Supervisory framework for the use of 'backtesting' in conjunction with the internal models approach to market risk capital requirements

This document is a technical note which forms part of a three-part package of documents issued by the Basle Committee to amend the Capital Accord of July 1988 to take account of market risks.

The document presents a methodology for testing the accuracy of the models used by banks to measure their market risks. The essence of the technique is to compare actual trading results with model-generated risk measures. The other two papers in the package are an overview of the market risk amendment and a detailed description of the methodology adopted.