CA-1.3.17

For the measurement of their market risks, banks will have a choice, subject to the written approval of the Central Bank, between two broad methodologies. One alternative is to measure the risks in a standardised approach, using the measurement frameworks described in Chapters CA-4 to CA-8 of these regulations. Chapters CA-4 to CA-7 deal with the four risks addressed by these regulations; namely interest rate risk, equity position risk, foreign exchange risk and commodities risk. Chapter CA-8 sets out a number of possible methods for measuring the price risk in options of all kinds. The capital charge under the standardised approach is the arithmetical sum of the risk measures obtained from the measurement frameworks in Chapters CA-4 to CA-8.

CA-1.3.18

The standardised approach uses a 'building-block' approach in which the specific risk and the general market risk arising from interest rate and equity positions are calculated separately.

CA-1.3.19

The second alternative methodology, which is subject to the fulfilment of certain conditions and the use of which is, therefore, conditional upon the explicit approval of the Central Bank, is set out in detail in Chapter CA-9 including the procedure for obtaining the Central Bank's approval. This method allows banks to use risk measures derived from their own internal risk measurement models (Internal Models Approach), subject to seven sets of conditions which are described in detail in Chapter CA-9.

CA-1.3.20

The focus of most internal models currently used by banks is the general market risk exposure, typically leaving specific risk (i.e. exposures to specific issuers of debt securities or equities¹) to be measured largely through separate credit risk measurement systems. Banks using internal models for the measurement of their market risk capital requirements will be subject to a separate capital charge for specific risk, to the extent that the model does not capture specific risk. The capital charge for banks which are modelling specific risk is set out in Chapter CA-9.

¹ Specific risk includes the risk that an individual debt or equity security moves by more or less than the general market in day-to-day trading (including periods when the whole market is volatile) and event risk (where the price of an individual debt or equity security moves precipitously relative to the general market, e.g. on a take-over bid or some other shock event; such events would also include the risk of 'default').

CA-1.3.21

In measuring the price risk in options under the standardised approach, a number of alternatives with varying degrees of sophistication are allowed (see Chapter CA-8). The more a bank is engaged in writing options, the more sophisticated its measurement method needs to be. In the longer term, banks with significant options business will be expected to move to comprehensive value-at-risk models and become subject to the full range of quantitative and qualitative standards set out in Chapter CA-9.

CA-1.3.22

All transactions, including forward sales and purchases, shall be included in the calculation of capital requirements as from the date on which they were entered into.