§ 217.204 - Measure for market risk.

§ 217.204 Measure for market risk.

(a) General requirement.

(1) A Board-regulated institution must calculate its standardized measure for market risk by following the steps described in paragraph (a)(2) of this section. An advanced approaches Board-regulated institution also must calculate an advanced measure for market risk by following the steps in paragraph (a)(2) of this section.

(2) Measure for market risk. A Board-regulated institution must calculate the standardized measure for market risk, which equals the sum of the VaR-based capital requirement, stressed VaR-based capital requirement, specific risk add-ons, incremental risk capital requirement, comprehensive risk capital requirement, and capital requirement for de minimis exposures all as defined under this paragraph (a)(2), (except, that the Board-regulated institution may not use the SFA in section 210(b)(2)(vii)(B) of this subpart for purposes of this calculation)[, plus any additional capital requirement established by the Board]. An advanced approaches Board-regulated institution that has completed the parallel run process and that has received notifications from the Board pursuant to § 217.121(d) also must calculate the advanced measure for market risk, which equals the sum of the VaR-based capital requirement, stressed VaR-based capital requirement, specific risk add-ons, incremental risk capital requirement, comprehensive risk capital requirement, and capital requirement for de minimis exposures as defined under this paragraph (a)(2) [, plus any additional capital requirement established by the Board].

(i) VaR-based capital requirement. A Board-regulated institution's VaR-based capital requirement equals the greater of:

(A) The previous day's VaR-based measure as calculated under § 217.205; or

(B) The average of the daily VaR-based measures as calculated under § 217.205 for each of the preceding 60 business days multiplied by three, except as provided in paragraph (b) of this section.

(ii) Stressed VaR-based capital requirement. A Board-regulated institution's stressed VaR-based capital requirement equals the greater of:

(A) The most recent stressed VaR-based measure as calculated under § 217.206; or

(B) The average of the stressed VaR-based measures as calculated under § 217.206 for each of the preceding 12 weeks multiplied by three, except as provided in paragraph (b) of this section.

(iii) Specific risk add-ons. A Board-regulated institution's specific risk add-ons equal any specific risk add-ons that are required under § 217.207 and are calculated in accordance with § 217.210.

(iv) Incremental risk capital requirement. A Board-regulated institution's incremental risk capital requirement equals any incremental risk capital requirement as calculated under section 208 of this subpart.

(v) Comprehensive risk capital requirement. A Board-regulated institution's comprehensive risk capital requirement equals any comprehensive risk capital requirement as calculated under section 209 of this subpart.

(vi) Capital requirement for de minimis exposures. A Board-regulated institution's capital requirement for de minimis exposures equals:

(A) The absolute value of the fair value of those de minimis exposures that are not captured in the Board-regulated institution's VaR-based measure or under paragraph (a)(2)(vi)(B) of this section; and

(B) With the prior written approval of the Board, the capital requirement for any de minimis exposures using alternative techniques that appropriately measure the market risk associated with those exposures.

(b) Backtesting. A Board-regulated institution must compare each of its most recent 250 business days' trading losses (excluding fees, commissions, reserves, net interest income, and intraday trading) with the corresponding daily VaR-based measures calibrated to a one-day holding period and at a one-tail, 99.0 percent confidence level. A Board-regulated institution must begin backtesting as required by this paragraph (b) no later than one year after the later of January 1, 2014 and the date on which the Board-regulated institution becomes subject to this subpart. In the interim, consistent with safety and soundness principles, a Board-regulated institution subject to this subpart as of January 1, 2014 should continue to follow backtesting procedures in accordance with the Board's supervisory expectations.

(1) Once each quarter, the Board-regulated institution must identify the number of exceptions (that is, the number of business days for which the actual daily net trading loss, if any, exceeds the corresponding daily VaR-based measure) that have occurred over the preceding 250 business days.

(2) A Board-regulated institution must use the multiplication factor in Table 1 to § 217.204 that corresponds to the number of exceptions identified in paragraph (b)(1) of this section to determine its VaR-based capital requirement for market risk under paragraph (a)(2)(i) of this section and to determine its stressed VaR-based capital requirement for market risk under paragraph (a)(2)(ii) of this section until it obtains the next quarter's backtesting results, unless the Board notifies the Board-regulated institution in writing that a different adjustment or other action is appropriate.

Table 1 to § 217.204 - Multiplication Factors Based on Results of Backtesting

Number of exceptions	Multiplication factor
4 or fewer	3.00
5	3.40
6	3.50
7	3.65
8	3.75
9	3.85
10 or more	4.00