Minimum Capital Requirements for Market Risk

Exposures to the same obligator may be offset as follows: (1) The gross JTD risk positions of long and short exposures to the same obligor may be offset where the short exposure has the same or lower seniority relative to the long exposure. For example, a short exposure in an equity may offset a long exposure in a bond, but a short exposure in a bond cannot offset a long exposure in the equity. (2) For the purposes of determining whether a guaranteed bond is an exposure to the underlying obligor or an exposure to the guarantor, the credit risk mitigation requirements set out in paragraphs 9.70 and 9.72 of the SAMA Minimum Capital Requirements for Credit Risk . (3) Exposures of different maturities that meet this offsetting criterion may be offset as follows. (a) Exposures with maturities longer than the capital horizon (one year) may be fully offset. (b) An exposure to an obligor comprising a mix of long and short exposures with a maturity less than the capital horizon (equal to one year) must be weighted by the ratio of the exposure’s maturity relative to the capital horizon. For example, with the one-year capital horizon, a three-month short exposure would be weighted so that its benefit against long exposures of longer-than- one-year maturity would be reduced to one quarter of the exposure size. 36 8.20 In the case of long and short offsetting exposures where both have a maturity under one year, the scaling can be applied to both the long and short exposures. 8.21 Finally, the offsetting may result in net long JTD risk positions and net short JTD risk positions. The net long and net short JTD risk positions are aggregated separately as described below. Calculation of default risk capital requirement for non-securitisation 8.22 For the default risk of non-securitisations, three buckets are defined as: (1) corporates; (2) sovereigns; and (3) local governments and municipalities. 8.23 In order to recognise hedging relationship between net long and net short positions within a bucket, a hedge benefit ratio is computed as follows. (1) A simple sum of the net long JTD risk positions (not risk-weighted) must be calculated, where the summation is across the credit quality categories (ie rating bands). The aggregated amount is used in the numerator and denominator of the expression of the hedge benefit ratio (HBR) below. (2) A simple sum of the net (not risk-weighted) short JTD risk positions must be calculated, where the summation is across the credit quality categories (ie rating bands). The aggregated amount is used in the denominator of the expression of the HBR below. (3) The HBR is the ratio of net long JTD risk positions to the sum of net long JTD and absolute value of net short JTD risk positions: 8.24 For calculating the weighted net JTD, default risk weights are set depending on the credit quality categories (ie rating bands) for all three buckets (ie irrespective of the type of counterparty), as set out in Table 2: Default risk weights for non-securitisations by credit quality category Table 2 Credit quality category Default risk weight AAA 0.5% AA 2% A 3% BBB 6% BB 15% B 30% CCC 50% Unrated 15% Defaulted 100% 8.25 The capital requirement for each bucket is to be calculated as the combination of the sum of the risk-weighted long net JTD, the HBR, and the sum of the risk- weighted short net JTD, where the summation for each long net JTD and short net JTD is across the credit quality categories (ie rating bands). In the following formula, DRC stands for DRC requirement; and i refers to an instrument belonging to bucket b .