PRU A4.5 PRU A4.5 Requirements for use of VaR models
PRU A4.5.1 PRU A4.5.1
An Authorised Person using VaR models must:(a) use a minimum holding period of ten business days except in the case of an SFT, for which it must use a minimum holding period of five business days;(b) backtest its output by:(i) identifying a sample of 20 Counterparties, on an annual basis, which must include the ten largest Counterparties as determined by the Authorised Person according to its own Exposure measurement approach and ten others selected at random;(ii) comparing, for each day and for the sample of 20 Counterparties, the VaR estimate of the previous day for the Counterparty portfolio to the difference between the net value of the previous day's portfolio using today's market prices and the net value of that portfolio using the previous day's market prices; and(iii) counting it as an exception, where this difference exceeds the previous day's VaR estimate.
An Authorised Person should adjust the minimum holding period upwards for any Financial Instrument where the specified holding period would be inappropriate given the liquidity of the instrument concerned. When the outcome of the model consistently results in a large number of exceptions, either overall or for one significant Counterparty, the Authorised Person is expected to review the model assumptions and make modifications as appropriate.