At the beginning of 1998, in the United States (1997) in the European Community, regulators allowed certain large banks the discretion to calculate capital requirements for their trading books — or market risk exposures–using internal models rather than the alternative regulatory standardized model, internal models have had certain constraints imposed on them by regulators and are subjected to back-testing verification; nevertheless, they potentially allow for (1) the Value at Risk (VAR) of each tradable instrument to be more accurately measured (e.g. based on its price volatility, maturity, and so on and (2) correlations among assets to be taken into account. In the context of market risk, VAR measures the market value exposure of a financial instrument in case tomorrow is a statistically defined bad day.
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