Back Custom print Link Text Only Rich Text Print

  • Risk Mitigation and Diversification Effects

    • CA-14.13.20

      Within the IRC model, exposure amounts may be netted only when long and short positions refer to the same financial instrument. Otherwise, exposure amounts must be captured on a gross (i.e. non-netted) basis. Thus, hedging or diversification effects associated with long and short positions involving different instruments or different securities of the same obligor ("intra-obligor hedges"), as well as long and short positions in different issuers ("interobligor hedges"), may not be recognised through netting of exposure amounts. Rather, such effects may only be recognised by capturing and modelling separately the gross long and short positions in the different instruments or securities.

      Added: January 2012

    • CA-14.13.21

      Significant basis risks by product, seniority in the capital structure, internal or external rating, maturity, vintage for offsetting positions as well as differences between offsetting instruments, such as different payout triggers and procedures, should be reflected in the IRC model.

      Added: January 2012

    • CA-14.13.22

      If an instrument has a shorter maturity than the liquidity horizon or a maturity longer than the liquidity horizon is not contractually assured, the IRC must, where material, include the impact of potential risks that could occur during the interval between the maturity of the instrument and the liquidity horizon.

      Added: January 2012

    • CA-14.13.23

      For trading book risk positions that are typically hedged via dynamic hedging strategies, a rebalancing of the hedge within the liquidity horizon of the hedged position may also be recognised. Such recognition is only admissible if the bank (i) chooses to model rebalancing of the hedge consistently over the relevant set of trading book risk positions, (ii) demonstrates that the inclusion of rebalancing results in a better risk measurement, and (iii) demonstrates that the markets for the instruments serving as hedge are liquid enough to allow for this kind of rebalancing even during periods of stress. Any residual risks resulting from dynamic hedging strategies must be reflected in the capital charge. A bank must validate its approach to capture such residual risks to the satisfaction of the CBB.

      Added: January 2012