Risk Components for Corporate, Sovereign and Bank Exposures

The quantitative and qualitative criteria for recognition of internal market risk models for SFTs are in principle the same as in paragraphs 10.5 to 10.16 and 13.1 to 13.12 in The Market Risk Framework . The minimum liquidity horizon or the holding period for SFTs is 5 business days for margined repo-style transactions, rather than the 10 business days in paragraph 13.12 in The Market Risk Framework . For other transactions eligible for the VaR models approach, the 10 business day holding period will be retained. The minimum holding period should be adjusted upwards for market instruments where such a holding period would be inappropriate given the liquidity of the instrument concerned. 12.41 The calculation of the exposure E* for banks using their internal model to calculate their counterparty credit risk requirement will be as follows, where banks will use the previous day's VaR number: 12.42 Subject to SAMA’s approval, instead of using the VaR approach, banks may also calculate an effective expected positive exposure for repo-style and other similar SFTs, in accordance with the internal models method set out in the counterparty credit risk standards. 12.43 As in the standardized approach, for transactions where the conditions in paragraph 9.36 are met, and in addition, the counterparty is a core market participant as specified in paragraph 9.37 , banks can apply a zero H. A netting set that contains any transaction that does not meet the requirements in paragraph 9.36 of the standardized approach is not eligible for this treatment. Effective maturity (M) 12.44 Effective maturity (M) will be 2.5 years for exposures to which the bank applies the foundation approach, except for repo-style transactions where the effective maturity is 6 months (i.e. M=0.5). Banks using the foundation and advanced approaches are required to measure M for each facility using the definition provided below. 12.45 Banks using any element of the A-IRB approach are required to measure effective maturity for each facility as defined below. 12.46 Except as noted in paragraph 12.51, the effective maturity (M) is subject to a floor of one year and a cap of 5 years. 12.47 For an instrument subject to a determined cash flow schedule, effective maturity M is defined as follows, where CF t denotes the cash flows (principal, interest payments and fees) contractually payable by the borrower in period t: 12.48 If a bank is not in a position to calculate the effective maturity of the contracted payments as noted above, it is allowed to use a more conservative measure of M such as that it equals the maximum remaining time (in years) that the borrower is permitted to take to fully discharge its contractual obligation (principal, interest, and fees) under the terms of loan agreement. Normally, this will correspond to the nominal maturity of the instrument. 12.49 For derivatives subject to a master netting agreement, the effective maturity is defined as the weighted average maturity of the transactions within the netting agreement. Further, the notional amount of each transaction should be used for weighting the maturity. 12.50 For revolving exposures, effective maturity must be determined using the maximum contractual termination date of the facility. Banks must not use the repayment date of the current drawing.