Minimum Capital Requirements for Market Risk

Two processes are needed to calculate the capital requirement for FX risk. (1) The first is to measure the exposure in a single currency position as set out in [14.55] to [14.58]. (2) The second is to measure the risks inherent in a bank’s mix of long and short positions in different currencies as set out in [14.59] to [14.62]. Measuring the exposure in a single currency 14.55 The bank’s net open position in each currency should be calculated by summing: (1) the net spot position (ie all asset items less all liability items, including accrued interest, denominated in the currency in question); (2) the net forward position (ie all amounts to be received less all amounts to be paid under forward FX transactions, including currency futures and the principal on currency swaps not included in the spot position); (3) guarantees (and similar instruments) that are certain to be called and are likely to be irrecoverable; (4) net future income/expenses not yet accrued but already fully hedged (at the discretion of the reporting bank); (5) any other item representing a profit or loss in foreign currencies (depending on particular accounting conventions in different countries); and (6) the net delta-based equivalent of the total book of foreign currency options. 71 14.56 Positions in composite currencies need to be separately reported but, for measuring banks’ open positions, may be either treated as a currency in their own right or split into their component parts on a consistent basis. Positions in gold should be measured in the same manner as described in [14.68] . 72 14.57 Interest, other income and expenses should be treated as follows. Interest accrued (ie earned but not yet received) should be included as a position. Accrued expenses should also be included. Unearned but expected future interest and anticipated expenses may be excluded unless the amounts are certain and banks have taken the opportunity to hedge them. If banks include future income/expenses they should do so on a consistent basis, and not be permitted to select only those expected future flows which reduce their position. 14.58 Forward currency and gold positions should be measured as follows: Forward currency and gold positions will normally be valued at current spot market exchange rates. Using forward exchange rates would be inappropriate since it would result in the measured positions reflecting current interest rate differentials to some extent. However, banks that base their normal management accounting on net present values are expected to use the net present values of each position, discounted using current interest rates and valued at current spot rates, for measuring their forward currency and gold positions. Measuring the foreign exchange risk in a portfolio of foreign currency positions and gold 14.59 For measuring the FX risk in a portfolio of foreign currency positions and gold as set out in [14.54](2), a bank that is not approved to use internal models by SAMA must use a shorthand method which treats all currencies equally. 14.60 Under the shorthand method, the nominal amount (or net present value) of the net position in each foreign currency and in gold is converted at spot rates into the reporting currency. 73 The overall net open position is measured by aggregating: (1) the sum of the net short positions or the sum of the net long positions, whichever is the greater; 74 plus (2) the net position (short or long) in gold, regardless of sign. 14.61 The capital requirement will be 8% of the overall net open position (see example in Table 9). In particular, the capital requirement would be 8% of the higher of either the net long currency positions or the net short currency positions (ie 300) and of the net position in gold (35) = 335 x 8% = 26.8. Example of the shorthand measure of FX risk Table 9 JPY EUR GBP CAD USD Gold Net position per currency +50 + 100 + 150 -20 -180 -35 Net open position +300 -200 35