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Repealed by LN. 2013/198 as from 1.1.2014 - page 79 / 94

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Financial Services (Investment and Fiduciary Services)

FINANCIAL SERVICES (CAPITAL ADEQUACY OF INVESTMENT FIRMS) REGULATIONS 2007

  • (i)

    chooses to model rebalancing of the hedge consistently over the relevant set of trading book positions,

  • (ii)

    demonstrates that the inclusion of rebalancing results in a better risk measurement, and

(iii)

demonstrates that the markets for the instruments serving as hedges are liquid enough to allow for such rebalancing even during periods of stress. Any residual risks resulting from dynamic hedging strategies must be reflected in the capital charge.

5f. The approach to capture the incremental default and migration risks shall reflect the nonlinear impact of options, structured credit derivatives and other positions with material nonlinear behaviour with respect to price changes. The institution shall also have due regard to the amount of model risk inherent in the valuation and estimation of price risks associated with such products.

5g. The approach to capture the incremental default and migration risks shall be based on data that are objective and up-to-date.

Validation

5h.As part of the independent review of their risk measurement system and the validation of their internal models as required in this Schedule, institutions shall, with a view to the approach to capture incremental default and migration risks, in particular:

  • (i)

    validate that its modelling approach for correlations and price changes is appropriate for its portfolio, including the choice and weights of its systematic risk factors;

  • (ii)

    perform a variety of stress tests, including sensitivity analysis and scenario analysis, to assess the qualitative and quantitative reasonableness of the approach, particularly with regard to the treatment of concentrations. Such tests shall not be limited to the range of events experienced historically;

(iii)

apply appropriate quantitative validation relevant internal modelling benchmarks.

including

© Government of Gibraltar (www.gibraltarlaws.gov.gi)

1989-47

Repealed Subsidiary 2007/002

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