Minimum Capital Requirements for Market Risk

This section sets out the simplified standard approach for measuring the risk of holding or taking positions in debt securities and other interest rate related instruments in the trading book. The instruments covered include all fixed-rate and floating-rate debt securities and instruments that behave like them, including non-convertible preference shares. 53 Convertible bonds, ie debt issues or preference shares that are convertible, at a stated price, into common shares of the issuer, will be treated as debt securities if they trade like debt securities and as equities if they trade like equities. The basis for dealing with derivative products is considered in [14.31] to [14.40]. 14.4 The minimum capital requirement is expressed in terms of two separately calculated amounts, one applying to the “specific risk” of each security, whether it is a short or a long position, and the other to the interest rate risk in the portfolio (termed “general market risk”) where long and short positions in different securities or instruments can be offset. Specific risk 14.5 The capital requirement for specific risk is designed to protect against an adverse movement in the price of an individual security owing to factors related to the individual issuer. In measuring the risk, offsetting will be restricted to matched positions in the identical issue (including positions in derivatives). Even if the issuer is the same, no offsetting will be permitted between different issues since differences in coupon rates, liquidity, call features, etc mean that prices may diverge in the short run. Netting is only allowed under limited circumstances for interest rate specific risk as explained in [14.5]: “offsetting will be restricted to matched positions in the identical issue (including positions in derivatives). Even if the issuer is the same, no offsetting will be permitted between different issues since differences in coupon rates, liquidity, call features, etc means that prices may diverge in the short run.” In addition, partial offsetting is allowed in two other sets of circumstances. One set of circumstances is described in [14.21] and concerns nth-to-default basked products. The other set of circumstances described in [14.16] to [14.18] pertains to offsetting between a credit derivative (whether total return swap or credit default swap) and the underlying exposure (ie cash position). Although this treatment applies generally in a one-for-one fashion, it is possible that multiple instruments could combine to create a hedge that would be eligible for consideration for partial offsetting. SAMA recognise that, in the case of multiple instruments comprising one side of the position, necessary conditions (ie the value of two legs moving in opposite directions, key contractual features of the credit derivative, identical reference obligations and currency/maturity mismatches) will be extremely difficult to meet, in practice. 14.6 The Specific risk capital requirements for “government” and “other” categories will be as follows: Specific risk capital requirements for issuer risk Government and "other" categories Table 1 Categories External credit assessment Specific risk capital requirement Government AAA to AA- 0% A+ to BBB- 0.25% (residual term to final maturity 6 months or less) 1.00% (residual term to final maturity greater than 6 and up to and including 24 months) 1.60% (residual term to final maturity exceeding 24 months) BB+ to B- 8.00% Below B- 12.00% Unrated 8.00% Qualifying 0.25% (residual term to final maturity 6 months or less) 1.00% (residual term to final maturity greater than 6 and up to and including 24 months) 1.60% (residual term to final maturity exceeding 24 months) Other BB+ to BB- 8.00% Below BB- 12.00% Unrated 8.00%