7.3.1 Overall requirements

• L1-153. Whenever internal models are allowed as an Other Method for calculating the ICS capital requirement, the group-wide supervisor (GWS) considers how the Balance Sheet, used within the internal model, complies with the requirements for the calculation of the balance sheet in the standard method, currently set out within section 3 on Market-Adjusted Valuation. In doing so, the GWS should ensure consistency between the approaches used for the determination of capital requirements and capital resources.
• L1-154. Whenever internal models are allowed as an Other Method for calculating the ICS capital requirement, their use is subject to the requirements specified in sections 7.3.2 to 7.3.5.

7.3.2 General provisions on the use of an internal model to determine regulatory capital requirements

7.3.2.1 Internal model approval process

7.3.2.1.1 Framework for application and review process

• L1-155. The GWS sets up an internal model application process (IMAP). The IMAP enables the GWS to decide whether the IAIG may use a specified internal model to calculate its group-wide PCR under the ICS.
• L2-355. The GWS ensures that the IMAP is open by allowing any IAIG under its supervision to apply for the use of an internal model to calculate its PCR and by stating, as the case may be, the basis for its decision to reject the application.
• L2-356. The GWS is responsible for the decision to approve or reject the IM application of an IAIG under its supervision.
• L2-357. The GWS may wish to consult with other members of the supervisory college on the review process, the outcome of the application process and the on-going supervision.
• L2-358. Finally, a model is not considered for approval unless the IAIG can demonstrate a comprehensive and effective approach to risk management which includes establishing and successfully achieving an internal capital target greater than the regulatory capital requirement as indicated by the internal model.

7.3.2.1.1.1 Pre-application process

• L2-359. The GWS may choose to develop a pre-application process to indicate the IAIG’s preparedness to undergo an internal model review and outline criteria that should be satisfied before an internal model application. The process may consist of the IAIG’s submission and the GWS’s review of the following four items:

  	process	desc
  a)	Self-Assessment	consists of a number of qualitative and quantitative affirmations, with a brief narrative explaining how the statistical quality test, calibration test, validation standards, use test, governance and documentation standards are met
  b)	Overview of internal model	provides the GWS with an introduction to the model and its role within the IAIG’s risk management framework
  c)	Model Demonstration	provides a high-level overview of the internal model’s functionality; and
  d)	Documentation Gap Analysis	initial assessment of an IAIG’s ability to satisfy the GWS’s information request.

• L2-360. The pre-application process aims to indicate the IAIG’s preparedness to undergo an internal model review and is not necessarily an indication of internal model approval. The GWS may provide feedback regarding any significant internal model deficiencies as soon as possible during the pre- application and review processes so that the IAIG may have the opportunity to resolve these issues before the start of the application process.

7.3.2.1.1.2 Application process

• L2-361. The internal model application and review process can comprise several stages, including at least the following:

7.3.2.2 Post-approval monitoring and control process

• L1-156. Following approval of an internal model for calculating the group-wide PCR, the GWS requires some additional reporting regarding the internal model. The GWS conducts periodic reviews to ensure that the internal model continues to meet the criteria of statistical quality test, calibration test, validation standards, use test, governance and documentation standards.
• L2-375. Post-approval reporting will enable the GWS to monitor internal model developments and conduct relevant analysis and benchmarking exercises. The GWS should include the elements necessary for benchmarking exercise in the information request.
• L2-376. Specific reporting requirements relating to the internal model will be established during the model review process. The GWS works with the IAIG in developing data submission templates for post-approval reporting purposes. While most reporting will be required annually, some circumstances may require more frequent filings. Reporting requirements may include:
  • a) standard periodic internal model output;
  • b) ICS standard method output;
  • c) narrative discussing previous and future planned changes and developments to the internal model;
  • d) updated model documentation; and
  • e) new or updated validation reports.
• L2-377. The IAIG cooperates with the GWS to establish an appropriate policy relating to post- approval monitoring and reporting major and minor changes, including the materiality threshold in relation to major and minor model modifications as described in section 7.3.4.1 on the model change policy
• L2-378. Moreover, the GWS ensures that the IAIG establishes an appropriate policy relating to communication and public disclosure on model results and changes post-approval.
• L1-157. As part of the supervisory process the GWS reviews the model post approval regularly to assess whether the internal model deviates from the assumptions, portfolio characteristics, structure or parameterisation used in previously approved versions, and ad-hoc reviews in case such deviations have been identified.
• L2-379. Where relevant, the post-approval internal model reviews by the GWS will focus on the portions of the internal model that have changed. However, the GWS reserves the right to conduct a comprehensive review on an already approved internal model at its discretion and may resort to a capital add-on in case the deviation is material.
• L2-380. Should any conditions of an internal model approval be breached, the GWS may allow the IAIG a reasonable time to correct such breach and work with the IAIG to resolve any issues. If these outstanding issues cannot be corrected within the allotted time, the GWS may revoke its approval of the internal model.
• L2-381. In the event that the GWS revokes approval of an internal model, the affected IAIG may reapply once all internal model deficiencies have been resolved.
• L2-382. The GWS should cooperate with other involved supervisors as part of its internal model supervisory review. The GWS should engage in collaborative model review efforts with other members of the supervisory college to maximise the effectiveness and consistency of outcomes of the ICS.