§3.207. Specific risk. — Inbound Citations

(iii) A national bank's or Federal savings association's specific risk add-ons equal any specific risk add-ons that are required under § 3.207 and are calculated in accordance with § 3.210.

(ii) Determine its specific risk add-on for debt positions issued by the counterparty using a specific risk model described in § 3.207(b).

(a) A national bank or Federal savings association that measures the specific risk of a portfolio of debt positions under § 3.207(b) using internal models must calculate at least weekly an incremental risk measure for that portfolio according to the requirements in this section. The incremental risk measure is the national bank's or Federal savings association's measure of potential losses due to incremental 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. With the prior approval of the OCC, a national bank or Federal savings association may choose to include portfolios of equity positions in its incremental risk model, provided that it consistently includes such equity positions in a manner that is consistent with how the national bank or Federal savings association internally measures and manages the incremental risk of such positions at the portfolio level. If equity positions are included in the model, for modeling purposes default is considered to have occurred upon the default of any debt of the issuer of the equity position. A national bank or Federal savings association may not include correlation trading positions or securitization positions in its incremental risk measure.

(i) A national bank or Federal savings association may use the VaR model that it uses to determine specific risk under § 3.207(b) or another VaR model that meets the quantitative requirements of §§ 3.205(b) and 3.207(b)(1) to calculate its CVA capital requirement for a counterparty by modeling the impact of changes in the counterparties' credit spreads, together with any recognized CVA hedges, on the CVA for the counterparties, subject to the following requirements:

(A) The VaR model must incorporate only changes in the counterparties' credit spreads, not changes in other risk factors. The VaR model does not need to capture jump-to-default risk;

(B) A national bank or Federal savings association that qualifies to use the advanced CVA approach must include in that approach any immaterial OTC derivative portfolios for which it uses the standardized approach for counterparty credit risk methodology in paragraph (c) of this section according to paragraph (e)(6)(viii) of this section; and

(C) A national bank or Federal savings association must have the systems capability to calculate the CVA capital requirement for a counterparty on a daily basis (but is not required to calculate the CVA capital requirement on a daily basis).

(10) If a national bank or Federal savings association uses internal models to measure specific risk, the internal models must also satisfy the requirements in paragraph (b)(1) of § 3.207.

(a) A national bank or Federal savings association must use one or more internal models to calculate daily a VaR-based measure of the general market risk of all covered positions. The daily VaR-based measure also may reflect the national bank's or Federal savings association's specific risk for one or more portfolios of debt and equity positions, if the internal models meet the requirements of paragraph (b)(1) of § 3.207. The daily VaR-based measure must also reflect the national bank's or Federal savings association's specific risk for any portfolio of correlation trading positions that is modeled under § 3.209. A national bank or Federal savings association may elect to include term repo-style transactions in its VaR-based measure, provided that the national bank or Federal savings association includes all such term repo-style transactions consistently over time.

(1) The national bank's or Federal savings association's internal models for calculating its VaR-based measure must use risk factors sufficient to measure the market risk inherent in all covered positions. The market risk categories must include, as appropriate, interest rate risk, credit spread risk, equity price risk, foreign exchange risk, and commodity price risk. For material positions in the major currencies and markets, modeling techniques must incorporate enough segments of the yield curve—in no case less than six—to capture differences in volatility and less than perfect correlation of rates along the yield curve.

(2) The VaR-based measure may incorporate empirical correlations within and across risk categories, provided the national bank or Federal savings association validates and demonstrates the reasonableness of its process for measuring correlations. If the VaR-based measure does not incorporate empirical correlations across risk categories, the national bank or Federal savings association must add the separate measures from its internal models used to calculate the VaR-based measure for the appropriate market risk categories (interest rate risk, credit spread risk, equity price risk, foreign exchange rate risk, and/or commodity price risk) to determine its aggregate VaR-based measure.

(3) The VaR-based measure must include the risks arising from the nonlinear price characteristics of options positions or positions with embedded optionality and the sensitivity of the fair value of the positions to changes in the volatility of the underlying rates, prices, or other material risk factors. A national bank or Federal savings association with a large or complex options portfolio must measure the volatility of options positions or positions with embedded optionality by different maturities and/or strike prices, where material.

(4) The national bank or Federal savings association must be able to justify to the satisfaction of the OCC the omission of any risk factors from the calculation of its VaR-based measure that the national bank or Federal savings association uses in its pricing models.

(5) The national bank or Federal savings association must demonstrate to the satisfaction of the OCC the appropriateness of any proxies used to capture the risks of the national bank's or Federal savings association's actual positions for which such proxies are used.