Article 221 › 4

Competent authorities shall permit an institution to use an internal models approach only where they are satisfied that the institution's system for managing the risks arising from the transactions covered by the master netting agreement is conceptually sound and implemented with integrity and where the following qualitative standards are met: (a) the internal risk-measurement model used for calculating the potential price volatility for the transactions is closely integrated into the daily risk-management process of the institution and serves as the basis for reporting risk exposures to the senior management of the institution; (b) the institution has a risk control unit that meets all the following requirements: (i) it is independent from business trading units and reports directly to senior management; (ii) it is responsible for designing and implementing the institution's risk-management system; (iii) it produces and analyses daily reports on the output of the risk-measurement model and on the appropriate measures to be taken in terms of position limits; (c) the daily reports produced by the risk-control unit are reviewed by a level of management with sufficient authority to enforce reductions of positions taken and of overall risk exposure; (d) the institution has sufficient staff skilled in the use of sophisticated models in the risk control unit; (e) the institution has established procedures for monitoring and ensuring compliance with a documented set of internal policies and controls concerning the overall operation of the risk-measurement system; (f) the institution's models have a proven track record of reasonable accuracy in measuring risks demonstrated through the back-testing of its output using at least one year of data; (g) the institution frequently conducts a rigorous programme of stress testing and the results of these tests are reviewed by senior management and reflected in the policies and limits it sets; (h) the institution conducts, as part of its regular internal auditing process, an independent review of its risk-measurement system. This review shall include both the activities of the business trading units and of the independent risk-control unit; (i) at least once a year, the institution conducts a review of its risk-management system; (j) the internal model meets the requirements set out in Article 292(8) and (9) and in Article 294.

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Source: EUR-Lex CELLAR · retrieved 2026-09-04