Internal model for correlation trading

For an internal model for incremental default risk and migration risk “an institution may choose to consistently use a one-year constant position assumption.” (Second sentence of Article 374 (4) of Regulation (EU) No 575/2013 (CRR)). Does an institution also have this choice for an internal model for correlation trading?

Art. 377 (2) CRR states: “Institutions shall use this internal model to calculate a number which adequately measures all price risks at the 99,9 % confidence interval over a time horizon of one year under the assumption of a constant level of risk, ...” For internal models for incremental default risk and migration risk Art. 374 CRR explains the meaning of an “assumption of a constant level of risk” as follows: “The internal model shall be based on the assumption of a constant level of risk over the one-year time horizon, implying that given individual trading book positions or sets of positions that have experienced default or migration over their liquidity horizon are re-balanced at the end of their liquidity horizon to attain the initial level of risk. Alternatively, an institution may choose to consistently use a one-year constant position assumption.” We infer from the context that the institution’s choice according to sentence 2 (“a one-year constant position assumption”) is just one way of operationalising an “assumption of a constant level of risk”. The other way of operationalising this assumption is to assume re-balancing at the end of the liquidity horizon as stated in sentence 1. For an internal model for correlation trading an institution is therefore also allowed to operationalise the “assumption of a constant level of risk” by consistently using “a one-year constant position assumption”.