An internal model used for calculating own funds requirements for specific risk and an internal model for correlation trading shall meet the following additional requirements:
it explains the historical price variation in the portfolio;
it captures concentration in terms of magnitude and changes of composition of the portfolio;
it is robust to an adverse environment;
it is validated through back-testing aimed at assessing whether specific risk is being accurately captured. If the institution performs such back-testing on the basis of relevant sub-portfolios, these shall be chosen in a consistent manner;
it captures name-related basis risk and shall in particular be sensitive to material idiosyncratic differences between similar but not identical positions;
it captures event risk.
1.An institution may choose to exclude from the calculation of its specific risk own funds requirement using an internal model those positions for which it fulfils an own funds requirement for specific risk in accordance with Article 332(1)(e) or Article 337 with exception of those positions that are subject to the approach set out in Article 377.
2.An institution may choose not to capture default and migration risks for traded debt instruments in its internal model where it is capturing those risks through the requirements set out in Section 4.