Process to Calculate the Capital Requirement Under the Sensitivities-Based Method

In order to address the risk that correlations increase or decrease in periods of financial stress, the aggregation of bucket level capital requirements and risk class level capital requirements per each risk class for delta, vega, and curvature risks as specified in [7.4] to [7.5] must be repeated, corresponding to three different scenarios on the specified values for the correlation parameter ρkɭ (correlation between risk factors within a bucket) and γ bc (correlation across buckets within a risk class). (1) Under the “medium correlations” scenario, the correlation parameters ρ kɭ and γ bc as specified in [7.39] to [7.101] apply. (2) Under the “high correlations” scenario, the correlation parameters ρ kɭ and γ bc that are specified in [7.39] to [7.101] are uniformly multiplied by 1.25, with ρ kɭ and γ bc subject to a cap at 100%. (3) Under the “low correlations” scenario, the correlation parameters ρ kɭ and γ bc that are specified in 7.39 to 7.101 ] are replaced by ρ = max(2 x ρ kɭ - 100%;75%x ρ kɭ ) γ and =max(2x γ bc -100%;75%x γ bc ). 7.7 The total capital requirement under the sensitivities-based method is aggregated as follows: (1) For each of three correlation scenarios, the bank must simply sum up the separately calculated delta, vega and curvature capital requirements for all risk classes to determine the overall capital requirement for that scenario. (2) The sensitivities-based method capital requirement is the largest capital requirement from the three scenarios. (a) For the calculation of capital requirements for all instruments in all trading desks using the standardised approach as set out in [3.10] ( 1) and [17.2] and [13.40] , the capital requirement is calculated for all instruments in all trading desks. (b) For the calculation of capital requirements for each trading desk using the standardised approach as if that desk were a standalone regulatory portfolio as set out in [3.8] (2), the capital requirements under each correlation scenario are calculated and compared at each trading desk level, and the maximum for each trading desk is taken as the capital requirement.