CA-5.1 CA-5.1 Introduction
CA-5.1.1
This Chapter sets out the minimum capital requirements to cover the risk of holding or taking positions in equities in the bank's trading book.
October 07CA-5.1.2
For the guidance of the banks, and without being exhaustive, the following list includes financial instruments in the trading book, including forward positions, to which equity position risk capital requirements will apply:
(a) Common stocks, whether voting or non-voting;(b) Depository receipts (which should be included in the measurement framework in terms of the underlying shares);(c) Convertible preferencesecurities (non-convertible preferencesecurities are treated as bonds);(d) Convertible debtsecurities which convert into equity instruments and are, therefore, treated as equities (see Paragraph CA-5.1.3 below);(e) Commitments to buy or sell equitysecurities ;(f)Derivatives based on the above instruments.October 07CA-5.1.3
Convertible debt
securities must be treated as equities where:(a) The first date at which the conversion may take place is less than three months ahead, or the next such date (where the first date has passed) is less than a year ahead; and(b) The convertible is trading at a premium of less than 10%, where the premium is defined as the current marked-to-market value of the convertible less the marked-to-market value of the underlying equity, expressed as a percentage of the latter.
In other instances, convertibles should be treated as either equity or debtsecurities , based reasonably on their market behaviour.October 07CA-5.1.4
For instruments that deviate from the structures described in Paragraphs CA-5.1.2 and CA-5.1.3 above, or which 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 07CA-5.1.5
Where equities are part of a forward contract, a future or an
option (i.e. a quantity of equities to be received or delivered), any interest rate or foreign currencyexposure from the other leg of the contract should be included in the measurement framework as described in Chapters CA-4 and CA-6, respectively.October 07CA-5.1.6
As with interest rate related instruments, the minimum capital requirement for equities is expressed in terms of two separately calculated charges, one applying to the 'specific risk' of holding a long or short position in an individual equity, and the other to the 'general market risk' of holding a long or short position in the market as a whole.
October 07CA-5.1.7
Banks which have the intention and capability to use internal models for the measurement of general and specific equity risk 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 equity position risk capital requirement, as set out in detail in this Chapter.
October 07
