Regulatory Alerts2025-05-28
Added · Updated
Commission Delegated Regulation (EU) 2022/2059 specifying technical details of back-testing and profit and loss attribution requirements
Institutions must calculate actual and hypothetical changes in trading desk and institution-level portfolio values for back-testing purposes using end-of-day valuation techniques, while excluding credit valuation adjustments, own credit risk adjustments, and specific additional value deductions. The regulation mandates that institutions classify each trading desk into green, orange, yellow, or red zones based on Spearman correlation coefficients and Kolmogorov-Smirnov test metrics derived from the most recent 250 business days of data. Green zone desks require a Spearman coefficient greater than 0.8 and a Kolmogorov-Smirnov metric lower than 0.09, whereas red zone classification occurs if the coefficient falls below 0.7 or the metric exceeds 0.12. Institutions are required to maintain documented policies and procedures detailing the methodologies used for these calculations and the treatment of various market risk adjustments.