PIB A5.9 PIB A5.9 Use of Internal Models for Market Risk
PIB A5.9.1 PIB A5.9.1 Criteria for Use of Internally Developed Market Risk Models
PIB A5.9.1 Guidance
Qualitative standards1. Any internal model used for purposes of PIB chapter 5 of
PIBshould be conceptually sound and implemented with integrity and, in particular, all of the following qualitative requirements should be met:a. any internal model used to calculate Capital Requirementsfor equity risk, interest rate risk, foreign exchange risk or commodities risk should be closely integrated into the daily risk management process set out in (b) and serve as the basis for reporting risk Exposuresto senior management;b. the Authorised Firmshould have a risk control unit that is independent from business trading units and reports directly to senior management. The unit should be responsible for designing and implementing any internal model used for purposes of PIB chapter 5. The unit should conduct the initial and on-going validation of any internal model used for purposes of PIB chapter 5. The unit should produce and analyse daily reports on the output of any internal model used for calculating Capital Requirementsfor position risk, foreign exchange risk and commodities risk, and on the appropriate measures to be taken in terms of trading limits;c. the Authorised Firm'smanagement body and senior management should be actively involved in the risk control process and the daily reports produced by the risk control unit are reviewed by a level of management with sufficient authority to enforce both reductions of positions taken by individual traders as well as in the Authorised Firm'soverall risk Exposure;d. the Authorised Firmshould have sufficient numbers of staff skilled in the use of sophisticated internal models, and including the ones used for purposes of PIB chapter 5, in the trading, risk-control, audit and back-office areas;e. the Authorised Firmshould have established procedures for monitoring and ensuring compliance with a documented set of internal policies and controls concerning the overall operation of its internal models, and including the ones used for purposes of PIB chapter 5;f. any internal model used for purposes of PIB chapter 5 should have a proven track record of reasonable accuracy in measuring risks;g. the Authorised Firmshould frequently conduct a rigorous programme of stress testing, including reverse stress tests, which encompasses any internal model used for purposes of PIB chapter 5 and the results of these stress tests should be reviewed by senior management and reflected in the policies and limits it sets. This process should particularly address illiquidity of markets in stressed market conditions, Concentration Risk, one way markets, event and jump-to-default risks, non-linearity of products, deep out-of-the-money positions, positions subject to the gapping of prices and other risks that may not be captured appropriately in the internal models. The shocks applied should reflect the nature of the portfolios and the time it could take to hedge out or manage risks under severe market conditions; andh. the Authorised Firmshould conduct, as part of its regular internal auditing process, an independent review of its internal models, and including the ones used for purposes of PIB chapter 5.2. The review referred to in (h) of Guidancenote 1 above, should include the activities both of the business trading units and of the independent risk-control unit. At least once a year, the Authorised Firmshould conduct a review of its overall risk management process. The review should consider the following:a. the adequacy of the documentation of the risk-management system and process and the organisation of the risk-control unit;b. the integration of risk measures into daily risk management and the integrity of the management information system;c. the process the Authorised Firmemploys for approving risk-pricing models and valuation systems that are used by front and back-office personnel;d. the scope of risks captured by the risk-measurement model and the validation of any significant changes in the risk-measurement process;e. the accuracy and completeness of position data, the accuracy and appropriateness of volatility and correlation assumptions, and the accuracy of valuation and risk sensitivity calculations;f. the verification process the Authorised Firmemploys to evaluate the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources; andg. the verification process the Authorised Firmuses to evaluate back-testing that is conducted to assess the models' accuracy.3. As techniques and best practices evolve, Authorised Firmsshould apply those new techniques and practices in any internal model used for purposes of PIB chapter 5.
Market Riskfactors4. Any internal model used to calculate Capital Requirementsfor equity position risk, interest rate risk, foreign exchange risk, commodities risk and any internal model for correlation trading should meet all of the following requirements:a. the model must capture accurately reflect, on a continuous basis, all material price risks, including General Market Risksand, where approval has been granted in relation to Specific Risk, Specific Risksarising on the underlying portfolio, and should ensure that sufficient risk factors are properly specified; andb. the model should capture a sufficient number of risk factors, depending on the level of activity of the Authorised Firmin the respective markets. The risk factors in the model should be sufficient to capture the risks inherent in the Authorised Firm'sportfolio of on and off-balance sheet trading positions. The Authorised Firmshould at least incorporate those risk factors in its model that are incorporated into its pricing model. The risk-measurement model should capture nonlinearities for options and other products as well as correlation risk and basis risk. Where proxies for risk factors are used they should show a good track record for the actual position held. Although an Authorised Firmwill have some discretion in specifying the risk factors for its internal models, the DFSAexpects that such models will meet the criteria specified in the following paragraphs.5. Any internal model used to calculate Capital Requirementsfor position risk, foreign exchange risk or commodities risk should meet all of the following requirements:a. the model should incorporate a set of risk factors corresponding to the interest rates in each currency in which the Authorised Firmhas interest rate sensitive on or off balance sheet positions. The Authorised Firmshould model the yield curves using one of a number of generally accepted approaches, for example, by estimating forward rates of zero-coupon yields. For material Exposuresto interest-rate risk in the major currencies and markets, the yield curve should be divided into a minimum of six maturity segments, to capture the variations of volatility of rates along the yield curve. The model should also capture the risk of less than perfectly correlated movements between different yield curves. The risk measurement system should incorporate separate risk factors to capture spread risk, for example, between bonds and swaps;b. the model should incorporate risk factors corresponding to gold and to the individual foreign currencies in which the Authorised Firm'spositions are denominated. For Collective Investment Fundsthe actual foreign exchange positions of the Fundshould be taken into account. Authorised Firmsmay rely on third party reporting of the foreign exchange position of the Fund, where the correctness of this report is adequately ensured. If an Authorised Firmis not aware of the foreign exchange positions of a Fund, this position should be carved out of the model and treated separately;c. the model should use a separate risk factor at least for each of the equity markets in which the Authorised Firmholds significant positions. At a minimum, this will include a risk factor that is designed to capture market-wide movements in equity prices, for example, a market index. Positions in individual securities or in sector indices could be expressed in "beta-equivalents" relative to this market-wide index. A relatively more-detailed approach would be to have risk factors corresponding to various sectors of the overall equity market, for instance, industry sectors or cyclical and non-cyclical sectors. The most extensive approach would be to have risk factors corresponding to the volatility of individual equity issues;d. the model should use a separate risk factor at least for each commodity in which the Authorised Firmholds significant positions. The model must also capture the risk of less than perfectly correlated movements between similar, but not identical, commodities and the Exposureto changes in forward prices arising from maturity mismatches. It should also take account of market characteristics, notably delivery dates and the scope provided to traders to close out positions; For more actively traded portfolios, the model should also take account of variation in the "convenience yield" between derivative positions such as forwards and swaps and cash positions in the commodity; ande. the Authorised Firm'sinternal model should conservatively assess the risk arising from less liquid positions and positions with limited price transparency under realistic market scenarios. In addition, the internal model should meet minimum data standards. Proxies should be appropriately conservative and should be used only where available data is insufficient or is not reflective of the true volatility of a position or portfolio.6. Authorised Firmsmay, in any internal model used for purposes of PIB chapter 5, use empirical correlations within risk categories and across risk categories only if the Authorised Firm'sapproach for measuring correlations is sound and implemented with integrity.
Quantitative standards7. The
DFSAwill usually only approve an internal Value-at-Risk (VaR) model or its use when the VaR model meets the following quantitative criteria:a. VaR should be computed at least on a daily basis;b. in calculating the value-at-risk, a 99th percentile, one-tailed confidence interval is to be used;c. in calculating VaR, an instantaneous price shock equivalent to a 10 day movement in prices is to be used, i.e., the minimum "holding period" will be 10 trading days;d. an effective historical observation period of at least one year except where a shorter observation period is justified by a significant upsurge in price volatility; ande. its data set is updated by the Authorised Firmno less frequently than once every month and is reassessed whenever market prices are subject to material changes.8. An Authorised Firmmay use VaR numbers calculated according to shorter holding periods than 10 days scaled up to 10 days by an appropriate methodology that is reviewed periodically.
Qualitative standards9. In addition to 7 and 8:a. no particular type of model is prescribed. So long as each model used captures all the material risks run by the
Authorised Firm, the Authorised Firmwill be free to use models based, for example, on variance-covariance matrices, historical simulations, or Monte Carlo simulations;b. an Authorised Firmwill have discretion to recognise empirical correlations within broad risk categories, for example, interest rates, exchange rates, equity prices and commodity prices, including related options volatilities in each risk factor category;c. an Authorised Firm'smodels should accurately capture the unique risks associated with options within each of the broad risk categories; andd. an Authorised Firmshould calculate, on a daily basis, its Market Risk Capital Requirementor any component for which an internal model is used, expressed as the higher of (a) its previous day's VaR number measured according to the parameters specified in this section and (b) an average of the daily VaR measures on each of the preceding sixty business days, multiplied by a multiplication factor.10. The DFSAwill usually set a multiplication factor of 3 that must be used by the Authorised Firmwhere all the qualitative and quantitative criteria are satisfied. This will be imposed as a condition on the approval and may be varied by the DFSAshould circumstances require.11. In addition to the calculation of VaR, an Authorised Firmusing internal VaR models, an Authorised Firmshould at least on a weekly basis, calculate a 'Stressed VaR' of the current portfolio, in accordance with the requirements set out in Guidancenote 7, with VaR model inputs calibrated to historical data from a continuous 12-month period of significant financial stress relevant to the Authorised Firm'sportfolio. The choice of such historical data should be subject to at least annual review by the Authorised Firm, which should notify the outcome to the DFSA.12. An Authorised Firmusing an internal model should calculate Capital Requirementfor the relevant risk categories, as the sum of points (a) and (b):a. the higher of:i. its previous day's VaR number calculated in accordance with Guidancenote 7 of this guidance under PIB A5.9.1; orb. the higher of:i. its latest available stressed-value-at-risk number calculated in accordance with Guidancenote 9 of PIB A5.9.1 (sVaRt-1); orii. an average of the stressed VaR numbers calculated in accordance with Guidancenote 9 of PIB A5.9.1 during the preceding sixty business days (sVaRavg), multiplied by the multiplication factor (ms) according to Guidancenote 10. Regulatoryback-testing and multiplication factors13. The results of the Stressed VaR calculations referred to in Guidancenote 11 of PIB A5.9.1 should be scaled up by the multiplication factors given below.14. The multiplication factor referred above is defined as the sum of 3 and an addend between 0 and 1 in accordance with 1. That addend should depend on the number of violations for the most recent 250 business days as evidenced by the Authorised Firm'sback-testing of the VaR as set out in Guidancenote 7 above. Number of violations addend Fewer than 5 0.00 5 0.40 6 0.50 7 0.65 8 0.75 9 0.85 10 or more 1.0015. An Authorised Firmshould count daily violations on the basis of back-testing on hypothetical and actual changes in the portfolio's value. A violation for this purpose is defined as a one-day change in the portfolio's value that exceeds the related one-day VaR number generated by the Authorised Firm'smodel. For the purpose of determining the addend the number of violations should be assessed at least on a quarterly basis and should be equal to the higher of the number of violations under hypothetical and actual changes in the value of the portfolio.16. Back-testing on hypothetical changes in the portfolio's value should be based on a comparison between the portfolio's end-of-day value and, assuming unchanged positions, its value at the end of the subsequent day. Back-testing on actual changes in the portfolio's value should be based on a comparison between the portfolio's end-of-day value and its actual value at the end of the subsequent day excluding fees, commissions, and net interest income.17. The DFSAmay in individual cases limit the addend to that resulting from violations under hypothetical changes, where the number of violations under actual changes does not result from deficiencies in the internal model.18. In order to enable the DFSAto monitor the appropriateness of the multiplication factors on an ongoing basis, the Authorised Firmshould notify promptly, and in any case no later than within five working days, any violations that result from its back-testing programme.
Authorised Firmsshould have processes in place to ensure that all their internal models used for purposes of PIB chapter 5 have been adequately validated by suitably qualified parties independent of the development process to ensure that they are conceptually sound and adequately capture all material risks. The validation should be conducted when the internal model is initially developed and when any significant changes are made to the internal model. The validation should also be conducted on a periodic basis but especially where there have been any significant structural changes in the market or changes to the composition of the portfolio which might lead to the internal model no longer being adequate. As techniques and best practices for internal validation evolve, Authorised Firmsshould apply these advances. Internal model validation should not be limited to back-testing, but should, at a minimum, also include the following:a. tests to demonstrate that any assumptions made within the internal model are appropriate and do not underestimate or overestimate the risk;b. in addition to the regulatory back-testing programmes, Authorised Firmsshould carry out their own internal model validation tests, including back-testing, in relation to the risks and structures of their portfolios; andc. the use of hypothetical portfolios to ensure that the internal model is able to account for particular structural features that may arise, for example material basis risks and Concentration Risk.20. The Authorised Firmshould perform back-testing on both actual and hypothetical changes in the portfolio's value.
Requirements for modelling
Specific Risk21. An internal model used for calculating Capital Requirementsfor Specific Riskand an internal model for correlation trading should meet the following additional requirements:a. it explains the historical price variation in the portfolio;b. it captures concentration in terms of magnitude and changes of composition of the portfolio;c. it is robust to an adverse environment;d. it is validated through back-testing aimed at assessing whether Specific Riskis being accurately captured. If the Authorised Firmperforms such back-testing on the basis of relevant sub-portfolios, these must be chosen in a consistent manner;e. it captures name-related basis risk and should in particular be sensitive to material idiosyncratic differences between similar, but not identical, positions; andf. it captures event risk.
Specific Riskmodels22. An Authorised Firmmay choose to exclude from the calculation of its Specific Risk Capital Requirementusing an internal model those positions for which it fulfils a Capital Requirementfor Specific Riskin accordance with relevant sections of PIB chapter 5.23. An Authorised Firmmay choose not to capture default and migration risks for debt instruments in its internal model where it is capturing those risks through internal models for incremental default and migration risk.
PIB A5.9.2 PIB A5.9.2 Incremental Risk Charge (IRC) Model
PIB A5.9.2 Guidance1. An
Authorised Firmthat uses an internal model for calculating Capital Requirementsfor Specific Riskof interest rate risk Exposuresshould also have an internal incremental default and migration risk (incremental risk charge, or IRC) model in place to capture the default and migration risks of its Trading Bookpositions that are incremental to the risks captured by the VaR measure as specified in Guidancenote 7 of PIB A5.9.1. An Authorised Firmshould demonstrate that its internal model meets soundness standards comparable to the Internal Ratings Based (IRB) approach for Credit Riskunder the assumption of a constant level of risk, and adjusted where appropriate to reflect the impact of liquidity, concentrations, hedging and optionality.
Scope of the internal IRC model2. The internal IRC model should cover all positions subject to a
Capital Requirementfor specific interest rate risk, including those subject to a 0% Specific Riskcapital charge under PIB Rule A5.2.13, but should not cover securitisation positions and n-th-to-default Credit Derivatives.3. The Authorised Firmmay, subject to approval by the DFSA, choose to include consistently all listed equity positions and derivatives positions based on listed equities. The permission will be granted only if such inclusion is consistent with how the Authorised Firminternally measures and manages risk.
Parameters of the internal IRC model4.
Authorised Firmsshould use the internal model to calculate a number which measures losses due to default and internal or external ratings migration at the 99.9 % confidence interval over a time horizon of one year. Authorised Firmsshould calculate this number at least weekly.5. Correlation assumptions should be supported by analysis of objective data in a conceptually sound framework. The internal model should appropriately reflect issuer concentrations. Concentrations that can arise within and across product classes under stressed conditions should also be reflected.6. The internal IRC model should reflect the impact of correlations between default and migration events. The impact of diversification between, on the one hand, default and migration events and, on the other hand, other risk factors should not be reflected.7. The internal model should be based on the assumption of a constant level of risk over the one-year time horizon, implying that given individual Trading Bookpositions or sets of positions that have experienced default or migration over their liquidity horizon are re-balanced at the end of their liquidity horizon to attain the initial level of risk. Alternatively, an Authorised Firmmay choose to consistently use a one-year constant position assumption.8. The liquidity horizons should be set according to the time required to sell the position or to hedge all material relevant price risks in a stressed market, having particular regard to the size of the position. Liquidity horizons should reflect actual practice and experience during periods of both systematic and idiosyncratic stresses. The liquidity horizon should be measured under conservative assumptions and should be sufficiently long that the act of selling or hedging, in itself, would not materially affect the price at which the selling or hedging would be executed.9. The determination of the appropriate liquidity horizon for a position or set of positions is subject to a floor of three months.10. The determination of the appropriate liquidity horizon for a position or set of positions should take into account an Authorised Firm'sinternal policies relating to valuation adjustments and the management of stale positions. When an Authorised Firmdetermines liquidity horizons for sets of positions rather than for individual positions, the criteria for defining sets of positions should be defined in a way that meaningfully reflects differences in liquidity. The liquidity horizons should be greater for positions that are concentrated, reflecting the longer period needed to liquidate such positions. The liquidity horizon for a securitisation warehouse should reflect the time to build, sell and securitise the assets, or to hedge the material risk factors, under stressed market conditions. Recognitionof hedges in the internal IRC model11. Hedgesmay be incorporated into an Authorised Firm'sinternal model to capture the incremental default and migration risks. Positions may be netted when long and short positions refer to the same financial instrument. Hedging or diversification effects associated with long and short positions involving different instruments or different securities of the same obligor, as well as long and short positions in different issuers, may only be recognised by explicitly modelling gross long and short positions in the different instruments. Authorised Firmsshould reflect the impact of material risks that could occur during the interval between the hedge's maturity and the liquidity horizon as well as the potential for significant basis risks in hedging strategies by product, seniority in the capital structure, internal or external rating, maturity, vintage and other differences in the instruments. An Authorised Firmshould reflect a hedge only to the extent that it can be maintained even as the obligor approaches a credit or other event.12. For positions that are hedged via dynamic hedging strategies, a rebalancing of the hedge within the liquidity horizon of the hedged position may be recognised, provided that the Authorised Firm:a. chooses to model rebalancing of the hedge consistently over the relevant set of Trading Bookpositions;b. demonstrates that the inclusion of rebalancing results in a better risk measurement; andc. demonstrates that the markets for the instruments serving as hedges are liquid enough to allow for such rebalancing even during periods of stress. Any residual risks resulting from dynamic hedging strategies must be reflected in the Capital Requirement.
Additional content of the internal IRC model13. The internal model to capture the incremental default and migration risks should reflect the nonlinear impact of options, structured
Credit Derivativesand other positions with material nonlinear behaviour with respect to price changes. The Authorised Firmshould also have due regard to the amount of model risk inherent in the valuation and estimation of price risks associated with such products.14. The internal model should be based on data that are objective and up-to-date.15. As part of the independent review and validation of their internal models used for purposes of this chapter, an Authorised Firmshould in particular do all of the following:a. validate that its modelling approach for correlations and price changes is appropriate for its portfolio, including the choice and weights of its systematic risk factors;b. perform a variety of stress tests, including sensitivity analysis and scenario analysis, to assess the qualitative and quantitative reasonableness of the internal model, particularly with regard to the treatment of concentrations. Such tests should not be limited to the range of events experienced historically; andc. apply appropriate quantitative validation, including relevant internal modelling benchmarks.16. The internal model should be consistent with the Authorised Firm'sinternal risk management methodologies for identifying, measuring, and managing trading risks.17. Authorised Firmsshould document their internal models so that their correlation and other modelling assumptions are transparent to the DFSA.18. The internal model should conservatively assess the risk arising from less liquid positions and positions with limited price transparency under realistic market scenarios. In addition, the internal model should meet minimum data standards. Proxies should be appropriately conservative and may be used only where available data is insufficient or is not reflective of the true volatility of a position or portfolio.
Not fully compliant IRC approaches19. If an
Authorised Firmuses an internal model to capture incremental default and migration risks that does not comply with all requirements specified in Guidancenotes 4 to 18 of PIB A5.9.2, but that is consistent with the Authorised Firm'sinternal methodologies for identifying, measuring and managing incremental default and migration risks, it should be able to demonstrate that its internal model results in a Capital Requirementthat is at least as high as if it were based on a model in full compliance with the requirements of the Guidancenotes referred above. The DFSAwill review compliance with the previous sentence at least annually.
PIB A5.9.3 PIB A5.9.3 Internal Model for Correlation Trading
PIB A5.9.3 Guidance1. The
DFSAwill grant permission to use an internal model for calculating the Capital Requirementfor a correlation trading portfolio only to Authorised Firmsthat have obtained the DFSA'sapproval to use an internal model for Specific Riskof interest rate risk Exposuresand that meet the requirements for internal models specified earlier in this section.2. Authorised Firmsshould use this internal model to calculate a number which adequately measures all price risks at the 99.9 % confidence interval over a time horizon of one year under the assumption of a constant level of risk, and adjusted where appropriate to reflect the impact of liquidity, concentrations, hedging and optionality. Authorised Firmsshould calculate this number at least weekly.3. The following risks should be adequately captured by the model referred to in Guidancenote 1 of PIB A5.9.3:a. the cumulative risk arising from multiple defaults, including different ordering of defaults, in tranched products;b. credit spread risk, including the gamma and cross-gamma effects;c. volatility of implied correlations, including the cross effect between spreads and correlations;d. basis risk, including both of the following:i. the basis between the spread of an index and those of its constituent single names; andii. the basis between the implied correlation of an index and that of bespoke portfolios;e. recovery rate volatility, as it relates to the propensity for recovery rates to affect tranche prices;f. to the extent the comprehensive risk measure incorporated benefits from dynamic hedging, the risk of hedge slippage and the potential costs of rebalancing such hedges; andg. any other material price risks of positions in the correlation trading portfolio.4. An Authorised Firmshould use sufficient market data within the model referred to in Guidancenote 1 in order to ensure that it fully captures the salient risks of those Exposuresin its internal approach in accordance with the requirements set out in this guidance in PIB A5.9.3. It should be able to demonstrate to the DFSAthrough back testing or other appropriate means that its model can appropriately explain the historical price variation of those products.5. The Authorised Firmshould have appropriate policies and procedures in place in order to separate the positions for which it holds permission to incorporate them in the Capital Requirementin accordance with this guidance in PIB A5.9.3 from other positions for which it does not hold such permission.6. With regard to the portfolio of all the positions incorporated in the model referred to in Guidancenote 1, the Authorised Firmshould regularly apply a set of specific, predetermined stress scenarios. Such stress scenarios should examine the effects of stress to default rates, recovery rates, credit spreads, basis risk, correlations and other relevant risk factors on the correlation trading portfolio. The Authorised Firmshould apply stress scenarios at least weekly and report at least quarterly to the DFSAthe results, including comparisons with the Authorised Firm's Capital Requirementin accordance with this point. Any instances where the stress test results materially exceed the Capital Requirementfor the correlation trading portfolio should be reported to the DFSAin a timely manner.7. The internal model should conservatively assess the risk arising from less liquid positions and positions with limited price transparency under realistic market scenarios. In addition, the internal model should meet minimum data standards. Proxies should be appropriately conservative and may be used only where available data is insufficient or is not reflective of the true volatility of a position or portfolio.
PIB A5.9.4(1) For the purposes of PIB Rule 5.11.3, an
Authorised Firm'sinternal model must meet the following criteria:(a) the Authorised Firm'sstress scenarios must cover a range of factors that can create extraordinary losses or gains in trading portfolios, or make the control of risk in those portfolios very difficult. These factors include low-probability events in all major types of risks, including the various components of market, credit, and Operational Risks;(b) the Authorised Firm'sstress tests must be both of a quantitative and qualitative nature, incorporating both Market Riskand liquidity aspects of market disturbances. Quantitative criteria must identify plausible stress scenarios to which the Authorised Firmcould be exposed. Qualitative criteria must emphasise that two major goals of stress testing are to evaluate the capacity of the Authorised Firm'scapital to absorb potential large losses and to identify steps the Authorised Firmcan take to reduce its risk and conserve capital; and(c) the Authorised Firmmust combine the use of supervisory stress scenarios with stress tests developed by the Authorised Firmitself to reflect their Specific Riskcharacteristics. Information is required in three broad areas:(i) supervisory scenarios requiring no simulations by the Authorised Firm— the Authorised Firmmust have information on the largest losses experienced during the reporting period available for supervisory review. This loss information must be compared to the level of capital that results from an Authorised Firm'sinternal measurement system;(ii) supervisory scenarios requiring a simulation by the Authorised Firm— the Authorised Firmmust subject its portfolio to a series of simulated stress scenarios and provide the DFSAwith the results (e.g., the sensitivity of the Authorised Firm's Market Risk Exposureto changes in the assumptions about volatilities and correlations); and(iii) scenarios developed by the Authorised Firmitself to capture the specific characteristics of its portfolio.(2) In addition to the scenarios prescribed under (1)(c), an Authorised Firmmust also develop its own stress tests which it identifies as most adverse, based on the characteristics of its portfolio, for example, problems arising in a key region of the world combined with a sharp move in oil prices. The Authorised Firmmust also provide the DFSAwith a description of the methodology used to identify and carry out the scenarios as well as with a description of the results derived from these scenarios.