Table 13: Value at Risk results

Method one

(all numbers are entered in the row labelled Total)

End of quarter VaR

Enter that VaR number calculated across all asset classes for the last day in the reporting period.

Average VaR over past 60 trading days

Calculate the average daily total VaR measure for the 60 trading days up to and including the last day of the quarter.

Backtesting exceptions

To complete these two columns the most recent 250 days of aggregated profit and loss and VaR data, up to and including the last day in the quarter, is needed (refer paragraphs 54 to 82 of Guidance Note AGN 113.2 The Internal Model Approach). The aggregated data should be that profit and loss and VaR data which applies to all asset classes for which the ADI’s internal model is being used to calculate the capital charge. Using this data, compare each day’s trading outcome (profit or loss) with the corresponding VaR number. If the trading outcome on a particular day is a loss that exceeds the corresponding VaR number for that day then the result is recorded as an exception. Count the number of exceptions that occur over the 250 days.

The Prudential Standard allows ADIs to perform back testing based on either actual or hypothetical profit and loss. All ADIs using internal models must complete at least one of the two back testing columns. Those ADIs that have the capacity to back test using both actual and hypothetical profit and loss must report the results of back testing on both bases.

Scaling factor

The scaling factor consists of the multiplication factor and a plus factor (refer to paragraph 22(j) of Guidance Note AGN 113.2 The Internal Model Approach). The multiplication factor is set for each ADI by APRA, within the range 3 to 5. The plus factor is specified by APRA and relates directly to the quarterly backtesting results (refer paragraphs 54 to 82 of Guidance Note AGN 113.2 The Internal Model Approach).

Scaled average VaR

Multiply the number in column 2 by the number in column 5 to determine the scaled average VaR.

Capital charge

The capital charge, using method one, is the larger of column 1 (the end of quarter VaR) and column 6 (the scaled average VaR).

Method two

(numbers are entered in the rows labelled Interest Rates, Equities, Foreign Exchange and Commodities)

End of quarter VaR

Enter that VaR number calculated for each asset class for the last day in the reporting period.

Average VaR over past 60 trading days

For each asset class, calculate the average daily total VaR measure for the 60 trading days up to and including the last day of the quarter (i.e. the end of quarter VaR number should be included in the calculation).

Backtesting exceptions

To complete these two columns the most recent 250 days of profit and loss and VaR data for each asset class, up to and including the last day in the quarter, is needed (refer paragraphs 54 to 82 of Guidance Note AGN 113.2 The Internal Model Approach). Using this data, for each asset class compare each day’s trading outcome (profit or loss) with the corresponding VaR number. If the trading outcome on a particular day is a loss that exceeds the corresponding VaR number for that day then the result is recorded as an exception. For each asset class, count the number of exceptions that occur over the 250 days.

The Prudential Standard allows ADIs to perform back testing based on either actual or hypothetical profit and loss. All ADIs using internal models must complete at least one of the two back testing columns. Those ADIs that have the capacity to back test using both actual and hypothetical profit and loss must report the results of back testing on both bases.

Scaling factor

The scaling factor consists of the multiplication factor and a plus factor (refer paragraph 22(j) of Guidance Note AGN 113.2 The Internal Model Approach). The multiplication factor is set for each ADI by APRA, within the range 3 to 5. The plus factor is specified by APRA and relates directly to the quarterly backtesting results (refer paragraphs 54 to 82 of Guidance Note AGN 113.2 The Internal Model Approach). For an ADI using method two, APRA may specify different scaling factors for different risk categories if it is determined that the quality of an ADI’s internal model varies across asset classes.

Scaled average VaR

For each asset class, multiply the number in column 2 by the number in column 5 to determine the scaled average VaR.

Capital charge

Calculate the maximum of column 6 (the scaled average VaR number) and column 1 (the end of quarter VaR number) for each asset class. The capital charge is the sum of these maximum values.

Method three

(numbers are entered in the rows labelled Total as well as Interest Rates, Equities, Foreign Exchange and Commodities).

End of quarter VaR

Enter that VaR number calculated across all asset classes and the VaR numbers calculated for each asset class for the last day in the reporting period.

Average VaR over past 60 trading days

Calculate the average daily total VaR measure for the 60 trading days up to and including the last day of the quarter (ie the end of quarter VaR number should be included in the calculation) for each asset class and across all asset classes (i.e. for the total VaR).

Backtesting exceptions

To complete these two columns the most recent 250 days of profit and loss and VaR data for each asset class and in aggregate, up to and including the last day in the quarter, is needed (refer paragraphs 54 to 82 of Guidance Note AGN 113.2 The Internal Model Approach). Using this data, for each asset class and for the aggregate data compare each day’s trading outcome (profit or loss) with the corresponding VaR number. If the trading outcome on a particular day is a loss that exceeds the corresponding VaR number for that day then the result is recorded as an exception. For each asset class and the total, count the number of exceptions that occur over the 250 days.

The Prudential Standard allows ADIs to perform back testing based on either actual or hypothetical profit and loss. All ADIs using internal models must complete at least one of the two back testing columns. Those ADIs that have the capacity to back test using both actual and hypothetical profit and loss must report the results of back testing on both bases.

Scaling factor

The scaling factor consists of the multiplication factor and a plus factor (refer paragraph 22(j) of Guidance Note AGN 113.2 The Internal Model Approach). The multiplication factor is set for each ADI by APRA, within the range 3 to 5. The plus factor is specified by APRA and relates directly to the quarterly backtesting results (refer paragraphs 54 to 82 of Guidance Note AGN 113.2 The Internal Model Approach).

Scaled average VaR

For each asset class and for the total, multiply the number in column 2 by the number in column 5 to determine the scaled average VaR.

Capital charge

The capital charge is based on method one and hence only the row labelled Total needs to be considered. The capital requirement is the larger of column 1 (the end of quarter VaR across asset classes) and column 6 (the scaled average VaR across asset classes).