Minimum Capital Requirements for Market Risk

The RTPL is the daily trading desk-level P&L that is produced by the valuation engine of the trading desk’s risk management model. (1) The trading desk’s risk management model must include all risk factors that are included in the bank’s expected shortfall (ES) model with SAMA parameters and any risk factors deemed not modellable by SAMA, and which are therefore not included in the ES model for calculating the respective regulatory capital requirement, but are included in non-modellable risk factors. (2) The RTPL must not take into account any risk factors that the bank does not include in its trading desk’s risk management model. 12.23 Movements in all risk factors contained in the trading desk’s risk management model should be included, even if the forecasting component of the internal model uses data that incorporates additional residual risk. For example, a bank using a multifactor beta-based index model to capture event risk might include alternative data in the calibration of the residual component to reflect potential events not observed in the name-specific historical time series. The fact that the name is a risk factor in the model, albeit modelled in a multifactor model environment, means that, for the purposes of the PLA test, the bank would include the actual return of the name in the RTPL (and in the HPL) and receive recognition for the risk factor coverage of the model. 12.24 The PLA test compares a trading desk’s RTPL with its HPL. The HPL used for the PLA test should be identical to the HPL used for backtesting purposes. This comparison is performed to determine whether the risk factors included and the valuation engines used in the trading desk’s risk management model capture the material drivers of the bank’s P&L by determining if there is a significant degree of association between the two P&L measures observed over a suitable time period. The RTPL can differ from the HPL for a number of reasons. However, a trading desk risk management model should provide a reasonably accurate assessment of the risks of a trading desk to be deemed eligible for the internal models-based approach. 12.25 The HPL must be calculated by revaluing the positions held at the end of the previous day using the market data of the present day (ie using static positions). As HPL measures changes in portfolio value that would occur when end-of-day positions remain unchanged, it must not take into account intraday trading nor new or modified deals, in contrast to the APL. Both APL and HPL include foreign denominated positions and commodities included in the banking book. 12.26 Fees and commissions must be excluded from both APL and HPL as well as valuation adjustments for which separate regulatory capital approaches have been otherwise specified as part of the rules (eg credit valuation adjustment and its associated eligible hedges) and valuation adjustments that are deducted from Common Equity Tier 1 (eg the impact on the debt valuation adjustment component of the fair value of financial instruments must be excluded from these P&Ls). 12.27 Any other market risk-related valuation adjustments, irrespective of the frequency by which they are updated, must be included in the APL while only valuation adjustments updated daily must be included in the HPL, unless the bank has received specific agreement to exclude them from SAMA. Smoothing of valuation adjustments that are not calculated daily is not allowed. P&L due to the passage of time should be included in the APL and should be treated consistently in both HPL and RTPL. 48