Minimum Capital Requirements for Market Risk

In calculating ES, the liquidity horizons described in [13.12] must be reflected by scaling an ES calculated on a base horizon. The ES for a liquidity horizon must be calculated from an ES at a base liquidity horizon of 10 days with scaling applied to this base horizon result as expressed below, where: (1) ES is the regulatory liquidity-adjusted ES; (2) T is the length of the base horizon, ie 10 days; (3) ES T (P) is the ES at horizon T of a portfolio with positions P = (p i ) with respect to shocks to all risk factors that the positions P are exposed to; (4) ES T (P, j) is the ES at horizon T of a portfolio with positions P = (p i ) with respect to shocks for each position pi in the subset of risk factors Q(p i , j), with all other risk factors held constant; (5) the ES at horizon T, ES T (P) must be calculated for changes in the risk factors, and ES T (P, j) must be calculated for changes in the relevant subset Q(p i , j) of risk factors, over the time interval T without scaling from a shorter horizon; (6) Q(p i , j) j is the subset of risk factors for which liquidity horizons, as specified in [13.12], for the desk where pi is booked are at least as long as LHj according to the table below. For example, Q(p i ,4) is the set of risk factors with a 60-day horizon and a 120-day liquidity horizon. Note that Q(p i , j) is a subset of Q(p i , j–1); (7) the time series of changes in risk factors over the base time interval T may be determined by overlapping observations; and (8) LHj is the liquidity horizon j , with lengths in the following table: Liquidity horizons, j Table 1 j LH j 1 10 2 20 3 40 4 60 5 120 13.5 The ES measure must be calibrated to a period of stress. (1) Specifically, the ES measure must replicate an ES outcome that would be generated on the bank’s current portfolio if the relevant risk factors were experiencing a period of stress. This is a joint assessment across all relevant risk factors, which will capture stressed correlation measures. (2) This calibration is to be based on an indirect approach using a reduced set of risk factors. Banks must specify a reduced set of risk factors that are relevant for their portfolio and for which there is a sufficiently long history of observations. (a) This reduced set of risk factors is subject to SAMA approval and must meet the data quality requirements for a modellable risk factor as outlined in [11.12] to [11.24] . (b) The identified reduced set of risk factors must be able to explain a minimum of 75% of the variation of the full ES model (ie the ES of the reduced set of risk factors should be at least equal to 75% of the fully specified ES model on average measured over the preceding 12- week period). The indicator that must be maximised for the identification of the stressed period is the aggregate capital requirement for modellable risk factors (IMCC) as per [13.15] , it has to be maximised for the modellable risk factors, which implies that ESr,s is maximised, as noted in [13.7]. The reduced set of risk factors must be able to explain a minimum of 75% of the variation of the full ES model at the group level for the aggregate of all desks with IMA model approval. 13.6 The ES for market risk capital purposes is therefore expressed as follows, where: (1) The ES for the portfolio using the above reduced set of risk factors (ES R,S ), is calculated based on the most severe 12-month period of stress available over the observation horizon. (2) ES R,S is then scaled up by the ratio of (i) the current ES using the full set of risk factors to (ii) the current ES measure using the reduced set of factors. For the purpose of this calculation, this ratio is floored at 1. (a) ES F,C is the ES measure based on the current (most recent) 12-month observation period with the full set of risk factors; and (b) ES R,C is the ES measure based on the current period with a reduced set of risk factors.