• PRU A6.9 PRU A6.9 Use of internal models for Market Risk

    • PRU A6.9.1 PRU A6.9.1 Criteria for use of internally developed Market Risk models

      • Guidance

        • Qualitative standards

          1. Any internal model used for purposes of Chapter 5 of these Rules should be conceptually sound and implemented with integrity and, in particular, all of the following qualitative requirements should be met:
          a. any internal model used to calculate Capital Requirements for equity risk, interest rate risk, foreign exchange risk or commodities risk should be closely integrated into the daily risk management process set out in (b) and serve as the basis for reporting risk Exposures to senior management;
          b. the Authorised Person should have a risk control unit that is independent from business trading units and reports directly to senior management. The unit should be responsible for designing and implementing any internal model used for purposes of Chapter 5. The unit should conduct the initial and on-going validation of any internal model used for purposes of Chapter 5. The unit should produce and analyse daily reports on the output of any internal model used for calculating Capital Requirements for position risk, foreign exchange risk and commodities risk, and on the appropriate measures to be taken in terms of trading limits;
          c. the Authorised Person's management body and senior management should be actively involved in the risk control process and the daily reports produced by the risk control unit are reviewed by a level of management with sufficient authority to enforce both reductions of positions taken by individual traders as well as in the Authorised Person's overall risk Exposure;
          d. the Authorised Person should have sufficient numbers of staff skilled in the use of sophisticated internal models, and including the ones used for purposes of Chapter 5, in the trading, risk-control, audit and back-office areas;
          e. the Authorised Person should have established procedures for monitoring and ensuring compliance with a documented set of internal policies and controls concerning the overall operation of its internal models, and including the ones used for purposes of Chapter 5;
          f. any internal model used for purposes of Chapter 5 should have a proven track record of reasonable accuracy in measuring risks;
          g. the Authorised Person should frequently conduct a rigorous programme of stress testing, including reverse stress tests, which encompasses any internal model used for purposes of Chapter 5 and the results of these stress tests should be reviewed by senior management and reflected in the policies and limits it sets. This process should particularly address illiquidity of markets in stressed market conditions, Large Exposures and concentration risks, one way markets, event and jump-to-default risks, non-linearity of products, deep out-of-the-money positions, positions subject to the gapping of prices and other risks that may not be captured appropriately in the internal models. The shocks applied should reflect the nature of the portfolios and the time it could take to hedge out or manage risks under severe market conditions; and
          h. the Authorised Person should conduct, as part of its regular internal auditing process, an independent review of its internal models, and including the ones used for purposes of Chapter 5.
          2. The review referred to in h. of Guidance note 1 above, should include the activities both of the business trading units and of the independent risk-control unit. At least once a year, the Authorised Person should conduct a review of its overall risk management process. The review should consider the following:
          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 process the Authorised Person employs for approving risk-pricing models and valuation systems that are used by front and back-office personnel;
          d. the scope of risks captured by the risk-measurement model and the validation of any significant changes in the risk-measurement process;
          e. 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;
          f. the verification process the Authorised Person employs to evaluate the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources; and
          g. the verification process the Authorised Person uses to evaluate back-testing that is conducted to assess the models' accuracy.
          3. As techniques and best practices evolve, Authorised Persons should apply those new techniques and practices in any internal model used for purposes of Chapter 5.

        • Specification of Market Risk factors

          4. Any internal model used to calculate Capital Requirements for equity position risk, interest rate risk, foreign exchange risk, commodities risk and any internal model for correlation trading should meet all of the following requirements:
          a. the model must capture accurately reflect, on a continuous basis, all material price risks, including General Market Risks and, where approval has been granted in relation to Specific Risk, Specific Risks arising on the underlying portfolio, and should ensure that sufficient risk factors are properly specified; and
          b. the model should capture a sufficient number of risk factors, depending on the level of activity of the Authorised Person in the respective markets. The risk factors in the model should be sufficient to capture the risks inherent in the Authorised Person's portfolio of on and off-balance sheet trading positions. The Authorised Person should at least incorporate those risk factors in its model that are incorporated into its pricing model. The risk-measurement model should capture nonlinearities for Options and other products as well as correlation risk and basis risk. Where proxies for risk factors are used they should show a good track record for the actual position held. Although an Authorised Person will have some discretion in specifying the risk factors for its internal models, the Regulator expects that such models will meet the criteria specified in the following paragraphs.
          5. Any internal model used to calculate Capital Requirements for position risk, foreign exchange risk or commodities risk should meet all of the following requirements:
          a. the model should incorporate a set of risk factors corresponding to the interest rates in each currency in which the Authorised Person has interest rate sensitive on or off balance sheet positions. The Authorised Person should model the yield curves using one of a number of generally accepted approaches, for example, by estimating forward rates of zero-coupon yields. For material Exposures to interest-rate risk in the major currencies and markets, the yield curve should be divided into a minimum of six maturity segments, to capture the variations of volatility of rates along the yield curve. The model should also capture the risk of less than perfectly correlated movements between different yield curves. The risk measurement system should incorporate separate risk factors to capture spread risk, for example, between bonds and swaps;
          b. the model should incorporate risk factors corresponding to gold and to the individual foreign currencies in which the Authorised Person's positions are denominated. For Collective Investment Funds the actual foreign exchange positions of the Fund should be taken into account. Authorised Persons may rely on third party reporting of the foreign exchange position of the Fund, where the correctness of this report is adequately ensured. If an Authorised Person is not aware of the foreign exchange positions of a Fund, this position should be carved out of the model and treated separately;
          c. the model should use a separate risk factor at least for each of the equity markets in which the Authorised Person holds significant positions. At a minimum, this will include a risk factor that is designed to capture market-wide movements in equity prices, for example, a market index. Positions in individual Securities or in sector indices could be expressed in "beta-equivalents" relative to this market-wide index. A relatively more detailed approach would be to have risk factors corresponding to various sectors of the overall equity market, for instance, industry sectors or cyclical and non-cyclical sectors. The most extensive approach would be to have risk factors corresponding to the volatility of individual equity issues;
          d. the model should use a separate risk factor at least for each commodity in which the Authorised Person holds significant positions. The model must also capture the risk of less than perfectly correlated movements between similar, but not identical, commodities and the Exposure to changes in forward prices arising from Maturity Mismatches. It should also take account of market characteristics, notably delivery dates and the scope provided to traders to close out positions; For more actively traded portfolios, the model should also take account of variation in the "convenience yield" between Derivative positions such as forwards and swaps and cash positions in the commodity; and
          e. the Authorised Person's internal model should conservatively assess the risk arising from less liquid positions and positions with limited price transparency under realistic market scenarios. In addition, the internal model should meet minimum data standards. Proxies should be appropriately conservative and should be used only where available data is insufficient or is not reflective of the true volatility of a position or portfolio.
          6. Authorised Persons may, in any internal model used for purposes of Chapter 5, use empirical correlations within risk categories and across risk categories only if the Authorised Person's approach for measuring correlations is sound and implemented with integrity.

        • Quantitative standards

          7. The Regulator will usually only approve an internal Value-at-Risk (VaR) model or its use when the VaR model meets the following quantitative criteria:
          a. VaR should be computed at least on a daily basis;
          b. in calculating the value-at-risk, a 99th percentile, one-tailed confidence interval is to be used;
          c. in calculating VaR, an instantaneous price shock equivalent to a 10 day movement in prices is to be used, i.e., the minimum "holding period" will be ten trading days;
          d. an effective historical observation period of at least one year except where a shorter observation period is justified by a significant upsurge in price volatility; and
          e. its data set is updated by the Authorised Person no less frequently than once every month and is reassessed whenever market prices are subject to material changes.
          8. An Authorised Person may use VaR numbers calculated according to shorter holding periods than ten days scaled up to ten days by an appropriate methodology that is reviewed periodically.

        • Qualitative standards

          9. In addition to the standards outlined under 7 and 8:
          a. no particular type of model is prescribed. So long as each model used captures all the material risks run by the Authorised Person, the Authorised Person will be free to use models based, for example, on variance-covariance matrices, historical simulations, or Monte Carlo simulations;
          b. an Authorised Person will have discretion to recognise empirical correlations within broad risk categories, for example, interest rates, exchange rates, equity prices and commodity prices, including related Options volatilities in each risk factor category;
          c. an Authorised Person's models should accurately capture the unique risks associated with Options within each of the broad risk categories; and
          d. an Authorised Person should calculate, on a daily basis, its Market Risk Capital Requirement or any component for which an internal model is used, expressed as the higher of (a) its previous day's VaR number measured according to the parameters specified in this Section and (b) an average of the daily VaR measures on each of the preceding 60 business days, multiplied by a multiplication factor.
          10. The Regulator will usually set a multiplication factor of 3 that must be used by the Authorised Person where all the qualitative and quantitative criteria are satisfied. This will be imposed as a condition on the approval and may be varied by the Regulator should circumstances require.
          11. In addition to the calculation of VaR, an Authorised Person using internal VaR models, an Authorised Person should at least on a weekly basis, calculate a 'Stressed VaR' of the current portfolio, in accordance with the requirements set out in Guidance note 7, with VaR model inputs calibrated to historical data from a continuous 12-month period of significant financial stress relevant to the Authorised Person's portfolio. The choice of such historical data should be subject to at least annual review by the Authorised Person, which should notify the outcome to the Regulator.
          12. An Authorised Person using an internal model should calculate Capital Requirement for the relevant risk categories, as the sum of points (a) and (b):
          a. the higher of:
          i. its previous day's VaR number calculated in accordance with Guidance note 7 of this guidance under A6.9.1; or
          ii. an average of the daily value-at-risk numbers calculated in accordance with Guidance note 7 of A6.9.1, on each of the preceding 60 business days (VaRavg), multiplied by the multiplication factor referred in Guidance note 8 of A6.9.1; plus
          b. the higher of:
          i. its latest available stressed-value-at-risk number calculated in accordance with Guidance note 9 of A6.9.1 (sVaRt-1); or
          ii. an average of the stressed VaR numbers calculated in accordance with Guidance note 9 of A6.9.1 during the preceding 60 business days (sVaRavg), multiplied by the multiplication factor (ms) according to Guidance note 10.

        • Regulatory back-testing and multiplication factors

          13. The results of the Stressed VaR calculations referred to in Guidance note 11 of A6.9.1 should be scaled up by the multiplication factors given below.
          14. The multiplication factor referred to above is defined as the sum of 3 and an addend of between 0 and 1, where that addend should depend on the number of violations for the most recent 250 business days as evidenced by the Authorised Person's back-testing of the VaR as set out in Guidance note 7 above.
           
          Number of violations addend
          Fewer than 5 0.00
          5 0.40
          6 0.50
          7 0.65
          8 0.75
          9 0.85
          10 or more 1.00
          15. An Authorised Person should count daily violations on the basis of back-testing on hypothetical and actual changes in the portfolio's value. A violation for this purpose is defined as a one-day change in the portfolio's value that exceeds the related one-day VaR number generated by the Authorised Person's model. For the purpose of determining the addend the number of violations should be assessed at least on a quarterly basis and should be equal to the higher of the number of violations under hypothetical and actual changes in the value of the portfolio.
          16. Back-testing on hypothetical changes in the portfolio's value should be based on a comparison between the portfolio's end-of-day value and, assuming unchanged positions, its value at the end of the subsequent day. Back-testing on actual changes in the portfolio's value should be based on a comparison between the portfolio's end-of-day value and its actual value at the end of the subsequent day excluding fees, commissions, and net interest income.
          17. The Regulator may in individual cases limit the addend to that resulting from violations under hypothetical changes, where the number of violations under actual changes does not result from deficiencies in the internal model.
          18. In order to enable the Regulator to monitor the appropriateness of the multiplication factors on an ongoing basis, the Authorised Person should notify promptly, and in any case no later than within five working days, any violations that result from its back-testing programme.

        • Internal Validation

          19. Authorised Persons should have processes in place to ensure that all their internal models used for purposes of Chapter 5 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 should be conducted when the internal model is initially developed and when any significant changes are made to the internal model.

          The validation should 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 for internal validation evolve, Authorised Persons should apply these advances. Internal model validation should not be limited to back-testing, but should, at a minimum, also include the following:
          a. tests to demonstrate that any assumptions made within the internal model are appropriate and do not underestimate or overestimate the risk;
          b. in addition to regulatory back-testing of programmes, Authorised Persons should carry out their own internal model validation tests, including back-testing, in relation to the risks and structures of their portfolios; and
          c. 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.
          20. The Authorised Person should perform back-testing on both actual and hypothetical changes in the portfolio's value.

        • Requirements for modelling Specific Risk

          21. An internal model used for calculating Capital Requirements for Specific Risk and an internal model for correlation trading should meet the following additional requirements:
          a. it explains the historical price variation in the portfolio;
          b. it captures concentration in terms of magnitude and changes of composition of the portfolio;
          c. it is robust to an adverse environment;
          d. it is validated through back-testing aimed at assessing whether Specific Risk is being accurately captured. If the Authorised Person performs such back-testing on the basis of relevant sub-portfolios, these must be chosen in a consistent manner;
          e. it captures name-related basis risk and should in particular be sensitive to material idiosyncratic differences between similar, but not identical, positions; and
          f. it captures event risk.

        • Exclusions from Specific Risk models

          22. An Authorised Person may choose to exclude from the calculation of its Specific Risk Capital Requirement using an internal model those positions for which it fulfils a Capital Requirement for Specific Risk in accordance with relevant Sections of Chapter 5.
          23. An Authorised Person may choose not to capture default and migration risks for debt instruments in its internal model where it is capturing those risks through internal models for incremental default and migration risk.

    • PRU A6.9.2 PRU A6.9.2 Incremental risk charge (IRC) model

      • Guidance

        1. An Authorised Person that uses an internal model for calculating Capital Requirements for Specific Risk of interest rate risk Exposures should also have an internal incremental default and migration risk (incremental risk charge, or IRC) model in place to capture the default and migration risks of its Trading Book positions that are incremental to the risks captured by the VaR measure as specified in Guidance note 7 of A6.9.1. An Authorised Person should demonstrate that its internal model meets soundness standards comparable to the Internal Ratings Based (IRB) approach for Credit Risk under the assumption of a constant level of risk, and adjusted where appropriate to reflect the impact of liquidity, concentrations, hedging and optionality.

      • Scope of the internal IRC model

        2. The internal IRC model should cover all positions subject to a Capital Requirement for specific interest rate risk, including those subject to a 0% Specific Risk capital charge under Rule A6.2.13, but should not cover securitisation positions and nth-to-default Credit Derivatives.
        3. The Authorised Person may, subject to approval by the Regulator, choose to include consistently all listed equity positions and Derivatives positions based on listed equities. The permission will be granted only if such inclusion is consistent with how the Authorised Person internally measures and manages risk.

      • Parameters of the internal IRC model

        4. Authorised Persons should use the internal model to calculate a number which measures losses due to default and internal or external ratings migration at the 99.9 % confidence interval over a time horizon of one year. Authorised Persons should calculate this number at least weekly.
        5. Correlation assumptions should be supported by analysis of objective data in a conceptually sound framework. The internal model should appropriately reflect Issuer concentrations. Concentrations that can arise within and across product classes under stressed conditions should also be reflected.
        6. The internal IRC model should reflect the impact of correlations between default and migration events. The impact of diversification between, on the one hand, default and migration events and, on the other hand, other risk factors should not be reflected.
        7. The internal model should be based on the assumption of a constant level of risk over the one-year time horizon, implying that given individual Trading Book positions or sets of positions that have experienced default or migration over their liquidity horizon are re-balanced at the end of their liquidity horizon to attain the initial level of risk. Alternatively, an Authorised Person may choose to consistently use a one-year constant position assumption.
        8. The liquidity horizons should be set according to the time required to sell the position or to hedge all material relevant price risks in a stressed market, having particular regard to the size of the position. Liquidity horizons should reflect actual practice and experience during periods of both systematic and idiosyncratic stresses. The liquidity horizon should be measured under conservative assumptions and should be sufficiently long that the act of selling or hedging, in itself, would not materially affect the price at which the selling or hedging would be executed.
        9. The determination of the appropriate liquidity horizon for a position or set of positions is subject to a floor of three months.
        10. The determination of the appropriate liquidity horizon for a position or set of positions should take into account an Authorised Person's internal policies relating to valuation adjustments and the management of stale positions. When an Authorised Person determines liquidity horizons for sets of positions rather than for individual positions, the criteria for defining sets of positions should be defined in a way that meaningfully reflects differences in liquidity. The liquidity horizons should be greater for positions that are concentrated, reflecting the longer period needed to liquidate such positions. The liquidity horizon for a securitisation warehouse should reflect the time to build, sell and securitise the assets, or to hedge the material risk factors, under stressed market conditions.

      • Recognition of hedges in the internal IRC model

        11. Hedges may be incorporated into an Authorised Person's internal model to capture the incremental default and migration risks. Positions may be netted when long and short positions refer to the same Financial Instrument. Hedging or diversification effects associated with long and short positions involving different instruments or different Financial Instruments of the same obligor, as well as long and short positions in different Issuers, may only be recognised by explicitly modelling gross long and short positions in the different instruments. Authorised Persons should reflect the impact of material risks that could occur during the interval between the hedge's maturity and the liquidity horizon as well as the potential for significant basis risks in hedging strategies by product, seniority in the capital structure, internal or external rating, maturity, vintage and other differences in the instruments. An Authorised Person should reflect a hedge only to the extent that it can be maintained even as the obligor approaches a credit or other event.
        12. For positions that are hedged via dynamic hedging strategies, a rebalancing of the hedge within the liquidity horizon of the hedged position may be recognised, provided that the Authorised Person:
        a. chooses to model rebalancing of the hedge consistently over the relevant set of Trading Book positions;
        b. demonstrates that the inclusion of rebalancing results in a better risk measurement; and
        c. 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 Requirement.

      • Additional content of the internal IRC model

        13. The internal model to capture the incremental default and migration risks should reflect the nonlinear impact of Options, structured Credit Derivatives and other positions with material nonlinear behaviour with respect to price changes. The Authorised Person should also have due regard to the amount of model risk inherent in the valuation and estimation of price risks associated with such products.
        14. The internal model should be based on data that are objective and up-to-date.
        15. As part of the independent review and validation of their internal models used for purposes of this Chapter, an Authorised Person should in particular do all of the following:
        a. 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;
        b. perform a variety of stress tests, including sensitivity analysis and scenario analysis, to assess the qualitative and quantitative reasonableness of the internal model, particularly with regard to the treatment of concentrations. Such tests should not be limited to the range of events experienced historically; and
        c. apply appropriate quantitative validation, including relevant internal modelling benchmarks.
        16. The internal model should be consistent with the Authorised Person's internal risk management methodologies for identifying, measuring, and managing trading risks.
        17. Authorised Persons should document their internal models so that their correlation and other modelling assumptions are transparent to the Regulator.
        18. The internal model should conservatively assess the risk arising from less liquid positions and positions with limited price transparency under realistic market scenarios. In addition, the internal model should meet minimum data standards. Proxies should be appropriately conservative and may be used only where available data is insufficient or is not reflective of the true volatility of a position or portfolio.

      • Not fully compliant IRC approaches

        19. If an Authorised Person uses an internal model to capture incremental default and migration risks that does not comply with all requirements specified in Guidance notes 4 to 18 of A6.9.2, but that is consistent with the Authorised Person's internal methodologies for identifying, measuring and managing incremental default and migration risks, it should be able to demonstrate that its internal model results in a Capital Requirement that is at least as high as if it were based on a model in full compliance with the requirements of the Guidance notes referred above. The Regulator will review compliance with the previous sentence at least annually.

    • PRU A6.9.3 PRU A6.9.3 Internal model for correlation trading

      • Guidance

        1. The Regulator will grant permission to use an internal model for calculating the Capital Requirement for a correlation trading portfolio only to Authorised Persons that have obtained the Regulator's approval to use an internal model for Specific Risk of interest rate risk Exposures and that meet the requirements for internal models specified earlier in this Section.
        2. Authorised Persons should use this internal model to calculate a number which adequately measures all price risks at the 99.9 % confidence interval over a time horizon of one year under the assumption of a constant level of risk, and adjusted where appropriate to reflect the impact of liquidity, concentrations, hedging and optionality. Authorised Persons should calculate this number at least weekly.
        3. The following risks should be adequately captured by the model referred to in Guidance note 1 of A6.9.3:
        a. the cumulative risk arising from multiple defaults, including different ordering of defaults, in tranched products;
        b. credit spread risk, including the Gamma and cross-Gamma effects;
        c. volatility of implied correlations, including the cross effect between spreads and correlations;
        d. basis risk, including both of the following:
        i. the basis between the spread of an index and those of its constituent single names; and
        ii. the basis between the implied correlation of an index and that of bespoke portfolios;
        e. recovery rate volatility, as it relates to the propensity for recovery rates to affect tranche prices;
        f. to the extent the comprehensive risk measure incorporated benefits from dynamic hedging, the risk of hedge slippage and the potential costs of rebalancing such hedges; and
        g. any other material price risks of positions in the correlation trading portfolio.
        4. An Authorised Person should use sufficient market data within the model referred to in Guidance note 1 in order to ensure that it fully captures the salient risks of those Exposures in its internal approach in accordance with the requirements set out in this guidance in A6.9.3. It should be able to demonstrate to the Regulator through back testing or other appropriate means that its model can appropriately explain the historical price variation of those products.
        5. The Authorised Person should have appropriate policies and procedures in place in order to separate the positions for which it holds permission to incorporate them in the Capital Requirement in accordance with this guidance in A6.9.3 from other positions for which it does not hold such permission.
        6. With regard to the portfolio of all the positions incorporated in the model referred to in Guidance note 1, the Authorised Person should regularly apply a set of specific, predetermined stress scenarios. Such stress scenarios should examine the effects of stress to default rates, recovery rates, credit spreads, basis risk, correlations and other relevant risk factors on the correlation trading portfolio. The Authorised Person should apply stress scenarios at least weekly and report at least quarterly to the Regulator the results, including comparisons with the Authorised Person's Capital Requirement in accordance with this point. Any instances where the stress test results materially exceed the Capital Requirement for the correlation trading portfolio should be reported to the Regulator in a timely manner.
        7. The internal model should conservatively assess the risk arising from less liquid positions and positions with limited price transparency under realistic market scenarios. In addition, the internal model should meet minimum data standards. Proxies should be appropriately conservative and may be used only where available data is insufficient or is not reflective of the true volatility of a position or portfolio.

    • Stress testing

      • PRU A6.9.4

        (1) For the purposes of Rule 5.11.3, an Authorised Person's internal model must meet the following criteria:
        (a) the Authorised Person's stress scenarios must cover a range of factors that can create extraordinary losses or gains in trading portfolios, or make the control of risk in those portfolios very difficult. These factors include low-probability events in all major types of risks, including the various components of market, credit, and Operational Risks;
        (b) the Authorised Person's stress tests must be both of a quantitative and qualitative nature, incorporating both Market Risk and liquidity aspects of market disturbances. Quantitative criteria must identify plausible stress scenarios to which the Authorised Person could be exposed. Qualitative criteria must emphasise that two major goals of stress testing are to evaluate the capacity of the Authorised Person's capital to absorb potential large losses and to identify steps the Authorised Person can take to reduce its risk and conserve capital; and
        (c) the Authorised Person must combine the use of supervisory stress scenarios with stress tests developed by the Authorised Person itself to reflect their Specific Risk characteristics. Information is required in three broad areas:
        (i) supervisory scenarios requiring no simulations by the Authorised Person — the Authorised Person must have information on the largest losses experienced during the reporting period available for supervisory review. This loss information must be compared to the level of capital that results from an Authorised Person's internal measurement system;
        (ii) supervisory scenarios requiring a simulation by the Authorised Person — the Authorised Person must subject its portfolio to a series of simulated stress scenarios and provide the Regulator with the results (e.g., the sensitivity of the Authorised Person's Market Risk Exposure to changes in the assumptions about volatilities and correlations); and
        (iii) scenarios developed by the Authorised Person itself to capture the specific characteristics of its portfolio.
        (2) In addition to the scenarios prescribed under (1)(c), an Authorised Person must also develop its own stress tests which it identifies as most adverse, based on the characteristics of its portfolio, for example, problems arising in a key region of the world combined with a sharp move in oil prices. The Authorised Person must also provide the Regulator with a description of the methodology used to identify and carry out the scenarios as well as with a description of the results derived from these scenarios.