S.L. 370.15 Art. 10Supervisory benchmarking of internal approaches.

(1) Where the competent authority chooses to develop specific portfolios of internal approaches permitted to be used by investment firms, it shall do so in consultation with the EBA and shall ensure that investment firms report the results of the calculations for these specific portfolios separately from the results of the calculations for the benchmark portfolios required under Article 78 of the CRD.

(2) The competent authority shall, on the basis of the information submitted by investment firms, monitor the range of risk weighted exposure amounts or own funds requirements, as applicable, except for operational risk, for the exposures or transactions in the benchmark portfolio resulting from the internal approaches of those investment firms. The competent authority shall make an assessment at least annually of the quality of those approaches paying particular attention to:

(a) those approaches that exhibit significant differences in own fund requirements for the same exposure;

(b) approaches where there is particularly high or low diversity, and also where there is a significant and systematic under-estimation of own funds requirements.

(3) Where particular investment firms diverge significantly from the majority of their peers or where there is little commonality in approach leading to a wide variance of results, the competent authority shall investigate the reasons therefor and, if it can be clearly identified that an investment firm’s approach leads to an underestimation of own funds requirements which is not attributable to differences in the underlying risks of the exposures or positions, the competent authority shall take corrective action.

(4) The competent authority shall ensure that its decisions on the appropriateness of corrective actions as referred to in sub-regulation (3) comply with the principle that such actions must maintain the objectives of an internal approach and therefore do not:

(a) lead to standardisation or preferred methods;

(b) create wrong incentives; or

(c) cause herd behaviour.