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FRM Part II · FRM Exam Part II · Backtesting VaR

A bank's 99% one-day VaR model has 8 exceptions over 250 days in the yellow zone. Investigation shows 3 of them occurred because traders' positions changed intraday, while the model itself was sound for the end-of-day portfolio. Under the Basel framework's treatment of the causes of exceptions, which classification is most appropriate for these three?

Exceptions caused by positions changing intraday fall under the Basel category of intraday trading. Supervisors weigh these case by case and may be lenient, unlike basic integrity failures, which are normally penalized.

  1. ABasic integrity of the model failure, which supervisors should treat as likely to be penalized
  2. BBad luck, which supervisors may treat as not requiring a multiplier increase
  3. CIntraday trading, which supervisors should consider on a case-by-case basis and may be treated more lenientlyCorrect
  4. DModel accuracy needing improvement, which always requires a multiplier increase

Explanation

The Basel categories are: basic integrity failure, model accuracy needing improvement, intraday trading, and bad luck. Intraday trading exceptions are considered case by case and may be treated with some leniency. Integrity failures are typically penalized, and accuracy issues are also viewed as penalty candidates.

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