Minimum Capital Requirements for Market Risk

As set out in [7.1] , the capital requirement under the sensitivities-based method is calculated by aggregating delta, vega and curvature capital requirements. The relevant paragraphs that describe this process are as follows: (1) The risk factors for delta, vega and curvature risks for each risk class are defined in [7.8] to [7.14] . (2) The methods to risk weight sensitivities to risk factors and aggregate them to calculate delta and vega risk positions for each risk class are set out in [7.4] and [7.15] to [7.95] , which include the definition of delta and vega sensitivities, definition of buckets, risk weights to apply to risk factors, and correlation parameters. (3) The methods to calculate curvature risk are set out in [7.5] and [7.96] to [7.101] , which include the definition of buckets, risk weights and correlation parameters. (4) The risk class level capital requirement calculated above must be aggregated to obtain the capital requirement at the entire portfolio level as set out in [7.6] and [7.7]. Calculation of the delta and vega risk capital requirement for each risk class 7.4 For each risk class, a bank must determine its instruments’ sensitivity to a set of prescribed risk factors, risk weight those sensitivities, and aggregate the resulting risk-weighted sensitivities separately for delta and vega risk using the following step-by-step approach: (1) For each risk factor (as defined in [7.8] to [7.14] ), a sensitivity is determined as set out in [7.15] to [7.38] . (2) Sensitivities to the same risk factor must be netted to give a net sensitivity S k across all instruments in the portfolio to each risk factor k. In calculating the net sensitivity, all sensitivities to the same given risk factor (eg all sensitivities to the one-year tenor point of the three-month Euribor swap curve) from instruments of opposite direction should offset, irrespective of the instrument from which they derive. For instance, if a bank’s portfolio is made of two interest rate swaps on three-month Euribor with the same fixed rate and same notional but of opposite direction, the GIRR on that portfolio would be zero. (3) The weighted sensitivity WSk is the product of the net sensitivity S k and the corresponding risk weight RWk as defined in [7.39] to [7.95] . (4) Within bucket aggregation: the risk position for delta (respectively vega) bucket b, K b , must be determined by aggregating the weighted sensitivities to risk factors within the same bucket using the prescribed correlation ρkɭ set out in the following formula, where the quantity within the square root function is floored at zero: (5) Across bucket aggregation: The delta (respectively vega) risk capital requirement is calculated by aggregating the risk positions across the delta (respectively vega) buckets within each risk class, using the corresponding prescribed correlations γ bc as set out in the following formula, where: (a) S b = ∑ k WSk for all risk factors in bucket b, and S c = ∑ k WSk in bucket c. (b) If these values for Sb and Sc described in above [7.4](5)(a) produce a negative number for the overall sum of ∑ b K b 2 + ∑ b ∑ c≠b γ bc S b S c , the bank is to calculate the delta (respectively vega) risk capital requirement using an alternative specification whereby: (i) S b =max [min (∑ k WS k , K b ), - K b ] for all risk factors in bucket b; and (ii) S c =max [min (∑ k WS k , K c ), - K c ] for all risk factors in bucket c. Calculation of the curvature risk capital requirement for each risk class