Minimum Capital Requirements for Market Risk

In the case of the futures-related arbitrage strategies described below, the additional 2% capital requirement described above (set out in [14.47]) may be applied to only one index with the opposite position exempt from a capital requirement. The strategies are: (1) when the bank takes an opposite position in exactly the same index at different dates or in different market centres; and (2) When the bank has an opposite position in contracts at the same date in different but similar indices, subject to SAMA oversight that the two indices contain sufficient common components to justify offsetting. 14.49 Where a bank engages in a deliberate arbitrage strategy, in which a futures contract on a broadly based index matches a basket of stocks, it will be allowed to carve out both positions from the simplified standardised approach on condition that: (1) the trade has been deliberately entered into and separately controlled; and (2) the composition of the basket of stocks represents at least 90% of the index when broken down into its notional components. 14.50 In such a case as set out in [14.49] the minimum capital requirement will be 4% (ie 2% of the gross value of the positions on each side) to reflect divergence and execution risks. This applies even if all of the stocks comprising the index are held in identical proportions. Any excess value of the stocks comprising the basket over the value of the futures contract or excess value of the futures contract over the value of the basket is to be treated as an open long or short position. 14.51 If a bank takes a position in depository receipts against an opposite position in the underlying equity or identical equities in different markets, it may offset the position (ie bear no capital requirement) but only on condition that any costs on conversion are fully taken into account. 68 14.52 Table 8 summarises the regulatory treatment of equity derivatives for market risk purposes. Summary of treatment of equity derivatives Table 8 Instrument Specific risk 69 General market risk Exchanged-traded or OTC future Individual equity Yes Yes, as underlying Index 2% Yes, as underlying Options Either Individual equity Yes (a) carve out together with the associated hedging positions: simplified approach; scenario analysis; internal models Index 2% (b) general market risk charge according to the delta-plus method (gamma and vega should receive separate capital requirements) 65 Where equities are part of a forward contract, a future or an option (quantity of equities to be received or to be delivered), any interest rate or foreign currency exposure from the other leg of the contract should be reported as set out in [14.3] to [14.40] and [14.53] to [14.62] . 66 For example, an equity swap in which a bank is receiving an amount based on the change in value of one particular equity or stock index and paying a different index will be treated as a long position in the former and a short position in the latter. Where one of the legs involves receiving/paying a fixed or floating interest rate, that exposure should be slotted into the appropriate repricing time band for interest rate related instruments as set out in [14.3] to [14.40] . The stock index should be covered by the equity treatment. 67 The interest rate risk arising out of the future, however, should be reported as set out in [14.3] to [14.40] . 68 Any FX risk arising out of these positions has to be reported as set out in [14.53] to [ 14.67 ]. 69 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. Foreign Exchange Risk 14.53 This section sets out the simplified standardised approach for measuring the risk of holding or taking positions in foreign currencies, including gold. 70