Minimum Capital Requirements for Credit Risk

The funds exposures will be risk weighted as follows: (1) The RWA for the cash (RWA cash ) are calculated as the exposure of USD 20 multiplied by the applicable SA risk weight of 0%. Thus, RWA cash = USD 0. (2) The RWA for the government bonds (RWA bonds ) are calculated as the exposure of USD 30 multiplied by the applicable SA risk weight of 0%. Thus, RWA bonds = USD 0. (3) The RWA for the exposures to the listed equities underlying the forward contracts (RWA underlying ) are calculated by multiplying the following three amounts: (1) the SA credit conversion factor of 100% that is applicable to forward purchases; (2) the exposure to the notional of USD 100; and (3) the applicable risk weight for listed equities under the SA which is 250%. Thus, RWA underlying = 100% * USD100 * 250% = USD 250. (4) The forward purchase equities expose the bank to counterparty credit risk in respect of the market value of the forwards and the collateral posted that is not held by the CCP on a bankruptcy remote basis. For the sake of simplicity, this example assumes the application of SA-CCR results in an exposure value of USD 56. The RWA for counterparty credit risk (RWACCR) are determined by multiplying the exposure amount by the relevant risk weight for trade exposures to CCPs, which 2% in this case (see chapter 8 of Minimum Capital Requirements for Credit Risk for the capital requirements for bank exposures to CCPs ). Thus, RWACCR = USD 56 * 2% = USD 1.12. (Note: There is no credit valuation adjustment, or CVA, charge assessed since the forward contracts are cleared through a CCP.) 28.3 The total RWA of the fund are therefore USD 251.12 = (0 + 0 +250 + 1.12). 28.4 The leverage of a fund under the LTA is calculated as the ratio of the fund’s total assets to its total equity, which in this examples is 100/95. 28.5 Therefore, the RWA for the bank’s equity investment in the fund is calculated as the product of the average risk weight of the fund, the fund’s leverage and the size of the banks equity investment. That is: 29. Equity Investments in Funds: Illustrative Example of the Calculation of RWA Under the Mandate-Based Approach (MBA) 29.1 Consider a fund with assets of USD 100, where it is stated in the mandate that the fund replicates an equity index. In addition to being permitted to invest its assets in either cash or listed equities, the mandate allows the fund to take long positions in equity index futures up to a maximum nominal amount equivalent to the size of the fund’s balance sheet (USD 100). This means that the total on balance sheet and off balance sheet exposures of the fund can reach USD 200. Consider also that a maximum financial leverage (fund assets/fund equity) of 1.1 applies according to the mandate. The bank holds 20% of the shares of the fund, which represents an investment of USD 18.18. 29.2 First, the on-balance sheet exposures of USD 100 will be risk weighted according to the risk weights applied to listed equity exposures (RW=250%), ie RWA on-BS = USD 100 * 250% = USD 250. 29.3 Second, we assume that the fund has exhausted its limit on derivative positions, ie USD 100 notional amount. The RWA for the maximum notional amount of underlying the derivatives positions calculated by multiplying the following three amounts: (1) the SA credit conversion factor of 100% that is applicable to forward purchases; (2) the maximum exposure to the notional of USD 100; and (3) the applicable risk weight for listed equities under the SA which is 250%. Thus, RWA underlying = 100% * USD100 * 250% = USD 250.