Minimum Capital Requirements for Market Risk

If, for internal risk management, a bank computes vega sensitivities using different definitions than the definitions set out in this standard, the bank may transform the sensitivities computed for internal risk management purposes to deduce the sensitivities to be used for the calculation of the vega risk measure. 7.30 All vega sensitivities must be computed ignoring the impact of credit valuation adjustments (CVA). Treatment of index instruments and multi-underlying options 7.31 In the delta and curvature risk context: for index instruments and multi-underlying options, a look-through approach should be used. However, a bank may opt not to apply the look-through approach for instruments referencing any listed and widely recognised and accepted equity or credit index, where: (1) it is possible to look-through the index (ie the constituents and their respective weightings are known); (2) the index contains at least 20 constituents; (3) no single constituent contained within the index represents more than 25% of the total index; (4) the largest 10% of constituents represents less than 60% of the total index; and (5) the total market capitalisation of all the constituents of the index is no less than USD 40 billion. 7.32 For a given instrument, irrespective of whether a look-through approach is adopted or not, the sensitivity inputs used for the delta and curvature risk calculation must be consistent. 7.33 Where a bank opts not to apply the look-through approach in accordance with [7.31], a single sensitivity shall be calculated to each widely recognised and accepted index that an instrument references. The sensitivity to the index should be assigned to the relevant delta risk bucket defined in [7.53] and [7.72] as follows: (1) Where more than 75% of constituents in that index (taking into account the weightings of that index) would be mapped to a specific sector bucket (ie bucket 1 to bucket 11 for equity risk, or bucket 1 to bucket 16 for CSR), the sensitivity to the index shall be mapped to that single specific sector bucket and treated like any other single-name sensitivity in that bucket. (2) In all other cases, the sensitivity may be mapped to an “index” bucket (ie bucket 12 or bucket 13 for equity risk; or bucket 17 or bucket 18 for CSR). 7.34 A look-through approach must always be used for indices that do not meet the criteria set out in [7.31](2) to [7.31](5), and for any multi-underlying instruments that reference a bespoke set of equities or credit positions. (1) Where a look-through approach is adopted, for index instruments and multi-underlying options other than the CTP, the sensitivities to constituent risk factors from those instruments or options are allowed to net with sensitivities to single-name instruments without restriction. (2) Index CTP instruments cannot be broken down into its constituents (ie the index CTP should be considered a risk factor as a whole) and the above-mentioned netting at the issuer level does not apply either. (3) Where a look-through approach is adopted, it shall be applied consistently through time, 20 and shall be used for all identical instruments that reference the same index. Treatment of equity investments in funds