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Basel Committee on Banking Supervision

Basel Committee on Banking Supervision Minimum capital requirements for market risk January 2019 (rev. February 2019). This publication is available on the BIS website ( ). Bank for International Settlements 2019. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9259-237-0 (online). Contents Minimum capital requirements for market risk .. 1. Introduction .. 1. RBC25 Boundary between the Banking book and the trading book .. 3. Scope of the trading book .. 3. Standards for assigning instruments to the regulatory books .. 3. Supervisory powers .. 5. Documentation of instrument designation .. 6. Restrictions on moving instruments between the regulatory books .. 6. Treatment of internal risk transfers .. 7. MAR10 market risk terminology .. 10. General terminology .. 10. Terminology for financial instruments .. 10. Terminology for market risk capital requirement calculations.

MAR11 Definitions and application of market risk MAR12 Definition of a trading desk MAR20 to MAR 23 Standardised approach MAR20 Standardised approach: general provisions and structure

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1 Basel Committee on Banking Supervision Minimum capital requirements for market risk January 2019 (rev. February 2019). This publication is available on the BIS website ( ). Bank for International Settlements 2019. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9259-237-0 (online). Contents Minimum capital requirements for market risk .. 1. Introduction .. 1. RBC25 Boundary between the Banking book and the trading book .. 3. Scope of the trading book .. 3. Standards for assigning instruments to the regulatory books .. 3. Supervisory powers .. 5. Documentation of instrument designation .. 6. Restrictions on moving instruments between the regulatory books .. 6. Treatment of internal risk transfers .. 7. MAR10 market risk terminology .. 10. General terminology .. 10. Terminology for financial instruments .. 10. Terminology for market risk capital requirement calculations.

2 10. Terminology for risk 11. Terminology for hedging and diversification .. 11. Terminology for risk factor eligibility and modellability .. 11. Terminology for internal model validation .. 12. Terminology for credit valuation adjustment risk .. 12. MAR11 Definitions and application of market risk .. 13. definition and scope of application .. 13. Methods of measuring market risk .. 15. MAR12 definition of a trading desk .. 16. MAR20 Standardised approach: general provisions and 19. General provisions .. 19. Structure of the standardised approach .. 19. definition of correlation trading portfolio .. 20. MAR21 Standardised approach: sensitivities-based method .. 21. Main concepts of the sensitivities-based method .. 21. Instruments subject to each component of the sensitivities-based method .. 21. Process to calculate the capital requirement under the sensitivities-based method .. 22. Sensitivities-based method: risk factor and sensitivity definitions.

3 26. Sensitivities-based method: definition of delta risk buckets, risk weights and correlations .. 37. Minimum capital requirements for market risk iii Sensitivities-based method: definition of vega risk buckets, risk weights and correlations .. 51. Sensitivities-based method: definition of curvature risk buckets, risk weights and correlations . 52. MAR22 Standardised approach: default risk capital requirement ..54. Main concepts of default risk capital requirements ..54. Instruments subject to the default risk capital Overview of DRC requirement calculation ..54. Default risk capital requirement for non-securitisations ..55. Default risk capital requirement for securitisations (non-CTP) ..59. Default risk capital requirement for securitisations (CTP) ..61. MAR23 Standardised approach: residual risk add-on ..64. Instruments subject to the residual risk add-on ..64. Calculation of the residual risk add-on.

4 65. MAR30 Internal models approach: general provisions ..66. General criteria ..66. Qualitative standards ..67. Model validation standards ..69. External Stress testing ..70. MAR31 Internal models approach: model requirements ..72. Specification of market risk factors ..72. Model eligibility of risk factors ..74. MAR32 Internal models approach: backtesting and P&L attribution test requirements .. 81. Backtesting requirements ..81. PLA test requirements ..83. Treatment for exceptional situations ..87. MAR33 Internal models approach: capital requirements Calculation of expected shortfall ..89. Calculation of capital requirement for modellable risk Calculation of capital requirement for non-modellable risk factors ..93. Calculation of default risk capital requirement ..94. Calculation of capital requirement for model-ineligible trading Aggregation of capital requirement ..97. iv Minimum capital requirements for market risk MAR40 Simplified standardised 99.

5 Risk-weighted assets and capital requirements .. 99. Interest rate risk .. 99. Equity risk .. 110. Foreign exchange risk .. 112. Commodities risk .. 114. Treatment of 117. MAR90 Transitional 123. MAR99 Guidance on use of the internal models approach .. 124. Trading desk-level 124. Bank-wide 125. Examples of the application of the principles for risk factor modellability .. 129. Minimum capital requirements for market risk v Errata The following table lists the corrections made in this version of the standard relative to the version originally published on 14 January 2019. Paragraph Correction made Reason for correction .. fair valued though the P&L account. corrected to Spelling error Footnote 2 .. fair valued through the P&L account. (emphasis added). Formula misspecification;. no change to the addition operation that precedes Formula corrected from: the term . = ( ( ) ) ( ) . (2)(f). was intended relative to to: the January 2016 version.

6 = ( ) ( ) + of the standard or relative to the March 2018. consultative document that proposed revisions to the standard vi Minimum capital requirements for market risk Minimum capital requirements for market risk Introduction This document sets outs the amended minimum capital requirements for market risk that will serve as the Pillar 1 minimum capital requirement as of 1 January 2022, replacing the current minimum capital requirements for market risk as set out in Basel II 1 and its subsequent amendments. This standard supersedes the January 2016 publication Minimum capital requirements for market risk, for which the Basel Committee proposed targeted revisions via a March 2018 consultative 2. document. 3 Descriptions of the changes that have been incorporated into the standard relative to the January 2016 publication are set out in the publication Explanatory note on the minimum capital requirements for market risk.

7 4. The market risk standard set out in this document has been prepared in a new modular format. This reflects the style of a consolidated framework currently being prepared by the Basel Committee , which intends to improve the accessibility of the Basel standards. 5 The Committee expects to publish all standards in this format on its website in the coming months. An alternate version of the standard that includes previously published frequently asked questions is also available on the Basel Committee website. 6. At a high level, the chapters of the standard are organised as follows: Chapter acronym Chapter name RBC25 Boundary between the Banking book and the trading book MAR10 to MAR12 Definitions and application MAR10 market risk terminology MAR11 Definitions and application of market risk MAR12 definition of a trading desk MAR20 to MAR 23 Standardised approach MAR20 Standardised approach: general provisions and structure MAR21 Standardised approach: sensitivities-based method MAR22 Standardised approach: default risk capital requirement MAR23 Standardised approach: residual risk add-on MAR30 to MAR33 Internal models approach MAR30 Internal models approach: general provisions MAR31 Internal models approach: model requirements MAR32 Internal models approach: backtesting and P&L attribution test requirements 1.

8 Basel Committee on Banking Supervision , International Convergence of Capital Measurement and Capital Standards: A Revised Framework: Comprehensive Version, June 2006, 2. Basel Committee on Banking Supervision , Minimum capital requirements for market risk, January 2016, 3. Basel Committee on Banking Supervision , Consultative Document Revisions to the minimum capital requirements for market risk, March 2018, 4. Basel Committee on Banking Supervision , Explanatory note on the minimum capital requirements for market risk, January 2019, 5. For the purpose of this publication, cross-references to other paragraphs or chapters are indicated within square brackets (eg [ ]). These will be replaced with hyperlinks once the consolidated framework is made available on the BCBS website. 6. Basel Committee on Banking Supervision , Minimum capital requirements for market risk, January 2019 (version includes frequently asked questions), Minimum capital requirements for market risk 1.

9 Chapter acronym Chapter name MAR33 Internal models approach: capital requirements calculation MAR40 Simplified standardised approach MAR90 Transitional arrangements MAR99 Guidance on use of the internal models approach 2 Minimum capital requirements for market risk RBC25 Boundary between the Banking book and the trading book This chapter sets out the instruments to be included in the trading book (which are subject to market risk capital requirements) and those to be included in the Banking book (which are subject to credit risk capital requirements). Scope of the trading book A trading book consists of all instruments that meet the specifications for trading book instruments set out in [ ] through [ ]. All other instruments must be included in the Banking book. Instruments comprise financial instruments, foreign exchange (FX), and commodities. A financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity.

10 Financial instruments include primary financial instruments (or cash instruments) and derivative financial instruments. A financial asset is any asset that is cash, the right to receive cash or another financial asset or a commodity, or an equity instrument. A financial liability is the contractual obligation to deliver cash or another financial asset or a commodity. Commodities also include non-tangible (ie non-physical) goods such as electric power. Banks may only include a financial instrument, instruments on FX or commodity in the trading book when there is no legal impediment against selling or fully hedging it. Banks must fair value daily any trading book instrument and recognise any valuation change in the profit and loss (P&L) account. Standards for assigning instruments to the regulatory books Any instrument a bank holds for one or more of the following purposes must, when it is first recognised on its books, be designated as a trading book instrument, unless specifically otherwise provided for in [ ] or [ ]: (1) short-term resale.


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