Do the regulatory technical standards for assessing the materiality of extensions and changes of internal approaches when calculating own funds requirements (Delegated Regulation (EU) No 529/2014, as amended by Delegated Regulation (EU) 2015/942 for market risk) imply that institutions using internal approaches for market risk shall have the capability to perform a parallel run for 15 consecutive business days for all model changes in their market risk models, such that the materiality of the extension or change can be assessed in accordance with Article 7a(1)(c) of that regulation?
According to the RTS on assessing materiality, Article 7a(1) and (2) the calculation of a quantitative impact is not necessary for determining the materiality in cases of extensions and changes that fall under the cases described in Annex III, Part I, Section 1, or Annex III Part II, Section 1 (e.g. extension to an additional location or change of the aggregation scheme). However, every internal model for market risk that an institution uses shall be capable of performing an impact analysis for the purposes of Article 7a, paragraph (1)(c)(i) and (ii) (i.e. parallel run) of the RTS, otherwise the assessment of materiality of a future model extension or change could not be performed properly, because in many cases the parallel run is the decisive criterion for classification. If the quantitative impact data is not available, there can be extensions or changes that are not properly classified. This case arises for changes and notifications requiring ex-ante notification of the supervisory authority. In case of “under-classification” (a material change being classified as non-material), the model extension or change would not be subject to the supervisory prior approval and appropriate prior scrutiny. In case of “over-classification” (a non-material change being classified as material) the model extension or change could be delayed unduly.
CRR requires firms to apply for use of internal models for measuring market risk (IMA models). Once approved, extensions and changes to models may be subject to review by competent authorities, depending on materiality. One of the requirements for certain model extensions/changes is for an impact analysis for the purposes of Article 7a(1)(c)(i) and (ii) of the RTS on materiality (‘parallel run’) of the new and old model.
The ability to do a parallel run is not a requirement for the initial model approval. However, at the time when an institution makes any model change or extension that requires a parallel run then it must be able to do so.
Regarding weekly computations cf. QA 2015_2058.
Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.