Minimum Capital Requirements for Market Risk

For the purpose of calculating the credit spread risk capital requirement under the sensitivities based method and the DRC requirement, the correlation trading portfolio is defined as the set of instruments that meet the requirements of (1) or (2) below. (1) The instrument is a securitisation position that meets the following requirements: (a) The instrument is not a re-securitisation position, nor a derivative of securitisation exposures that does not provide a pro rata share in the proceeds of a securitisation tranche, where the definition of securitisation positon is identical to that used in the credit risk framework. (b) All reference entities are single-name products, including single-name credit derivatives, for which a liquid two-way market exists 10 , including traded indices on these reference entities. (c) The instrument does not reference an underlying that is treated as a retail exposure, a residential mortgage exposure, or a commercial mortgage exposure under the standardised approach to credit risk. (d) The instrument does not reference a claim on a special purpose entity. (2) The instrument is a non-securitisation hedge to a position described above. 10 A two-way market is deemed to exist where there are independent bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid-ask quotes can be determined within one day and the transaction settled at such price within a relatively short time frame in conformity with trade custom. 7- Standardised Approach: Sensitivities-Based Method Main Concepts of the Sensitivities-Based Method 7.1 The sensitivities of financial instruments to a prescribed list of risk factors are used to calculate the delta, vega and curvature risk capital requirements. These sensitivities are risk-weighted and then aggregated, first within risk buckets (risk factors with common characteristics) and then across buckets within the same risk class as set out in [7.8] to [7.14] . The following terminology is used in the sensitivities-based method: (1) Risk class: seven risk classes are defined (in [7.39] to [7.89] ). (a) General interest rate risk (GIRR) (b) Credit spread risk (CSR): non-securitisations (c) CSR: securitisations (non-correlation trading portfolio, or non-CTP) (d) CSR: securitisations (correlation trading portfolio, or CTP) (e) Equity risk (f) Commodity risk (g) Foreign exchange (FX) risk (2) Risk factor: variables (eg an equity price or a tenor of an interest rate curve) that affect the value of an instrument as defined in [7.8] to [7.14] (3) Bucket: a set of risk factors that are grouped together by common characteristics (eg all tenors of interest rate curves for the same currency), as defined in [7.39] to [7.89] . (4) Risk position: the portion of the risk of an instrument that relates to a risk factor. Methodologies to calculate risk positions for delta, vega and curvature risks are set out in [7.3] to [7.5] and [7.15] to [7.26] . (a) For delta and vega risks, the risk position is a sensitivity to a risk factor. (b) For curvature risk, the risk position is based on losses from two stress scenarios. (5) Risk capital requirement: the amount of capital that a bank should hold as a consequence of the risks it takes; it is computed as an aggregation of risk positions first at the bucket level, and then across buckets within a risk class defined for the sensitivities-based method as set out in [7.3] to [7.7] . Instruments Subject to Each Component of the Sensitivities-Based Method