(b) Modeled specific risk. A national bank or Federal savings association may use models to measure the specific risk of covered positions as provided in paragraph (a) of section 205 of this subpart (therefore, excluding securitization positions that are not modeled under section 209 of this subpart). A national bank or Federal savings association must use models to measure the specific risk of correlation trading positions that are modeled under § 3.209.

1. (1) Requirements for specific risk modeling.

   1. (i) If a national bank or Federal savings association uses internal models to measure the specific risk of a portfolio, the internal models must:

      1. (A) Explain the historical price variation in the portfolio;
      2. (B) Be responsive to changes in market conditions;
      3. (C) Be robust to an adverse environment, including signaling rising risk in an adverse environment; and

      4. (D) Capture all material components of specific risk for the debt and equity positions in the portfolio. Specifically, the internal models must:

         (1) Capture event risk and idiosyncratic risk; and

         (2) Capture and demonstrate sensitivity to material differences between positions that are similar but not identical and to changes in portfolio composition and concentrations.

   2. (ii) If a national bank or Federal savings association calculates an incremental risk measure for a portfolio of debt or equity positions under section 208 of this subpart, the national bank or Federal savings association is not required to capture default and credit migration risks in its internal models used to measure the specific risk of those portfolios.
2. (2) Specific risk fully modeled for one or more portfolios. If the national bank's or Federal savings association's VaR-based measure captures all material aspects of specific risk for one or more of its portfolios of debt, equity, or correlation trading positions, the national bank or Federal savings association has no specific risk add-on for those portfolios for purposes of paragraph (a)(2)(iii) of § 3.204.

(c) Specific risk not modeled.

1. (1) If the national bank's or Federal savings association's VaR-based measure does not capture all material aspects of specific risk for a portfolio of debt, equity, or correlation trading positions, the national bank or Federal savings association must calculate a specific-risk add-on for the portfolio under the standardized measurement method as described in § 3.210.
2. (2) A national bank or Federal savings association must calculate a specific risk add-on under the standardized measurement method as described in § 3.210 for all of its securitization positions that are not modeled under § 3.209.