Minimum Capital Requirements for Market Risk

For each risk factor defined in [7.8] to [7.14], sensitivities are calculated as the change in the market value of the instrument as a result of applying a specified shift to each risk factor, assuming all the other relevant risk factors are held at the current level as defined in [7.17] to [7.38]. As per [7.17], a bank may make use of alternative formulations of sensitivities based on pricing models that the bank’s independent risk control unit uses to report market risks or actual profits and losses to senior management. In doing so, the bank is to demonstrate to SAMA that the alternative formulations of sensitivities yield results very close to the prescribed formulations. Requirements on instrument price or pricing models for sensitivity calculation 7.17 In calculating the risk capital requirement under the sensitivities-based method in [7], the bank must determine each delta and vega sensitivity and curvature scenario based on instrument prices or pricing models that an independent risk control unit within a bank uses to report market risks or actual profits and losses to senior management. [7.17] states that banks must determine each delta sensitivity, vega sensitivity and curvature scenario based on instrument prices or pricing models that an independent risk control unit within a bank uses to report market risks or actual profits and losses to senior management. Banks should use zero rate or market rate sensitivities consistent with the pricing models referenced in that paragraph. 7.18 A key assumption of the standardised approach for market risk is that a bank’s pricing models used in actual profit and loss reporting provide an appropriate basis for the determination of regulatory capital requirements for all market risks. To ensure such adequacy, banks must at a minimum establish a framework for Prudent Valuation Guidance set out in Basel Framework . Sensitivity definitions for delta risk 7.19 Delta GIRR: the sensitivity is defined as the PV01. PV01 is measured by changing the interest rate r at tenor t ( r t ) of the risk-free yield curve in a given currency by 1 basis point (ie 0.0001 in absolute terms) and dividing the resulting change in the market value of the instrument ( V i ) by 0.0001 (ie 0.01%) as follows, where: (1) r t is the risk-free yield curve at tenor t ; (2) cs t is the credit spread curve at tenor t ; and (3) V i is the market value of the instrument i as a function of the risk-free interest rate curve and credit spread curve: 7.20 Delta CSR non-securitisation, securitisation (non-CTP) and securitisation (CTP): the sensitivity is defined as CS01. The CS01 (sensitivity) of an instrument i is measured by changing a credit spread cs at tenor t ( cs t ) by 1 basis point (ie 0.0001 in absolute terms) and dividing the resulting change in the market value of the instrument ( V i ) by 0.0001 (ie 0.01%) as follows: In cases where the bank does not have counterparty-specific money market curves, the bank can proxy PV01 to CS01 7.21 Delta equity spot: the sensitivity is measured by changing the equity spot price by 1 percentage point (ie 0.01 in relative terms) and dividing the resulting change in the market value of the instrument ( V i ) by 0.01 (ie 1%) as follows, where: (1) k is a given equity; (2) EQ k is the market value of equity k ; and (3) V i is the market value of instrument i as a function of the price of equity k . 7.22 Delta equity repo rates: the sensitivity is measured by applying a parallel shift to the equity repo rate term structure by 1 basis point (ie 0.0001 in absolute terms) and dividing the resulting change in the market value of the instrument V i by 0.0001 (ie 0.01%) as follows, where: (1) k is a given equity; (2) RTS k is the repo term structure of equity k ; and (3) V i is the market value of instrument i as a function of the repo term structure of equity k .