Minimum Capital Requirements for Market Risk

A bank may use systematic credit or equity risk factors within its models that are designed to capture market-wide movements for a given economy, region or sector, but not the idiosyncratic risk of a specific issuer (the idiosyncratic risk of a specific issuer would be a non-modellable risk factor (NMRF) unless there are sufficient real price observations of that issuer). Real price observations of market indices or instruments of individual issuers may be considered representative for a systematic risk factor as long as they share the same attributes as the systematic risk factor. 11.21 In addition to the approach set out in [11.20], where systematic risk factors of credit or equity risk factors include a maturity dimension (eg a credit spread curve), one of the bucketing approaches set out above must be used for this maturity dimension to count “real” price observations for the RFET. 11.22 Once a risk factor has passed the RFET, the bank should choose the most appropriate data to calibrate its model. The data used for calibration of the model does not need to be the same data used to pass the RFET. 11.23 Once a risk factor has passed the RFET, the bank must demonstrate that the data used to calibrate its ES model are appropriate based on the principles contained in [11.25] to[11.26].Where a bank has not met these principles to the satisfaction of SAMA for a particular risk factor, SAMA may choose to deem the data unsuitable for use to calibrate the model and, in such case, the risk factor must be excluded from the ES model and subject to capital requirements as an NMRF. 11.24 There may, on very rare occasions, be a valid reason why a significant number of modellable risk factors across different banks may become non-modellable due to a widespread reduction in trading activities (for instance, during periods of significant cross-border financial market stress affecting several banks or when financial markets are subjected to a major regime shift). One possible SAMA response in this instance could be to consider as modellable a risk factor that no longer passes the RFET. However, such a response should not facilitate a decrease in capital requirements. SAMA will only pursue such a response under the most extraordinary, systemic circumstances. Principles for the modellability of risk factors that pass the RFET 11.25 Banks use many different types of models to determine the risks resulting from trading positions. The data requirements for each model may be different. For any given model, banks may use different sources or types of data for the model’s risk factors. Banks must not rely solely on the number of observations of real prices to determine whether a risk factor is modellable. The accuracy of the source of the risk factor real price observation must also be considered.