FRM Part II · FRM Exam Part II · Backtesting VaR
A bank has 8 exceptions in the last 250 days under its 99% one-day VaR. Investigation shows the exceptions arose because the model's positions feed omitted a new trading desk. Under the traffic light framework, how should supervisors treat this?
Eight exceptions caused by a missing trading desk reflects a basic integrity problem with the model, so the yellow zone multiplier increase should normally apply. It is not bad luck, and the count is not in the red zone, so revocation is not automatic.
- ATreat the exceptions as bad luck and apply no multiplier increase
- BTreat it as a basic integrity issue; an increase in the multiplier should normally applyCorrect
- CMove the bank straight to the red zone and revoke the model
- DReduce the multiplier because the cause is operational and not model-related
Explanation
Basel guidance says that where exceptions result from deficiencies in model integrity, such as incorrect position data or model flaws, an increase in the multiplier should normally apply. Eight exceptions is yellow, not red, so automatic rejection does not follow. Bad luck would justify leniency, but this cause is a flaw.
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