment firm employs to evaluate the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources; and
the verification process the investment firm uses to evaluate back-testing that is conducted to assess the models’ accuracy.
Investment firms shall have processes in place to ensure that their internal
models have been adequately validated by suitably qualified parties independent of the development process to ensure that they are conceptually sound and adequately capture all material risks. The validation shall be conducted when the internal model is initially developed and when any significant changes are made to the internal model. The validation shall also be conducted on a periodic basis but especially where there have been any significant structural changes in the market or changes to the composition of the portfolio which might lead to the internal model no longer being adequate. As techniques and best practices evolve, investment firms shall avail themselves of these advances. Internal model validation shall not be limited to back-testing, but shall, at a minimum, also include the following–
tests to demonstrate that any assumptions made within the internal model are appropriate and do not underestimate or overestimate the risk;
in addition to the regulatory back-testing programmes, investment firms shall carry out their own internal model validation tests in relation to the risks and structures of their portfolios; and
the use of hypothetical portfolios to ensure that the internal model is able to account for particular structural features that may arise, for example material basis risks and concentration risk.
An investment firm shall monitor the accuracy and performance of its
model by conducting a back testing programme. The back testing has to provide for each business day a comparison of the one day value-at-risk measure generated by the investment firm’s model for the portfolio’s end-of- day positions to the one-day change of the portfolio’s value by the end of the subsequent business day.
© Government of Gibraltar (www.gibraltarlaws.gov.gi)
Repealed Subsidiary 2007/002