Minimum Capital Requirements for Market Risk

Valuation adjustments that the bank is unable to calculate at the trading desk level (eg because they are assessed in terms of the bank’s overall positions/risks or because of other constraints around the assessment process) are not required to be included in the HPL and APL for backtesting at the trading desk level, but should be included for bank-wide backtesting. To the satisfaction of SAMA, the bank must provide support for valuation adjustments that are not computed at a trading desk level. 12.29 Both APL and HPL must be computed based on the same pricing models (eg same pricing functions, pricing configurations, model parametrisation, market data and systems) as the ones used to produce the reported daily P&L. PLA test data input alignment 12.30 For the sole purpose of the PLA assessment, banks are allowed to align RTPL input data for its risk factors with the data used in HPL if these alignments are documented, justified to SAMA and the requirements set out below are fulfilled: (1) Banks must demonstrate that HPL input data can be appropriately used for RTPL purposes, and that no risk factor differences or valuation engine differences are omitted when transforming HPL input data into a format which can be applied to the risk factors used in RTPL calculation. (2) Any adjustment of RTPL input data must be properly documented, validated and justified to SAMA. (3) Banks must have procedures in place to identify changes with regard to the adjustments of RTPL input data. Banks must notify SAMA of any such changes. (4) Banks must provide assessments on the effect these input data alignments would have on the RTPL and the PLA test. To do so, banks must compare RTPL based on HPL-aligned market data with the RTPL based on market data without alignment. This comparison must be performed when designing or changing the input data alignment process and upon the request of SAMA. 12.31 Adjustments to RTPL input data will be allowed when the input data for a given risk factor that is included in both the RTPL and the HPL differs due to different providers of market data sources or time fixing of market data sources, or transformations of market data into input data suitable for the risk factors of the underlying pricing models. These adjustments can be done either: (1) by direct replacement of the RTPL input data (eg par rate tenor x, provider a) with the HPL input data (eg par rate tenor x, provider b); or (2) by using the HPL input data (eg par rate tenor x, provider b) as a basis to calculate the risk factor data needed in the RTPL/ES model (eg zero rate tenor x). In the event trading desks of a bank operate in different time zones compared to the location of the bank’s risk control department, data for risk modelling could be retrieved at different snapshot times compared to the data on which the desks’ front office P&L is based. Banks are permitted to align the snapshot time used for the calculation of the RTPL of a desk to the snapshot time used for the derivation of its HPL. 12.32 If the HPL uses market data in a different manner to RTPL to calculate risk parameters that are essential to the valuation engine, these differences must be reflected in the PLA test and as a result in the calculation of HPL and RTPL. In this regard, HPL and RTPL are allowed to use the same market data only as a basis, but must use their respective methods (which can differ) to calculate the respective valuation engine parameters. This would be the case, for example, where market data are transformed as part of the valuation process used to calculate RTPL. In that instance, banks may align market data between RTPL and HPL pre-transformation but not post- transformation.