Calculation of Expected Shortfall

Banks will have discretion to recognise empirical correlations within broad regulatory risk factor classes (interest rate risk, equity risk, foreign exchange risk, commodity risk and credit risk, including related options volatilities in each risk factor category). Empirical correlations across broad risk factor categories will be constrained by SAMA aggregation requirements, as described in [13.14] to [13.15] , and must be calculated and used in a manner consistent with the applicable liquidity horizons, clearly documented and able to be explained to SAMA on request. 13.11 Banks’ models must accurately capture the risks associated with options within each of the broad risk categories. The following criteria apply to the measurement of options risk: (1) Banks’ models must capture the non-linear price characteristics of options positions. (2) Banks’ risk measurement systems must have a set of risk factors that captures the volatilities of the rates and prices underlying option positions, ie vega risk. Banks with relatively large and/or complex options portfolios must have detailed specifications of the relevant volatilities. Banks must model the volatility surface across both strike price and vertex (ie tenor).