This chapter sets out specification and model eligibility for risk factors per the internal models approach.

Version effective as of 01 Jan 2023

Updated to include the following FAQ: MAR31.13 FAQ2.

Specification of market risk factors

31.1 An important part of a bank’s trading desk internal risk management model is the specification of an appropriate set of market risk factors. Risk factors are the market rates and prices that affect the value of the bank’s trading positions. The risk factors contained in a trading desk risk management model must be sufficient to represent the risks inherent in the bank’s portfolio of on- and off- balance sheet trading positions. Although banks will have some discretion in specifying the risk factors for their internal models, the following requirements must be fulfilled.

31.2 A bank’s market risk capital requirement models should include all risk factors that are used for pricing. In the event a risk factor is incorporated in a pricing model but not in the trading desk risk management model, the bank must support this omission to the satisfaction of its supervisory authority.

31.3 A bank’s market risk capital requirement model must include all risk factors that are specified in the standardised approach for the corresponding risk class, as set out in MAR20 to MAR22.

(1) In the event a standardised approach risk factor is not included in the market risk capital requirement model, the bank must support this omission to the satisfaction of its supervisory authority.