Minimum Capital Requirements for Market Risk

Interest rate and currency swaps, FRAs, forward FX contracts and interest rate futures will not be subject to a specific risk charge. This exemption also applies to futures on an interest rate index (eg London Interbank Offer Rate, or LIBOR). However, in the case of futures contracts where the underlying is a debt security, or an index representing a basket of debt securities, a specific risk charge will apply according to the credit risk of the issuer as set out in [14.5] to [14.21]. 14.39 General market risk applies to positions in all derivative products in the same manner as for cash positions, subject only to an exemption for fully or very closely matched positions in identical instruments as defined in [paragraphs 718(xiii) and 718(xiv) / [14.35] and [14.36]. The various categories of instruments should be slotted into the maturity ladder and treated according to the rules identified earlier. 14.40 Table 7 presents a summary of the regulatory treatment for interest rate derivatives, for market risk purposes. Summary of treatment of interest rate derivatives Table 7 Instrument Specific risk charge 63 General market risk charge Exchanged-traded future Government debt security Yes 64 Yes, as two positions Corporate debt security Yes Yes, as two positions Index on interest rates (eg LIBOR) No Yes, as two positions Over-the-counter (OTC) forward Government debt security Yes 63 Yes, as two positions Corporate debt security Yes Yes, as two positions Index on interest rates No Yes, as two positions FRAs, swaps No Yes, as two positions Forward FX No Yes, as one position in each currency Options Either Government debt security Yes 63 (a) carve out together with the associated hedging positions: simplified approach; scenario analysis; internal models Corporate debt security Yes (b) general market risk charge according to the delta-plus method (gamma and vega should receive separate capital requirements) Index on interest rates No FRAs, swaps No 53 Traded mortgage securities and mortgage derivative products possess unique characteristics because of the risk of prepayment. Accordingly, for the time being, no common treatment will apply to these securities, which will be dealt with SAMA at aleates stage. A security that is the subject of a repurchase or securities lending agreement will be treated as if it were still owned by the lender of the security, ie it will be treated in the same manner as other securities positions. 54 Including, local and regional governments subject to a zero credit risk weight in the credit risk framework. 55 For example, IG include rated Baa or higher by Moody’s and BBB or higher by Standard and Poor’s. 56 Equivalent means the debt security has a one-year probability of default (PD) equal to or less than the one year PD implied by the long-run average one-year PD of a security rated IG or better by a qualifying rating agency. 57 The maturity of the swap itself may be different from that of the underlying exposure. 58 Currency mismatches should feed into the normal reporting of FX risk. 59 The zones for coupons less than 3% are 0 to 1 year, 1 to 3.6 years, and 3.6 years and over. 60 The leg representing the time to expiry of the future should, however, be reported. 61 This includes the delta-equivalent value of options. The delta equivalent of the legs arising out of the treatment of caps and floors as set out in [14.78] can also be offset against each other under the rules laid down in this paragraph. 62 The separate legs of different swaps may also be matched subject to the same conditions. 63 This is the specific risk charge relating to the issuer of the instrument. Under the credit risk rules, a separate capital requirement for the counterparty credit risk applies. 64 The specific risk capital requirement only applies to government debt securities that are rated below AA– (see [14.6] and [14.7]). Equity Risk