Minimum Capital Requirements for Market Risk

A bank must determine which risk factors within its trading desks that have received approval to use the internal models approach as set out in [12] are eligible to be included in the bank’s internal expected shortfall (ES) model for regulatory capital requirements as set out in [13] . For a risk factor to be classified as modellable by a bank, a necessary condition is that it passes the risk factor eligibility test (RFET). This test requires identification of a sufficient number of real prices that are representative of the risk factor. Collateral reconciliations or valuations cannot be considered real prices to meet the RFET. A price will be considered real if it meets at least one of the following criteria: (1) It is a price at which the institution has conducted a transaction; (2) It is a verifiable price for an actual transaction between other arms-length parties; (3) It is a price obtained from a committed quote made by (i) the bank itself or (ii) another party. The committed quote must be collected and verified through a third-party vendor, a trading platform or an exchange; or (4) It is a price that is obtained from a third-party vendor, where: (a) the transaction or committed quote has been processed through the vendor; (b) the vendor agrees to provide evidence of the transaction or committed quote to SAMA upon request; or (c) the price meets any of the three criteria immediately listed in [11.12](1) to [11.12](3). As referenced in [11.12], a committed quote is a price from an arm’s length provider at which the provider of the quote must buy or sell the financial instrument. Orderly transactions and eligible committed quotes with a non-negligible volume, as compared to usual transaction sizes for the bank, reflective of normal market conditions can be generally accepted as valid. 11.13 To pass the RFET, a risk factor that a bank uses in an internal model must meet either of the following criteria on a quarterly basis. Any real price that is observed for a transaction should be counted as an observation for all of the risk factors for which it is representative. (1) The bank must identify for the risk factor at least 24 real price observations per year (measured over the period used to calibrate the current ES model, with no more than one real price observation per day to be included in this count). 41,42 Moreover, over the previous 12 months there must be no 90-day period in which fewer than four real price observations are identified for the risk factor (with no more than one real price observation per day to be included in this count). The above criteria must be monitored on a monthly basis; or (2) The bank must identify for the risk factor at least 100 “real” price observations over the previous 12 months (with no more than one “real” price observation per day to be included in this count). 11.14 In order for a risk factor to pass the RFET, a bank may also count real price observations based on information collected from a third-party vendor provided all of the following criteria are met: (1) The vendor communicates to the bank the number of corresponding real prices observed and the dates at which they have been observed. (2) The vendor provides, individually, a minimum necessary set of identifier information to enable banks to map real prices observed to risk factors. (3) The vendor is subject to an audit regarding the validity of its pricing information. The results and reports of this audit must be made available on request to SAMA and to banks as a precondition for the bank to be allowed to use real price observations collected by the third-party vendor. If the audit of a third-party vendor is not satisfactory to SAMA, SAMA may decide to prevent the bank from using data from this vendor. 43