This chapter sets out the process by which capital requirements are calculated per the internal models approach.

Version effective as of 01 Jan 2023

Updated to include the following FAQ: MAR33.5 FAQ4.

Calculation of expected shortfall

33.1 Banks will have flexibility in devising the precise nature of their expected shortfall (ES) models, but the following minimum standards will apply for the purpose of calculating market risk capital requirements. Individual banks or their supervisory authorities will have discretion to apply stricter standards.

FAQ

FAQ1

Does the internal models approach (IMA) require all products to be simulated on full revaluation? Can a parametric approach be used on simple products, such as a forward rate agreement?

The IMA does not require all products to be simulated on full revaluation. Simplifications (eg sensitivities-based valuation) may be used provided the bank's supervisor agrees that the method used is adequate for the instruments covered.

33.2 ES must be computed on a daily basis for the bank-wide internal models to determine market risk capital requirements. ES must also be computed on a daily basis for each trading desk that uses the internal models approach (IMA).

33.3 In calculating ES, a bank must use a 97.5th percentile, one-tailed confidence level.