[PDF] Minimum capital requirements for market risk





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Basel Committee

on Banking Supervision

Minimum capital

requirements for market risk J anuary 2019 (rev. February 2019) This publication is available on the BIS website (www.bis.org).

© Bank for International Settlements 2019. All rights reserved. Brief excerpts may be reproduced or

translated provided the source is stated. ISBN

978-92-9259-237-0 (online)

Minimum capital requirements for market risk iii

Contents

Minimum capital

requirements for market risk ..................................................................................................................... 1

Introduction ......................................................................................................................................................................................... 1

RBC25 Boundary between the banking book and the trading book ....................................................................... 3

Scope of the trading book .......................................................................................................................................... 3

Standards for assigning instruments to the regulatory books ..................................................................... 3

Supervisory powers ........................................................................................................................................................ 5

Documentation of instrument designation .......................................................................................................... 6

Restrictions on moving instruments between the regulatory books ......................................................... 6

Treatment of internal risk transfers ......................................................................................................................... 7

MAR10 Market risk terminology ............................................................................................................................................. 10

General terminology .................................................................................................................................................... 10

Terminology for financial instruments ................................................................................................................. 10

Terminology for market risk capital requirement calculations ................................................................... 10

Terminology for risk metrics ..................................................................................................................................... 11

Terminology for hedging and diversification .................................................................................................... 11

Terminology for risk factor eligibility and modellability ............................................................................... 11

Terminology for internal model validation ......................................................................................................... 12

Terminology for credit valuation adjustment risk ............................................................................................ 12

MAR11 Definitions and application of market risk .......................................................................................................... 13

Definition and scope of application ...................................................................................................................... 13

Methods of measuring market risk ........................................................................................................................ 15

MAR12 Definition of a trading desk ...................................................................................................................................... 16

MAR20 Standardised approach: general provisions and structure ........................................................................... 19

General provisions ........................................................................................................................................................ 19

Structure of the standardised approach .............................................................................................................. 19

Definition of correlation trading portfolio .......................................................................................................... 20

MAR21 Standardised approach: sensitivities-based method ...................................................................................... 21

Main concepts of the sensitivities-based method ........................................................................................... 21

Instruments subject to each component of the sensitivities-based method ....................................... 21

Process to calculate the capital requirement under the sensitivities-based method ........................ 22

Sensitivities-based method: risk factor and sensitivity definitions ........................................................... 26

Sensitivities-based method: definition of delta risk buckets, risk weights and correlations .......... 37

iv Minimum capital requirements for market risk

Sensitivities-based method: definition of vega risk buckets, risk weights and correlations ........... 51

Sensitivities-based method: definition of curvature risk buckets, risk weights and correlations . 52

MAR22 Standardised approach: default risk capital requirement ............................................................................. 54

Main concepts of default risk capital requirements ........................................................................................ 54

Instruments subject to the default risk capital requirement ........................................................................ 54

Overview of DRC requirement calculation .......................................................................................................... 54

Default risk capital requirement for non-securitisations ............................................................................... 55

Default risk capital requirement for securitisations (non-CTP) ................................................................... 59

Default risk capital requirement for securitisations (CTP) ............................................................................. 61

MAR23 Standardised approach: residual risk add-on .................................................................................................... 64

Introduction ..................................................................................................................................................................... 64

Instruments subject to the residual risk add-on ............................................................................................... 64

Calculation of the residual risk add-on ................................................................................................................ 65

MAR30 Internal models approach: general provisions .................................................................................................. 66

General criteria ............................................................................................................................................................... 66

Qualitative standards ................................................................................................................................................... 67

Model validation standards ...................................................................................................................................... 69

External validation ......................................................................................................................................................... 70

Stress testing ................................................................................................................................................................... 70

MAR31 Internal models approach: model requirements .............................................................................................. 72

Specification of market risk factors ........................................................................................................................ 72

Model eligibility of risk factors ................................................................................................................................ 74

MAR32 Internal models approach: backtesting and P&L attribution test requirements ................................. 81

Backtesting requirements .......................................................................................................................................... 81

PLA test requirements ................................................................................................................................................. 83

Treatment for exceptional situations .................................................................................................................... 87

MAR33 Internal models approach: capital requirements calculation....................................................................... 89

Calculation of expected shortfall ............................................................................................................................ 89

Calculation of capital requirement for modellable risk factors................................................................... 92

Calculation of capital requirement for non-modellable risk factors ......................................................... 93

Calculation of default risk capital requirement ................................................................................................. 94

Calculation of capital requirement for model-ineligible trading desks................................................... 97

Aggregation of capital requirement ...................................................................................................................... 97

Minimum capital requirements for market risk v

MAR40 Simplified standardised approach.......................................................................................................................... 99

Risk-weighted assets and capital requirements ............................................................................................... 99

Interest rate risk ............................................................................................................................................................. 99

Equity risk ...................................................................................................................................................................... 110

Foreign exchange risk .............................................................................................................................................. 112

Commodities risk ....................................................................................................................................................... 114

Treatment of options ................................................................................................................................................ 117

MAR90 Transitional arrangements ...................................................................................................................................... 123

MAR99 Guidance on use of the internal models approach ...................................................................................... 124

Trading desk-level backtesting............................................................................................................................. 124

Bank-wide backtesting............................................................................................................................................. 125

Examples of the application of the principles for risk factor modellability ........................................ 129

vi Minimum capital requirements for market risk

Errata

The following table lists the corrections made in this version of the standard relative to the version

originally published on 14 January 2019.

Paragraph Correction made Reason for correction

RBC25.9

Footnote 2 “. . . fair valued though the P&L account." corrected to

“. . . fair valued

through the P&L account." (emphasis added) Spelling error

MAR21.5(2)(f) Formula corrected from:

to:

Formula misspecification;

no change to the addition operation that precedes the term was intended relative to the January 2016 version of the standard or relative to the March 2018 consultative document that proposed revisions to the standard

Minimum capital requirements for market risk 1

Minimum capital requirements for market risk

Introduction

This document sets outs the amended minimum

capital requirements for market risk that will serve as the Pillar 1 minimum capital requirement as of 1 January 2022, replacing the current minimum capital requirements for market risk as set out in Basel II 1 and its subsequent amendments. This standard supersedes the January 2016 publication Minimum capital requirements for market risk, 2 for which the Basel Committee proposed targeted revisions via a March 2018 consultative document. 3 Descriptions of the changes that have been incorporated into the standard relative to the January 2016 publication are set out in the publication

Explanatory note on the minimum capital

requirements for market risk. 4 The market risk standard set out in this document has been prepared in a new modular format.

This reflects the style of a “consolidated framework" currently being prepared by the Basel Committee,

which intends to improve the accessibility of the Basel standards. 5

The Committee expects to publish all

standards in this format on its website in the coming months. An alternate version of the standard that

includes previously published frequently asked questions is also available on the Basel Committee website 6 At a high level, the chapters of the standard are organised as follows:

Chapter acronym Chapter name

RBC25 Boundary between the banking book and the trading book

MAR10 to MAR12 Definitions and application

MAR10 Market risk terminology

MAR11 Definitions and application of market risk

MAR12 Definition of a trading desk

MAR20 to MAR 23 Standardised approach

MAR20 Standardised approach: general provisions and structure MAR21 Standardised approach: sensitivities-based method MAR22 Standardised approach: default risk capital requirement MAR23 Standardised approach: residual risk add-on

MAR30 to MAR33 Internal models approach

MAR30 Internal models approach: general provisions MAR31 Internal models approach: model requirements MAR32 Internal models approach: backtesting and P&L attribution test requirements 1

Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Standards: A Revised

Framework: Comprehensive Version, June 2006, www.bis.org/publ/bcbs128.pdf. 2 Basel Committee on Banking Supervision, Minimum capital requirements for market risk, January 2016, www.bis.org/bcbs/publ/d352.pdf. 3

Basel Committee on Banking Supervision, Consultative Document - Revisions to the minimum capital requirements for market

risk, March 2018, www.bis.org/bcbs/publ/d436.pdf. 4

Basel Committee on Banking Supervision, Explanatory note on the minimum capital requirements for market risk, January 2019,

www.bis.org/bcbs/publ/d457_note.pdf. 5

For the purpose of this publication, cross-references to other paragraphs or chapters are indicated within square brackets

(eg [MAR21.1]). These will be replaced with hyperlinks once the consolidated framework is made available on the BCBS website.

6

Basel Committee on Banking Supervision, Minimum capital requirements for market risk, January 2019 (version includes

frequently asked questions), www.bis.org/bcbs/publ/d457_faq.pdf.

2 Minimum capital requirements for market risk

Chapter acronym Chapter name

MAR33 Internal models approach: capital requirements calculation

MAR40 Simplified standardised approach

MAR90 Transitional arrangements

MAR99 Guidance on use of the internal models approach

Minimum capital requirements for market risk 3

RBC25 Boundary between the banking book and the trading book

This chapter sets out the instruments to be included in the trading book (which are subject to market risk

capital requirements) and those to be included in the banking book (which are subject to credit risk capital

requirements).

Scope of the trading book

25.1
A trading book consists of all instruments that meet the specifications for trading book instruments set out in [RBC25.2] through [RBC25.13]. All other instruments must be included in the banking book. 25.2
Instruments comprise financial instruments, foreign exchange (FX), and commodities. A financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. Financial instruments include primary financial instruments (or cash instruments) and derivative financial instruments. A financial asset is any

asset that is cash, the right to receive cash or another financial asset or a commodity, or an equity

instrument. A financial liability is the contractual obligation to deliver cash or another financial asset or a commodity. Commodities also include non-tangible (ie non-physical) goods such as electric power. 25.3

Banks may only include a financial instrument, instruments on FX or commodity in the trading book when there is no legal impediment against selling or fully hedging it.

25.4
Banks must fair value daily any trading book instrument and recognise any valuation change in the profit and loss (P&L) account. Standards for assigning instruments to the regulatory books 25.5

Any instrument a bank holds for one or more of the following purposes must, when it is first recognised on its books, be designated as a trading book instrument, unless specifically otherwise

provided for in [RBC25.3] or [RBC25.8]: (1) short-term resale; (2) profiting from short-term price movements; (3) locking in arbitrage profits; or (4) hedging risks that arise from instruments meeting (1), (2) or (3) above. 25.6

Any of the following instruments is seen as being held for at least one of the purposes listed in [RBC25.5] and must therefore be included in the trading book, unless specifically otherwise provided for in [RBC25.3] or [RBC25.8]:

(1) instruments in the correlation trading portfolio; (2) instruments that would give rise to a net short credit or equity position in the banking book; [1] or (3)

instruments resulting from underwriting commitments, where underwriting commitments refer only to securities underwriting, and relate only to securities that are

expected to be actually purchased by the bank on the settlement date.

4 Minimum capital requirements for market risk

Footnote

[1] A bank will have a net short risk position for equity risk or credit risk in the banking book if the present value of the banking book increases when an equity price decreases or when a credit spread on an issuer or group of issuers of debt increases. 25.7

Any instrument which is not held for any of the purposes listed in [RBC25.5] at inception, nor seen as being held for these purposes according to [RBC25.6], must be assigned to the banking

book. 25.8
The following instruments must be assigned to the banking book: (1) unlisted equities; (2) instruments designated for securitisation warehousing; (3) real estate holdings, where in the context of assigning instrument to the trading book, real estate holdings relate only to direct holdings of real estate as well as derivatives on direct holdings; (4) retail and small or medium-sized enterprise (SME) credit; (5) equity investments in a fund, unless the bank meets at least one of the following conditions:

(a) the bank is able to look through the fund to its individual components and there is sufficient and frequent information, verified by an independent third party, provided to the bank regarding the fund's composition; or

(b) the bank obtains daily price quotes for the fund and it has access to the information contained in the fund's mandate or in the national regulations governing such investment funds; (6) hedge funds; (7) derivative instruments and funds that have the above instrument types as underlying assets; or (8) instruments held for the purpose of hedging a particular risk of a position in the types of instrument above. 25.9
There is a general presumption that any of the following instruments are being held for at least one of the purposes listed in [RBC25.5] and therefore are trading book instruments, unless specifically otherwise provided for in [RBC25.3] or [RBC25.8]: (1) instruments held as accounting trading assets or liabilities; [2] (2) instruments resulting from market-making activities; (3)

equity investments in a fund excluding those assigned to the banking book in accordance with [RBC25.8](5);

(4) listed equities; [3] (5) trading-related repo-style transaction; [4] or (6) options including embedded derivatives [5] from instruments that the institution issued out of its own banking book and that relate to credit or equity risk.

Minimum capital requirements for market risk 5

Footnotes

[2] Under IFRS (IAS 39) and US GAAP, these instruments would be designated as held for trading. Under IFRS 9, these instruments would be held within a trading business model. These instruments would be fair valued through the P&L account.

[3] Subject to supervisory review, certain listed equities may be excluded from the market risk framework. Examples of equities that may be excluded include, but are not limited to, equity positions arising from deferred compensation plans, convertible debt securities, loan

products with interest paid in the form of “equity kickers", equities taken as a debtquotesdbs_dbs26.pdfusesText_32
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