Treatment of CIUs in internal model for market risk – partial use

What are the conditions to include a CIU in an internal model with regard to model approval and risk categories for partial use institutions?

The decision, whether risks can be included in the internal model or not is connected to the model approval of the institution. CIUs might contain risks which are assigned to different risk categories. Some of these risks may even belong to categories not covered by Part Three Title IV CRR, e.g. in real estate mutual funds. As a consequence partial use institutions have to assess whether CIUs can be included in the internal model or not (e.g. partial use institutions which do not have a permission to model specific risk always have to determine own funds requirements for specific risk for positions in CIUs by the standardised approach). If own funds requirements for a CIU are modelled using an approach looking through to the underlying investments (analogous to Art. 350 (1)), the risk of the CIU is actually replaced by the risks of the underlyings and can be assigned to the relevant risk categories. Similarly, if a CIU is modelled by assuming positions representing those necessary to replicate the composition of an index or fixed basket (analogous to Art. 350 (2)), the assumed positions of the CIU can be assigned to the relevant risk categories. If, however, a CIU is modelled using a different approach (e.g. using liquid prices ,. because a daily look-through is not possible or feasible, and the CIU does not replicate an index), a mapping to risk categories is not straight forward/possible. Depending on the general eligibility of certain types of CIU for inclusion in an internal model, and on possible restrictions concerning the choice of the modelling approach (both points are addressed in separate questions), some of the aspects laid out in this entry may be rendered irrelevant.