Minimum Capital Requirements for Counterparty Credit Risk (CCR) and Credit Valuation Adjustment (CVA)

( SCVA c ) is calculated as follows (where the summation is across all netting sets with the counterparty), where: (1) RW c is the risk weight for counterparty c that reflects the volatility of its credit spread. These risk weights are based on a combination of sector and credit quality of the counterparty as prescribed in 11.16. (2) M NS is the effective maturity for the netting set NS . For banks that have SAMA’s approval to use IMM, N NS is calculated as per 7.20 and 7.21 of this framework, with the exception that the five year cap in 7.20 is not applied. For banks that do not have SAMA’s approval to use IMM, M NS is calculated according to chapter 12.46 to 12.54 of the Minimum Capital Requirements for Credit Risk , with the exception that the five-year cap in chapter 12.46 of the Minimum Capital Requirements for Credit Risk is not applied. (3) EAD NS is the exposure at default (EAD) of the netting set NS , calculated in the same way as the bank calculates it for minimum capital requirements for CCR. (4) DF NS is a supervisory discount factor. It is 1 for banks using the IMM to calculate EAD, and is for banks not using IMM. 42 (5) ∝ = 1.4. 43 11.16. The supervisory risk weights ( RW c ) are given in Table 1. Credit quality is specified as either investment grade (IG), high yield (HY), or not rated (NR). Where there are no external ratings or where external ratings are not recognized within a jurisdiction, banks may, subject to SAMA's approval, map the internal rating to an external rating and assign a risk weight corresponding to either IG or HY. Otherwise, the risk weights corresponding to NR is to be applied. Table 1: Supervisory risk weights, RW c Sector of counterparty Credit quality of counterparty IG HY and NR Sovereigns including central banks, multilateral development banks 0.5% 2.0% Local government, government-backed nonfinancials, education and public administration 1.0% 4.0% Financials including government-backed financials 5.0% 12.0% Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying 3.0% 7.0% Consumer goods and services, transportation and storage, administrative and support service activities 3.0% 8.5% Technology, telecommunications 2.0% 5.5% Health care, utilities, professional and technical activities 1.5% 5.0% Other sector 5.0% 12.0% Full version of the BA-CVA (hedges are recognized) 11.17. As set out in 11.13(1) the full version of the BA-CVA recognizes the effect of counterparty credit spread hedges. Only transactions used for the purpose of mitigating the counterparty credit spread component of CVA risk, and managed as such, can be eligible hedges. 11.18. Only single-name credit default swaps (CDS), single-name contingent CDS and index CDS can be eligible CVA hedges. 11.19. Eligible single-name credit instruments must: (1) reference the counterparty directly; or (2) reference an entity legally related to the counterparty; where legally related refers to cases where the reference name and the counterparty are either a parent and its subsidiary or two subsidiaries of a common parent; or (3) reference an entity that belongs to the same sector and region as the counterparty. 11.20. Banks that intend to use the full version of BA-CVA must calculate the reduced version ( K reduced ) as well. Under the full version, capital requirement for CVA risk DS BA-CVA × K full is calculated as follows, where DS BA-CVA = 0.65, and β = 0.25 is the SAMA supervisory parameter that is used to provide a floor that limits the extent to which hedging can reduce the capital requirements for CVA risk: K full = β ∙ K reduced + (1 - β ) ∙ K hedged 11.21. The part of capital requirements that recognizes eligible hedges (K hedged) is calculated formulas follows (where the summations are taken over all counterparties c that are within scope of the CVA charge), where: (1) Both the stand-alone CVA capital (SCVA c ) and the correlation parameter (ρ) are defined in exactly the same way as for the reduce