Minimum Capital Requirements for Market Risk

Delta commodity: the sensitivity is measured by changing the commodity 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 commodity; (2) CTY k is the market value of commodity k ; and (3) V i is the market value of instrument i as a function of the spot price of commodity k : 7.24 Delta FX: the sensitivity is measured by changing the exchange rate 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%), where: (1) k is a given currency; (2) FX k is the exchange rate between a given currency and a bank’s reporting currency or base currency, where the FX spot rate is the current market price of one unit of another currency expressed in the units of the bank’s reporting currency or base currency; and (3) V i is the market value of instrument i as a function of the exchange rate k : Sensitivity definitions for vega risk 7.25 The option-level vega risk sensitivity to a given risk factor 18 is measured by multiplying vega by the implied volatility of the option as follows, where: (1) vega, ∂vi/∂σi , is defined as the change in the market value of the option V i as a result of a small amount of change to the implied volatility σi, and (2) the instrument’s vega and implied volatility used in the calculation of vega sensitivities must be sourced from pricing models used by the independent risk control unit of the bank. 7.26 The following sets out how to derive vega risk sensitivities in specific cases: (1) Options that do not have a maturity, are assigned to the longest prescribed maturity tenor, and these options are also assigned to the RRAO. (2) Options that do not have a strike or barrier and options that have multiple strikes or barriers, are mapped to strikes and maturity used internally to price the option, and these options are also assigned to the RRAO. (3) CTP securitisation tranches that do not have an implied volatility, are not subject to vega risk capital requirement. Such instruments may not, however, be exempt from delta and curvature risk capital requirements. Under the sensitivities-based method and In the case where options do not have a specified maturity (eg cancellable swaps), the bank must assign those options to the longest prescribed maturity tenor for vega risk sensitivities and also assign such options to the RRAO. In the case of the bank viewing the optionality of the cancellable swap as a swaption, the bank must assign the swaption to the longest prescribed maturity tenor for vega risk sensitivities (as it does not have a specified maturity) and derive the residual maturity of the underlying of the option accordingly. Requirements on sensitivity computations 7.27 When computing a first-order sensitivity for instruments subject to optionality, banks should assume that the implied volatility either: (1) remains constant, consistent with a “sticky strike” approach; or (2) follows a “sticky delta” approach, such that implied volatility does not vary with respect to a given level of delta. 7.28 For the calculation of vega sensitivities, the distribution assumptions (ie log-normal assumptions or normal assumptions) for pricing models are applied as follows: (1) For the computation of a vega GIRR or CSR sensitivity, banks may use either the log- normal or normal assumptions. (2) For the computation of a vega equity, commodity or FX sensitivity, banks must use the log-normal assumption. 19 To compute vega GIRR, banks may choose a mix of log-normal and normal assumptions for different currencies.