International & EU

Parallel Running for Firms applying to use the Advanced Approaches in Basel 2/Capital Requirements Directive (CRD)

The aim of parallel running is to give firms – and us – confidence that the firms who apply to use the advanced approaches (IRB and AMA) have tested their systems and will be able to use them for capital calculations by the end of the parallel running period. The information in this paper also relates to firms that decide to move from the simple to advanced approach at a later date. We plan to adopt a pragmatic and firm-specific approach to parallel running.

Neither Basel 2 nor the CRD contain specific guidance on parallel running beyond the calculation of Basel 1 numbers until end 2009 for the purpose of establishing the capital floors. But there is a strong expectation that firms applying for the advanced approaches will parallel run their old and new systems for a minimum period of a year and that supervisors will review the output from the exercise, including two data points, as part of the process of approving an application. The Basel Committee's Accord Implementation Group has already gathered information on the approach being taken by member countries and we are aware that most, if not all, Member States will also expect parallel running. Parallel running is one way in which firms can demonstrate their compliance with the experience requirement. There will also be a direct link with firms' roll-out plans.

What is the purpose of parallel running?

Parallel running can be defined as the simultaneous operation by a firm of its existing systems to measure capital adequacy and new systems to generate figures for both credit and operational risk under Basel 2/CRD. It seeks to ensure that firms have developed and tested their risk measurement system and capital calculation engine and have embedded the necessary supporting systems and controls into their business operating environment. It should also ensure that firms develop their systems – resolving problems and fine-tuning them as appropriate during the parallel-running period.


There are several main, practical reasons for asking firms to perform parallel running:
i) to ensure that the new system generates results which conform to a firm's prior expectations, including taking account of information from their existing/legacy systems, and that any appropriate capital adjustments can be made before the first date of 'live' use;
ii) to enable firms to test the extent to which their new systems and reporting processes are robust over a reasonable period of time and can generate management information a firm can use to identify and manage risk.


Firms will need to undertake parallel running across at least their significant and risky portfolios for which they are submitting an application. Our high-level principles provide that firms must:

  • parallel run for a year and be able to calculate their capital requirement at least quarterly for regulatory purposes on the old and new basis;
  • have in place a robust process for reconciling credit risk data to accounting data and explaining the differences;
  • have in place a robust process for demonstrating the credibility, reliability and integrity of operational risk data, either by reconciliation to finance data or by some other appropriate means;
  • continue to support the calculation under the old basis at least until the floors have been removed;
  • be able, on at least their significant and risky portfolios, to run reports quickly through their systems with minimal workarounds and manual interventions in place;
  • as appropriate and in relation to credit risk on at least their significant and risky portfolios, be able to run stress and scenario tests quickly through their systems with minimal workarounds and manual interventions in place;
  • be able to demonstrate that systems are being tested and improved over time; and
  • have a plan showing how parallel running will be rolled out across the remaining portfolios to be included in a firm's IRB and/or AMA approaches, and associated systems.

Timing information for parallel running

Firms must be able to operate parallel systems for a year before we will be willing for them to use the results for capital purposes. A firm may be given a decision on an application before the one year parallel run is completed. However, firms will be unable to take advantage of this until the one year's parallel running is completed.

We will expect to see a firm's parallel running results at least three months before we make a decision on the application, so we recommend that firms should begin the parallel run no later than the point at which they submit their application. This will give time for the FSA to review the early results of the parallel running exercise before a decision is made.

What output will we expect firms to produce?

We expect firms to be able to calculate their capital requirement on at least a quarterly basis and have in place a robust process for reconciling risk data to accounting data and be able to explain the differences, or for operational risk, some other appropriate means of demonstrating the robustness of the risk data. We propose that firms calculate and report results on a portfolio basis for IRB and across all relevant operations and/or operational risks for AMA, providing at least the following minimum information:

  • IRB
    • for each portfolio included:
    • name of portfolio;
    • Basel/CRD asset class;
    • very brief description of portfolio;
    • value of exposure rated by the system;
    • risk-weighted asset value under Basel 1;
    • estimate of RWA under Basel 2/CRD IRB based on parallel running results;
    • estimate of expected loss calculations for credit risk.
    AMA
    • an estimate of Pillar 1 Operational Risk Capital Requirements across all operations and/or operational risks for which a firms intends to use AMA.
    • An estimate of the firm's total Pillar 1 operational risk charge

Systems improvement during the parallel running period

Firms will be allowed and indeed be expected to use the parallel running period to 'de-bug' and improve their capital calculation systems. As such, we envisage parallel running to be roughly comparable to a systems evaluation exercise such as those firms perform when introducing new software.


Parallel running throughout the rollout period

The majority of firms implementing an advanced approach intend to roll this out over a number of years. In these proposals we have assumed that each portfolio and new system will require a parallel running period before the results can be included in the capital calculations. It will be the responsibility of supervisors to monitor this process, but the starting position for discussions with firms is that parallel running for each new portfolio should be one year.