---
kind: "section"
citation: "12 C.F.R. § 217.209"
title: "12"
number: "217.209"
heading: "Comprehensive risk."
url: "https://uscodex.org/cfr/12/217.209"
---

# §217.209. Comprehensive risk.

- (a) **General requirement.**
  - (1) Subject to the prior approval of the Board, a Board-regulated institution may use the method in this section to measure comprehensive risk, that is, all price risk, for one or more portfolios of correlation trading positions.
  - (2) A Board-regulated institution that measures the price risk of a portfolio of correlation trading positions using internal models must calculate at least weekly a comprehensive risk measure that captures all price risk according to the requirements of this section. The comprehensive risk measure is either:
    - (i) **The sum of—**
      - (A) The Board-regulated institution's modeled measure of all price risk determined according to the requirements in [paragraph (b)](#b) of this section; and
      - (B) A surcharge for the Board-regulated institution's modeled correlation trading positions equal to the total specific risk add-on for such positions as calculated under [section 210](/cfr/12/210.md) of this subpart multiplied by 8.0 percent; or
    - (ii) With approval of the Board and provided the Board-regulated institution has met the requirements of this section for a period of at least one year and can demonstrate the effectiveness of the model through the results of ongoing model validation efforts including robust benchmarking, the greater of:
      - (A) The Board-regulated institution's modeled measure of all price risk determined according to the requirements in [paragraph (b)](#b) of this section; or
      - (B) The total specific risk add-on that would apply to the bank's modeled correlation trading positions as calculated under [section 210](/cfr/12/210.md) of this subpart multiplied by 8.0 percent.
- (b) **Requirements for modeling all price risk.** If a Board-regulated institution uses an internal model to measure the price risk of a portfolio of correlation trading positions:
  - (1) The internal model must measure comprehensive risk over a one-year time horizon at a one-tail, 99.9 percent confidence level, either under the assumption of a constant level of risk, or under the assumption of constant positions.
  - (2) The model must capture all material price risk, including but not limited to the following:
    - (i) The risks associated with the contractual structure of cash flows of the position, its issuer, and its underlying exposures;
    - (ii) Credit spread risk, including nonlinear price risks;
    - (iii) The volatility of implied correlations, including nonlinear price risks such as the cross-effect between spreads and correlations;
    - (iv) Basis risk;
    - (v) Recovery rate volatility as it relates to the propensity for recovery rates to affect tranche prices; and
    - (vi) To the extent the comprehensive risk measure incorporates the benefits of dynamic hedging, the static nature of the hedge over the liquidity horizon must be recognized. In such cases, a Board-regulated institution must:
      - (A) Choose to model the rebalancing of the hedge consistently over the relevant set of trading positions;
      - (B) Demonstrate that the inclusion of rebalancing results in a more appropriate risk measurement;
      - (C) Demonstrate that the market for the hedge is sufficiently liquid to permit rebalancing during periods of stress; and
      - (D) Capture in the comprehensive risk model any residual risks arising from such hedging strategies;
  - (3) The Board-regulated institution must use market data that are relevant in representing the risk profile of the Board-regulated institution's correlation trading positions in order to ensure that the Board-regulated institution fully captures the material risks of the correlation trading positions in its comprehensive risk measure in accordance with this section; and
  - (4) The Board-regulated institution must be able to demonstrate that its model is an appropriate representation of comprehensive risk in light of the historical price variation of its correlation trading positions.
- (c) **Requirements for stress testing.**
  - (1) A Board-regulated institution must at least weekly apply specific, supervisory stress scenarios to its portfolio of correlation trading positions that capture changes in:
    - (i) Default rates;
    - (ii) Recovery rates;
    - (iii) Credit spreads;
    - (iv) Correlations of underlying exposures; and
    - (v) **Correlations of a correlation trading position and its hedge.**
  - (2) **Other requirements.**
    - (i) A Board-regulated institution must retain and make available to the Board the results of the supervisory stress testing, including comparisons with the capital requirements generated by the Board-regulated institution's comprehensive risk model.
    - (ii) A Board-regulated institution must report to the Board promptly any instances where the stress tests indicate any material deficiencies in the comprehensive risk model.
- (d) **Calculation of comprehensive risk capital requirement.** The comprehensive risk capital requirement is the greater of:
  - (1) The average of the comprehensive risk measures over the previous 12 weeks; or
  - (2) **The most recent comprehensive risk measure.**

## Notes

### Authority

Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a, 1818, 1828, 1831n, 1831o, 1831p-1, 1831w, 1835, 1844(b), 1851, 3904, 3906-3909, 4808, 5365, 5368, 5371, 5371 note, and sec. 4012, Pub. L. 116-136, 134 Stat. 281.

### Source

Source: Reg. Q, 78 FR 62157, 62285, Oct. 11, 2013, unless otherwise noted.