Minimum Capital Requirements for Market Risk

A bank of which business in foreign currency is insignificant and which does not take FX positions for its own account may, at the discretion of SAMA, be exempted from capital requirements on these positions provided that: (1) its foreign currency business, defined as the greater of the sum of its gross long positions and the sum of its gross short positions in all foreign currencies, does not exceed 100% of eligible capital as defined in Regulatory Capital for Basel III in Finalized Guidance Document Concerning the Implementation of Basel III issued by SAMA in 19 December 2012 and any subsequent regulatory adjustments; and (2) its overall net open position as defined in [14.60] above does not exceed 2% of its eligible capital as defined in Regulatory Capital for Basel III in Finalized Guidance Document Concerning the Implementation of Basel III issued by SAMA in 19 December 2012 and any subsequent regulatory adjustments . 70 Gold is to be dealt with as an FX position rather than a commodity because its volatility is more in line with foreign currencies and banks manage it in a similar manner to foreign currencies. 71 Subject to a separately calculated capital requirement for gamma and vega as described in [14.77] to [14.80] ; alternatively, options and their associated underlyings are subject to one of the other methods described in [14.74] to [14.86] . 72 Where gold is part of a forward contract (quantity of gold 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 14.55] above. 73 Where the bank is assessing its FX risk on a consolidated basis, it may be technically impractical in the case of some marginal operations to include the currency positions of a foreign branch or subsidiary of the bank. In such cases, the internal limit in each currency may be used as a proxy for the positions. Provided there is adequate ex post monitoring of actual positions against such limits, the limits should be added, without regard to sign, to the net open position in each currency. 74 An alternative calculation, which produces an identical result, is to include the reporting currency as a residual and to take the sum of all the short (or long) positions. Commodities Risk 14.63 This section sets out the simplified standardised approach for measuring the risk of holding or taking positions in commodities, including precious metals, but excluding gold (which is treated as a foreign currency according to the methodology set out in [14.53] to [14.62] above). A commodity is defined as a physical product which is or can be traded on a secondary market, eg agricultural products, minerals (including oil) and precious metals. 14.64 The price risk in commodities is often more complex and volatile than that associated with currencies and interest rates. Commodity markets may also be less liquid than those for interest rates and currencies and, as a result, changes in supply and demand can have a more dramatic effect on price and volatility. 75 These market characteristics can make price transparency and the effective hedging of commodities risk more difficult.