(Art. 105 para. 3)
1.1 If debt securities have a credit rating from an approved rating agency, volatility estimates for each category of securities may be provided. 1.2 When delimiting securities categories, the type of issuer, its rating, the residual term and the modified duration must be taken into account. Volatility estimates must be representative of the securities actually contained in this category. 1.3 For the other debt securities or shares recognised as collateral, the haircuts must be individually calculated for each security. 1.4 The volatilities of the collateral and the currency mismatch must be individually estimated. The estimated volatilities may not take into account the correlations between claims without collateral, collateral and exchange rates. 1.5 If the haircuts are determined using own estimates, the following quantitative requirements must be met: 1.5.1 When determining the haircut, a one-sided 99% confidence interval is to be used. 1.5.2 The minimum holding period is ten business days. 1.5.3 If the frequency of the revaluation amounts to more than one day, the minimum haircut is to be scaled according to the number of business days between the revaluation, with the help of the following formula: H = HM √[(NR + (TM - 1)) / TM] The following abbreviations apply here: H = The haircut to be applied HM = The haircut with daily revaluation NR = The actual number of business days between the revaluations TM = The minimum holding period for the transaction in question. 1.5.4 Account must be taken of the illiquidity of assets of lower quality. In cases where a predefined holding period is too short in view of the liquidity of the collateral, the holding period must be increased. Banks must recognise if historical data underestimates the potential volatility, e.g. in the case of pegged exchange rates. In such cases, the data is to be subjected to a stress test. 1.5.5 The survey period for determining the haircut must amount to at least one year. Where individual daily observations with different weightings are taken into account, the weighted average observation period must be at least a year (i.e. the weighted average time lag for the individual figures may not be less than a year). 1.5.6 The data must be updated at least once every three months. If market conditions require it, it must be updated immediately.
2.1 The estimated volatilities and holding periods must be used in the bank's daily risk management process. 2.2 The banks must ensure that the requirements of this Annex are accurately reflected in the internal guidelines, controls and procedures with respect to the risk measurement system. 2.3 The risk measurement system must be used in connection with internal credit limits. 2.4 An independent review of the risk management system must be regularly carried out as part of the internal audit process. This must encompass at least the following points: 2.4.1 the embedding of risk measurement in daily risk management; 2.4.2 the validation of any material change in risk measurement procedures; 2.4.3 the accuracy and completeness of position data; 2.4.4 the review of the consistency, promptness and reliability of the data sources used for the internal models, including the independence of such data sources; and 2.4.5 the accuracy and appropriateness of the volatility assumptions.
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