Minimum Capital Requirements for Market Risk

If a trading desk is in the PLA test amber zone, it is not considered an out-of-scope trading desk for use of the IMA. (1) If a trading desk is in the PLA test amber zone, it cannot return to the PLA test green zone until: (a) the trading desk produces outcomes in the PLA test green zone; and (b) the trading desk has satisfied its backtesting exceptions requirements over the prior 12 months. (2) Trading desks in the PLA test amber zone are subject to a capital surcharge as specified in [13.43] 48 Time effects can include various elements such as: the sensitivity to time, or theta effect (ie using mathematical terminology, the first-order derivative of the price relative to the time) and carry or costs of funding. Treatment for Exceptional Situations 12.45 There may, on very rare occasions, be a valid reason why a series of accurate trading desk level- models across different banks will produce many backtesting exceptions or inadequately track the P&L produced by the front office pricing model (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 would be to permit the relevant trading desks to continue to use the IMA but require each trading desk’s model to take account of the regime shift or significant market stress as quickly as practicable while maintaining the integrity of its procedures for updating the model. SAMA will only pursue such a response under the most extraordinary, systemic circumstances. 13- Internal Models Approach: Capital Requirements Calculation The internal models approach is based on the use Expected Shortfall (ES) techniques. Calculation of Expected Shortfall 13.1 Banks will have flexibility in devising the precise nature of their expected shortfall ( ES ) models, but the following minimum standards will apply for the purpose of calculating market risk capital requirements. Banks subject to SAMA approval can apply stricter standards. The IMA does not require all products to be simulated on full revaluation. Simplifications (eg sensitivities-based valuation) may be used provided SAMA agrees that the method used is adequate for the instruments covered. 13.2 ES must be computed on a daily basis for the bank-wide internal models to determine market risk capital requirements. ES must also be computed on a daily basis for each trading desk that uses the internal models approach (IMA). 13.3 In calculating ES, a bank must use a 97.5th percentile, one-tailed confidence level.