Minimum Capital Requirements for Market Risk

For aggregating curvature risk positions across buckets, the curvature risk correlations γ bc are determined by squaring the corresponding delta correlation parameters γ bc . For instance, when aggregating C VR EUR and C VR USD for the GIRR, the correlation should be 50%2 = 25% . In applying the high and low correlations scenario set out in [7.6] , the curvature risk capital requirements are calculated by applying the curvature correlation parameters γ bc , (ie the square of the corresponding delta correlation parameter). 8- Standardised Approach: Default Risk Capital Requirement Main Concepts of Default Risk Capital Requirements 8.1 The default risk capital (DRC) requirement is intended to capture jump-to-default (JTD) risk that may not be captured by credit spread shocks under the sensitivities- based method. DRC requirements provide some limited hedging recognition. In this chapter offsetting refers to the netting of exposures to the same obligor (where a short exposure may be subtracted in full from a long exposure) and hedging refers to the application of a partial hedge benefit from the short exposures (where the risk of long and short exposures in distinct obligors do not fully offset due to basis or correlation risks). Instruments Subject to the Default Risk Capital Requirement 8.2 The DRC requirement must be calculated for instruments subject to default risk: (1) Non-securitisation portfolios (2) Securitisation portfolio (non-correlation trading portfolio, or non-CTP) (3) Securitisation (correlation trading portfolio, or CTP) Overview of Drc Requirement Calculation 8.3 The following step-by-step approach must be followed for each risk class subject to default risk. The specific definition of gross JTD risk, net JTD risk, bucket, risk weight and the method for aggregation of DRC requirement across buckets are separately set out per each risk class in subsections in [8.9] to [8.26] . (1) The gross JTD risk of each exposure is computed separately. (2) With respect to the same obligator, the JTD amounts of long and short exposures are offset (where permissible) to produce net long and/or net short exposure amounts per distinct obligor. (3) Net JTD risk positions are then allocated to buckets. (4) Within a bucket, a hedge benefit ratio is calculated using net long and short JTD risk positions. This acts as a discount factor that reduces the amount of net short positions to be netted against net long positions within a bucket. A prescribed risk weight is applied to the net positions which are then aggregated. (5) Bucket level DRC requirements are aggregated as a simple sum across buckets to give the overall DRC requirement. 8.4 No diversification benefit is recognised between the DRC requirements for: (1) non-securitisations; (2) securitisations (non-CTP) ; and (3) securitisations (CTP). 8.5 For traded non-securitisation credit and equity derivatives, JTD risk positions by individual constituent issuer legal entity should be determined by applying a look- through approach. The JTD equivalent is defined as the difference between the value of the security or product assuming that each single name referenced by the security or product, separately from the others, defaults (with zero recovery) and the value of the security or product assuming that none of the names referenced by the security or product default. 8.6 For the CTP, the capital requirement calculation includes the default risk for non securitisation hedges. These hedges must be removed from the calculation of default risk non-securitisation. 8.7 Claims on sovereigns, public sector entities and multilateral development banks would be subject to a zero default risk weight in line with paragraphs 7.1 through 7.11 in the SAMA Minimum Capital Requirements for Credit Risk framework. SAMA apply a non-zero risk weight to securities issued by certain foreign governments, including to securities denominated in a currency other than that of the issuing government.