Sensitivities-Based Method: Risk Factor and Sensitivity Definitions

For equity investments in funds that can be looked through as set out in [5.8] (5)(a), banks must apply a look-through approach and treat the underlying positions of the fund as if the positions were held directly by the bank (taking into account the bank’s share of the equity of the fund, and any leverage in the fund structure), except for the funds that meet the following conditions: (1) For funds that hold an index instrument that meets the criteria set out under [7.31], banks must still apply a look-through and treat the underlying positions of the fund as if the positions were held directly by the bank, but the bank may then choose to apply the “no look-through” approach for the index holdings of the fund as set out in [7.33]. (2) For funds that track an index benchmark, a bank may opt not to apply the look-through approach and opt to measure the risk assuming the fund is a position in the tracked index only where: (a) the fund has an absolute value of a tracking difference (ignoring fees and commissions) of less than 1%; and (b) the tracking difference is checked at least annually and is defined as the annualised return difference between the fund and its tracked benchmark over the last 12 months of available data (or a shorter period in the absence of a full 12 months of data). 7.36 For equity investments in funds that cannot be looked through (ie do not meet the criterion set out in [5.8] (5)(a)), but that the bank has access to daily price quotes and knowledge of the mandate of the fund (ie meet both the criteria set out in [5.8] (5)(b)), banks may calculate capital requirements for the fund in one of three ways: (1) If the fund tracks an index benchmark and meets the requirement set out in [7.35](2)(a) and (b), the bank may assume that the fund is a position in the tracked index, and may assign the sensitivity to the fund to relevant sector specific buckets or index buckets as set out in [7.33]. (2) Subject to SAMA approval, the bank may consider the fund as a hypothetical portfolio in which the fund invests to the maximum extent allowed under the fund’s mandate in those assets attracting the highest capital requirements under the sensitivities-based method, and then progressively in those other assets implying lower capital requirements. If more than one risk weight can be applied to a given exposure under the sensitivities-based method, the maximum risk weight applicable must be used. (a) This hypothetical portfolio must be subject to market risk capital requirements on a stand-alone basis for all positions in that fund, separate from any other positions subject to market risk capital requirements. (b) The counterparty credit and CVA risks of the derivatives of this hypothetical portfolio must be calculated using the simplified methodology set out in accordance with paragraph 80(vii)(c) of the banking book equity investment in funds treatment. (3) A bank may treat their equity investment in the fund as an unrated equity exposure to be allocated to the “other sector” bucket (bucket 11). In applying this treatment, banks must also consider whether, given the mandate of the fund, the default risk capital (DRC) requirement risk weight prescribed to the fund is sufficiently prudent (as set out in [8.8] ), and whether the RRAO should apply (as set out in [9.6] ). 7.37 As per the requirement in [5.8] (5), net long equity investments in a given fund in which the bank cannot look through or does not meet the requirements of [5.8] (5) for the fund must be assigned to the banking book. Net short positions in funds, where the bank cannot look through or does not meet the requirements of [5.8] (5), must be excluded from any trading book capital requirements under the market risk framework, with the net position instead subjected to a 100% capital requirement. Treatment of vega risk for multi-underlying instruments