Sensitivities-Based Method: Definition of Delta Risk Buckets, Risk Weights and Correlations

For aggregating delta CSR securitisations (non-CTP) risk positions within a bucket, the correlation parameter ρ kl between two sensitivities WS k and WS l within the same bucket, is set as follows, where: (1) ρ kl (tranche) is equal to 1 where the two names of sensitivities k and l are within the same bucket and related to the same securitisation tranche (more than 80% overlap in notional terms), and 40% otherwise; (2) ρ kl (tenor) is equal to 1 if the two tenors of the sensitivities k and l are identical, and to 80% otherwise; and (3) ρ kl (basis) is equal to 1 if the two sensitivities are related to same curves, and 99.90% otherwise. [7.68] includes ρ kl (tranche) , which equals 1 where the two sensitivities within the same bucket are related to the same securitisation tranche, or 40% otherwise. There is no issuer factor. This mean a two sensitivities relating to the same issuer but different tranches require 40% correlation. There is no granularity for issuers in the delta CSR securitisation part as set out in [ 7.10 ]. Where two tranches have exactly the same issuer, same tenor and same basis, but different tranches (ie different credit quality), the correlation must be 40%. 7.69 The correlations above do not apply to the other sector bucket (ie bucket 25). (1) The aggregation of delta CSR securitisations (non-CTP) risk positions within the other sector bucket would be equal to the simple sum of the absolute values of the net weighted sensitivities allocated to this bucket. The same method applies to the aggregation of vega risk position. (2) The aggregation of curvature CSR risk positions within the other sector bucket (ie bucket 16) would be calculated by the formula below. 7.70 For aggregating delta CSR securitisations (non-CTP) risk positions across buckets 1 to 24, the correlation parameter γ bc is set as 0%. 7.71 For aggregating delta CSR securitisations (non-CTP) risk positions between the other sector bucket (ie bucket 25) and buckets 1 to 24, the correlation parameter γ bc is set at 1. Bucket level capital requirements will be simply summed up to the overall risk class level capital requirements, with no diversification or hedging effects recognised with any bucket. Equity risk buckets, risk weights and correlations 7.72 For delta equity risk, buckets are set along three dimensions – market capitalisation, economy and sector – as set out in Table 9. The equity risk sensitivities or exposures must first be assigned to a bucket before calculating weighted sensitivities by applying a risk weight. Buckets for delta sensitivities to equity risk Table 9 Bucket number Market cap Economy Sector 1 Large Emerging market economy Consumer goods and services, transportation and storage, administrative and support service activities, healthcare, utilities 2 Telecommunications, industrials 3 Basic materials, energy, agriculture, manufacturing, mining and quarrying 4 Financials including government-backed financials, real estate activities, technology 5 Advanced economy Consumer goods and services, transportation and storage, administrative and support service activities, healthcare, utilities 6 Telecommunications, industrials 7 Basic materials, energy, agriculture, manufacturing, mining and quarrying 8 Financials including government-backed financials, real estate activities, technology 9 Small Emerging market economy All sectors described under bucket numbers 1, 2, 3 and 4 10 Advanced economy All sectors described under bucket numbers 5, 6, 7 and 8 11 Other sector 30 12 Large market cap, advanced economy equity indices (non-sector specific) 13 Other equity indices (non-sector specific)