Expected shortfall must be computed on a daily basis at a 97.5th percentile confidence level for each trading desk included in the scope for the internal model. The calculation must be calculated for a base liquidity horizon of 10 days and scaled to 20,40,60 and 120 days liquidity horizon. The horizons are based on risk factor categories. The ES must be calibrated to a the most severe 12-month period of stress over the observation horizon in which the portfolio experienced the largest loss using relevant risk factors.
Models must be periodically revalidated for any structural changes in market or the composition of the portfolio. If the desk experiences four or more breaches within the prior 12 months then it must be capitalised under the standardised approach. Banks must calculate the standardised capital charge for each trading desk which will be used as fallback capital charge for those desks that fail the eligibility under internal model approach. |