Minimum Capital Requirements for Market Risk

Holdings of capital instruments that are deducted from a bank’s capital or risk weighted at 1250% are not allowed to be included in the market risk framework. This includes: (1) Holdings of the bank’s own eligible regulatory capital instruments; and (2) Holdings of other banks’, securities firms’ and other financial entities’ eligible regulatory capital instruments, as well as intangible assets, (3) Where a bank demonstrates that it is an active market-maker, then SAMA will establish a dealer exception for holdings of other banks’, securities firms’, and other financial entities’ capital instruments in the trading book. In order to qualify for the dealer exception, the bank must have adequate systems and controls surrounding the trading of financial institutions’ eligible regulatory capital instruments. 3.8 In the same way as for credit risk and operational risk, the capital requirements for market risk apply on a worldwide consolidated basis. (1) Banking and financial entities in a group which is running a global consolidated trading book and whose capital is being assessed on a global basis allowed to include the net short and net long risk positions no matter where they are booked. 1 (2) SAMA will grant above treatment only when the standardised approach in [6] to [9] permits a full offset of the risk position (ie risk positions of the opposite sign do not attract a capital requirement). (3) Nonetheless, there will be circumstances in which SAMA demand that the individual risk positions be taken into the measurement system without any offsetting or netting against risk positions in the remainder of the group. This may be needed, for example, where there are obstacles to the quick repatriation of profits from a foreign subsidiary or where there are legal and procedural difficulties in carrying out the timely management of risks on a consolidated basis. (4) Moreover, SAMA will retain the right to continue to monitor the market risks of individual entities on a non-consolidated basis to ensure that significant imbalances within a group do not escape supervision. Banks should not conceal risk positions on reporting dates in such a way as to escape measurement. 1 The positions of less than wholly owned subsidiaries would be subject to the generally accepted accounting principles in the country where the parent company is supervised. Methods of Measuring Market Risk 3.9 In determining the market risk for regulatory capital requirements, a bank may choose between two broad methodologies: the standardised approach as described in [6] to [9] and internal models approach (IMA) for market risk as described in [10] to [13] . SAMA approval is required before using the IMA approach. SAMA may allow banks that maintain smaller or simpler trading books to use the simplified alternative to the standardised approach as set out in [14]. The use of the simplified alternative is subject to SAMA approval and oversight. (1) To determine the appropriateness of the simplified alternative for use by a bank for the purpose of its market risk capital requirements, SAMA will consider the following indicative criteria: (a) The bank should not be a global systemically important bank (G-SIB) or a domestic systemically important bank (D-SIB). (b) The bank should not use the IMA for any of its trading desks. (c) The bank should not hold any correlation trading positions. (2) SAMA can mandate that banks with relatively complex or sizeable risks in particular risk classes to apply the full standardised approach instead of the simplified alternative, even if those banks meet the indicative eligibility criteria referred to above.