The EBA states in Chapter 5.3.5 “Calibration to the long-run average default rate”, par. 89 that: “Institutions should conduct the calibration after taking into account any overrides applied in the assignment of obligors to grades or pools, and before the application of MoC or floors to PD estimates as referred to in Articles 160(1) and 163(1) of Regulation (EU) No 575/2013. Where a ranking method or overrides policy has changed over time, institutions should analyse the effects of these changes on the frequency and scope of overrides and take them into account appropriately.” In consideration of the above, the overrides should be taken into consideration during the PD model calibration procedure. Moreover, the same requirement applies to the new PD models where the ranking method or overrides policy has changed with respect to the previous one. Based on Article 172(3) of the CRR 575/213: “For grade and pool assignments institutions shall document the situations in which human judgement may override the inputs or outputs of the assignment process and the personnel responsible for approving these overrides. Institutions shall document these overrides and note down the personnel responsible. Institutions shall analyse the performance of the exposures whose assignments have been overridden. This analysis shall include an assessment of the performance of exposures whose rating has been overridden by a particular person, accounting for all the responsible personnel.” Such a revision is carried out on a case-by-case basis and should take into account all the quantitative and qualitative information characterizing a specific obligor and the relevant economic, legal and business environment. The overrides can regard the information that is already taken into consideration by the PD model but should be given a different weight based on some specific circumstances. Alternatively, it can regard the information that is not taken into consideration by the PD model but should be relevant for the correct risk profile definition of a certain obligor. Finally, the override process should be regulated by specific internal rules, while the motivations should be well-documented, analysed and authorized by an independent unit. On the basis thereof, in case of a material change of the rating system (that includes a substantial revision of both the ranking method and the overrides policy), we believe that the above described process cannot be replicated before the model release, because: • It is very difficult to analyse all the obligors present in the calibration sample on a case-by-case basis, taking into account their specific characteristics; moreover, the analysis should be conducted separately for each reference date, as both the obligor’s characteristics and the relevant economic, legal and business environment can change over time. • If a certain rating system is substantially / completely new, the familiarity of rating analysts with the inputs and outputs of the model is still quite low; hence, it would be difficult to apply an override before the rating attribution process is officially authorized to be actually used in the real-world context. • Any override simulation before the PD model release would introduce substantial doubtful assumptions, proxies and asymmetries, thus resulting in a potentially significant risk quantification error in the PD calibration phase; moreover, the above could reduce the conservativeness of the PD estimates. • The use of the previous overrides with regards to the new model would be incorrect, as those overrides used to be applied based on some specific set of risk drivers and their respective weights in the rating model; as a consequence, if the model design and the risk drivers (or their weights) are different in the new model, the application of the override based on the previous motivation would be incoherent. • Finally, when a new rating model is developed, one should analyse the recurring override motivations and all the relevant information that has not been accounted for in the previous rating model; therefore, the necessity of certain overrides can disappear for the new version of the PD model. As a supervised entity, we believe that if the “ranking method or override policy has changed over time”, the override process and its impact from the “risk quantification” point of view should be treated in the annual review of estimates framework and cannot be applied in the initial calibration phase. Once the actual unbiased distribution of the overrides is observed, the presence of any PD underestimation risk should be verified by means of annual back-testing analysis. The evidence highlighted by the analysis of the sufficiently long time series of the default rates observed by each rating grade after override application can be used to eventually adjust the risk quantification accuracy. In other words, if the observed default rates are lower than the PD estimates associated to the rating grades before override, but higher than PD estimates associated to the rating grades after override, there is a certain distortion introduced by the overrides process. Such a distortion should be adjusted in order to increase the risk quantification precision.