Back Custom print Link Text Only Rich Text Print

  • CA-4.1 CA-4.1 Introduction

    • CA-4.1.1

      This Chapter describes the standardised approach for the measurement of the interest rate risk in the bank's trading book, in order to determine the capital requirement for this risk. The interest rate exposure captured includes exposure arising from interest-bearing and discounted financial instruments, derivatives which are based on the movement of interest rates, foreign exchange forwards, and interest rate exposure embedded in derivatives which are based on non-interest rate related instruments.

      October 07

    • CA-4.1.2

      For the guidance of the banks, and without being exhaustive, the following list includes financial instruments in the trading book to which interest rate risk capital requirements will apply, irrespective of whether or not the instruments carry coupons:

      (a) Bonds/loan stocks, debentures etc.;
      (b) Non-convertible preference shares;
      (c) Convertible securities such as preference shares and bonds, which are treated as debt instruments5;
      (d) Mortgage backed securities and other securitised assets6;
      (e) Certificates of Deposit;
      (f) Treasury bills, local authority bills, banker's acceptances;
      (g) Commercial paper;
      (h) Euronotes, medium term notes, etc.;
      (i) Floating rate notes, FRCDs etc.;
      (j) Foreign exchange forward positions;
      (k) Derivatives based on the above instruments and interest rates; and
      (l) Interest rate exposure embedded in other financial instruments.

      5See Section CA-5.1 for an explanation of the circumstances in which convertible securities, should be treated as equity instruments. In other circumstances, they should be treated as debt instruments.

      6 Traded mortgage securities and mortgage derivative products possess unique characteristics because of the risk of pre-payment. It is possible that including such products within the standardised methodology as if they were similar to other securitised assets may not capture all the risks of holding positions in them. Banks which have traded mortgage securities and mortgage derivative products should discuss their proposed treatment with the Central Bank and obtain the Central Bank's prior written approval for it.

      October 07

    • CA-4.1.3

      For instruments that deviate from the above structures, or could be considered complex, each bank should agree a written policy statement with the Central Bank about the intended treatment, on a case-by-case basis. In some circumstances, the treatment of an instrument may be uncertain, for example bonds whose coupon payments are linked to equity indices. The position risk of such instruments should be broken down into its components and allocated appropriately between the equity, interest rate and foreign exchange risk categories. Advice must be sought from the Central Bank in cases of doubt, particularly when a bank is trading an instrument for the first time.

      October 07

    • CA-4.1.4

      A security which is the subject of a repurchase or securities lending agreement will be treated as if it were still owned by the lender of the security, i.e., it will be treated in the same manner as other securities positions.

      October 07

    • CA-4.1.5

      The minimum capital requirement is expressed in terms of two separately calculated charges, one applying to the 'specific risk' of each position, and the other to the interest rate risk in the portfolio, termed 'general market risk'. The aggregate capital requirement for interest rate risk is the sum of the general market interest rate risk capital requirements across currencies, and the specific risk capital requirements.

      October 07

    • CA-4.1.6

      The specific risk capital requirement recognises that individual instruments may change in value for reasons other than shifts in the yield curve of a given currency. The general risk capital requirement reflects the price change of these products caused by parallel and non-parallel shifts in the yield curve, as well as the difficulty of constructing perfect hedges.

      October 07

    • CA-4.1.7

      There is general market risk inherent in all interest rate risk positions. This may be accompanied by one or more out of specific interest rate risk, counterparty risk, equity risk and foreign exchange risk, depending on the nature of the position. Banks should consider carefully which risks are generated by each individual position. It should be recognised that the identification of the risks will require the application of the appropriate level of technical skills and professional judgement.

      October 07

    • CA-4.1.8

      Banks which have the intention and capability to use internal models for the measurement of general and specific interest rate risks and, hence, for the calculation of the capital requirement, should seek the prior written approval of the Central Bank for those models. The Central Bank's detailed rules for the recognition and use of internal models are included in Chapter CA-9. Banks which do not use internal models should adopt the standardised approach to calculate the interest rate risk capital requirement, as set out in detail in this Chapter.

      October 07