Minimum Capital Requirements for Market Risk

Where a bank has approved loss-given-default (LGD) 52 estimates as part of the IRB approach, this data must be used. Where such estimates do not exist, or SAMA determines that they are not sufficiently robust, LGDs must be computed using a methodology consistent with the IRB methodology and satisfy the following conditions. (1) LGDs must be determined from a market perspective, based on a position’s current market value less the position’s expected market value subsequent to default. The LGD should reflect the type and seniority of the position and cannot be less than zero. (2) LGDs must be based on an amount of historical data that is sufficient to derive robust, accurate estimates. (3) LGDs provided by external sources may also be used by institutions, provided they can be shown to be relevant for the bank’s portfolio. 13.39 Banks must establish a hierarchy ranking their preferred sources for PDs and LGDs, in order to avoid the cherry-picking of parameters. 51 Market-implied PDs are not acceptable. 52 LGD should be interpreted in this context as 1 – recovery rate. Calculation of Capital Requirement for Model-Ineligible Trading Desks 13.40 The regulatory capital requirement associated with trading desks that are either out-of-scope for model approval or that have been deemed ineligible to use an internal model (Cu) is to be calculated by aggregating all such risks and applying the standardised approach. Aggregation of Capital Requirement 13.41 The aggregate (non-DRC) capital requirement for those trading desks approved and eligible for the IMA (ie trading desks that pass the backtesting requirements and that have been assigned to the PLA test green zone or amber zone (CA) in [ 12.43 ] to [ 12.45 ]) is equal to the maximum of the most recent observation and a weighted average of the previous 60 days scaled by a multiplier and is calculated as follows where SES is the aggregate regulatory capital measure for the risk factors in model-eligible trading desks that are non-modellable. 13.42 The multiplication factor mc is fixed at 1.5 unless it is set at a higher level by SAMA to reflect the addition of a qualitative add-on and/or a backtesting add-on per the following considerations. (1) Banks must add to this factor a “plus” directly related to the ex-post performance of the model, thereby introducing a built-in positive incentive to maintain the predictive quality of the model. (2) For the backtesting add-on, the plus will range from 0 to 0.5 based on the outcome of the backtesting of the bank’s daily VaR at the 99 th percentile based on current observations on the full set of risk factors (VaR FC ). (3) If the backtesting results are satisfactory and the bank meets all of the qualitative standards set out in [10.5] to [10.16] , the plus factor could be zero. [12] presents in detail the approach to be applied for backtesting and the plus factor. (4) The backtesting add-on factor is determined based on the maximum of the exceptions generated by the backtesting results against actual P&L (APL) and hypothetical P&L (HPL) as described [12] . 13.43 The aggregate capital requirement for market risk ( ACR total ) is equal to the aggregate capital requirement for approved and eligible trading desks (IMA G,A = C A + DRC) plus the standardised approach capital requirement for trading desks that are either out-of-scope for model approval or that have been deemed ineligible to use the internal models approach (C u ). If at least one eligible trading desk is in the PLA test amber zone, a capital surcharge is added. The impact of the capital surcharge is limited by the formula: