CA-7.1.1

The framework outlined below presents two methods for calculating operational risk capital charges in a continuum of increasing sophistication and risk sensitivity:

CA-7.1.2

Conventional bank licensees are encouraged to move towards standardised approach as they develop more sophisticated operational risk measurement systems and practices.

CA-7.1.3

A conventional bank licensee will not be allowed to choose to revert to basic indicator approach once it has been approved for standardised approach without CBB's approval. However, if CBB determines that a conventional bank licensee using standardised approach no longer meets the qualifying criteria for standardised approach, it may require the conventional bank licensee to revert to basic indicator approach for some or all of its operations, until it meets the conditions specified by the CBB for returning to standardised approach.

Basic Indicator Approach

The Standardised Approach

CA-8.1.1

"Market risk" is defined as the risk of losses in on- and off-balance sheet positions arising from movements in market prices. The risks that are subject to the market risk capital requirement are:

⁴² Equity positions in the banking book are dealt with under Paragraph CA-3.2.26.

CA-8.1.2

A trading book consists of positions in financial instruments and commodities held either with trading intent or in order to hedge other elements of the trading book, along with open foreign exchange positions in both the banking and the trading book. To be eligible for trading book capital treatment, financial instruments must either be free of any restrictive covenants on their tradability or able to be hedged completely. In addition, positions must be frequently and accurately valued, and the portfolio must be actively managed (open equity stakes in hedge funds, private equity investments, positions in a securitisation warehouse and real estate holdings do not meet the definition of the trading book, owing to significant constraints on the ability of banks to liquidate these positions and value them reliably on a daily basis. Such holdings must therefore be held in the conventional bank licensee's banking book and treated as equity holding in corporates, except real estate which must be treated as per Paragraph CA-3.2.29).

CA-8.1.3

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. Financial instruments include both 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 the contractual right to exchange financial assets on potentially favourable terms, or an equity instrument. A financial liability is the contractual obligation to deliver cash or another financial asset or to exchange financial liabilities under conditions that are potentially unfavourable.

CA-8.1.4

Positions held with trading intent are those held intentionally for short-term resale and/or with the intent of benefiting from actual or expected short-term price movements or to lock in arbitrage profits, and may include for example proprietary positions, positions arising from client servicing (e.g. matched principal broking) and market making. It is therefore possible that conventional bank licensees may sometimes not have a trading book as defined above. Nonetheless the conventional bank licensee's strategy and business plan must take account of the requirements of this Chapter in case a conventional bank licensee does take on positions with trading intent.

CA-8.1.5

Conventional bank licensees must have clearly defined policies and procedures for determining which exposures to include in, and to exclude from, the trading book for purposes of calculating their regulatory capital, to ensure compliance with the criteria for trading book set forth in this Section and taking into account the conventional bank licensee's risk management capabilities and practices. The conventional bank licensee must have well-documented procedures to comply with stated policies, which must be fully documented and subject to periodic internal audit.

CA-8.1.6

The policies and procedures referred to in Paragraph CA-8.1.5 must, at a minimum, address the following general considerations:

The list above is not intended to provide a series of tests that a product or group of related products must pass to be eligible for inclusion in the trading book. Rather, the list provides a minimum set of key points that must be addressed by the policies and procedures for overall management of a conventional bank licensee's trading book.

CA-8.1.7

The basic requirements for positions eligible to receive trading book capital treatment are as follows:

CA-8.1.8

When a conventional bank licensee hedges a banking book credit risk exposure using a credit derivative booked in its trading book (i.e. using an internal hedge), the banking book exposure is not deemed to be hedged for capital purposes unless the conventional bank licensee purchases from an eligible third party protection provider a credit derivative meeting the requirements of Paragraph CA-4.5.3 vis-à-vis the banking book exposure. Where such third party protection is purchased and is recognised as a hedge of a banking book exposure for regulatory capital purposes, neither the internal nor external credit derivative hedge would be included in the trading book for regulatory capital purposes.

CA-8.1.8A

Positions in the conventional bank licensee's own regulatory capital instruments are deducted from capital (as detailed in Chapter CA-2.4). Positions in other banks', securities firms', and other financial entities' eligible regulatory capital instruments, as well as intangible assets, are subject to the treatment set down in Chapter CA-2.4.

CA-8.1.9

Term trading-related repo-style transactions that a conventional bank licensee accounts for in its banking book may be included in the conventional bank licensee's trading book for regulatory capital purposes so long as all such repo-style transactions are included. For this purpose, trading-related repo-style transactions are defined as only those that meet the requirements of Paragraphs CA-8.1.4 and CA-8.1.7 and both legs are in the form of either cash or securities includable in the trading book.

CA-8.1.10

Regardless of where they are booked, all repo-style transactions are subject to a banking book counterparty credit risk charge.

CA-8.1.11

For the purposes of this framework, the correlation trading portfolio incorporates securitisation exposures and n-th-to-default credit derivatives that meet the following criteria:

Positions which reference an underlying that would be treated as a retail exposure, a residential mortgage exposure or a commercial mortgage exposure under the standardised approach to credit risk are not included in the correlation trading portfolio. Positions which reference a claim on a special purpose entity are not included either. A conventional bank licensee may also include in the correlation trading portfolio positions that hedge the positions described above and which are neither securitisation exposures nor n-th-to-default credit derivatives and where a liquid two-way market as described above exists for the instrument or its underlyings.

CA-8.3.1

Conventional bank licensees must calculate the counterparty credit risk charge for OTC derivatives, repo-style and other transactions booked in the trading book, separate from the capital charge for general market risk and specific risk.⁴³ The risk weights to be used in this calculation must be consistent with those used for calculating the capital requirements in the banking book. Thus, conventional bank licensees must use the standardised approach risk weights in the trading book.

⁴³ The treatment for unsettled foreign exchange and securities trades is set forth in Paragraph CA-3.3.13.

CA-8.3.2

In the trading book, for repo-style transactions, all instruments, which are included in the trading book, may be used as eligible collateral. Those instruments which fall outside the banking book definition of eligible collateral are subject to a haircut at the level applicable to non-main index equities listed on recognised exchanges (as noted in Paragraph CA-4.3.7). Where conventional bank licensees are applying a VaR approach to measuring exposure for repo-style transactions, they also may apply this approach in the trading book in accordance with Paragraphs CA-4.3.22 to CA-4.3.25 and Appendix CA-2.

CA-8.3.3

The calculation of the counterparty credit risk charge for collateralised OTC derivative transactions is the same as the rules prescribed for such transactions booked in the banking book.

CA-8.3.4

The calculation of the counterparty charge for repo-style transactions must follow the rules in Paragraphs CA-4.3.3 to CA-4.3.25 and Appendix CA-2.

Credit Derivatives

CA-9.1.1

This Chapter describes the standardised approach for the measurement of the interest rate risk in the conventional bank licensee'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.

CA-9.1.2

For the guidance of the conventional bank licensees, 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:

⁴⁴ See Section CA-10.1 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.

⁴⁵ 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 CBB and obtain the CBB's prior written approval for it.

CA-9.1.3

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

CA-9.1.4

The minimum capital requirement is expressed in terms of two separately calculated charges, one applying to the "specific risk" of each security, whether it is a short or a long position, and the other to the interest rate risk in the portfolio (termed "general market risk") where long and short positions in different securities or instruments can be offset. The conventional bank licensees must, however, determine the specific risk capital charge for the correlation trading portfolio as follows: The conventional bank licensee computes (i) the total specific risk capital charges that would apply just to the net long positions from the net long correlation trading exposures combined, and (ii) the total specific risk capital charges that would apply just to the net short positions from the net short correlation trading exposures combined. The larger of these total amounts is then the specific risk capital charge for the correlation trading portfolio.

CA-9.1.4A

[This Paragraph was deleted in January 2015.]

CA-9.1.5

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.

CA-9.1.6

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. Conventional bank licensees must 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 judgment.

CA-9.1.7

Conventional bank licensees which have the intention and capability to use internal models for the measurement of general interest rate risk and, hence, for the calculation of the capital requirement, must seek the prior written approval of the CBB for those models. The CBB's detailed rules for the recognition and use of internal models are included in Chapter CA-14. Conventional bank licensees which do not use internal models must adopt the standardised approach to calculate the interest rate risk capital requirement, as set out in detail in this Chapter.

CA-9.2.1

The capital charge for specific risk is designed to protect against a movement in the price of an individual instrument, owing to factors related to the individual issuer.

CA-9.2.2

In measuring the specific risk for interest rate related instruments, a conventional bank licensee may net, by value, long and short positions (including positions in derivatives) in the same debt instrument to generate the individual net position in that instrument. Instruments will be considered to be the same where the issuer is the same, they have an equivalent ranking in a liquidation, and the currency, the coupon and the maturity are the same.

CA-9.2.3

The specific risk capital requirement is determined by weighting the current market value of each individual net position, whether long or short, according to its allocation among the following broad categories:

CA-9.2.4

When the government paper is denominated in the domestic currency and funded by the conventional bank licensee in the same currency, a 0% specific risk charge may be applied.

CA-9.2.5

Central "government" debt instruments include all forms of government paper, including bonds, treasury bills and other short-term instruments.

CA-9.2.6

However the CBB reserves the right to apply a specific risk weight to securities issued by certain foreign governments, especially to securities denominated in a currency other than that of the issuing government.

CA-9.2.7

The "qualifying" category includes securities issued by or fully guaranteed by public sector entities and multilateral development banks (refer to Paragraph CA-3.2.8), plus other securities that are:

Specific Risk Rules for Unrated Debt Securities

Specific Risk Rules for Non-qualifying Issuers

Specific Risk Rules for Positions Covered under the Securitisation Framework

Specific Risk Capital Charges under the Standardised Approach Based on External Credit Ratings

Specific Risk Capital Charges for Positions Hedged by Credit Derivatives

CA-9.3.1

The capital requirements for general market risk are designed to capture the risk of loss arising from changes in market interest rates, i.e. the risk of parallel and non-parallel shifts in the yield curve. A choice between two principal methods of measuring the general market risk is permitted, a "maturity" method and a "duration" method. In each method, the capital charge is the sum of the following four components:

CA-9.3.2

Separate maturity ladders must be used for each currency and capital charges must be calculated for each currency separately and then summed, by applying the prevailing foreign exchange spot rates, with no off-setting between positions of opposite sign.

CA-9.3.3

In the case of those currencies in which the value and volume of business is insignificant, separate maturity ladders for each currency are not required. Instead, the conventional bank licensee may construct a single maturity ladder and slot, within each appropriate time-band, the net long or short position for each currency. However, these individual net positions are to be summed within each time-band, irrespective of whether they are long or short positions, to arrive at the gross position figure for the time-band.

CA-9.3.4

A combination of the two methods (referred to under Paragraph CA-9.3.1) is not permitted.

CA-9.4.1

A worked example of the maturity method is included in Appendix CA-11. The various time-bands and their risk weights, relevant to the maturity method, are illustrated in Subparagraph CA-9.4.2(a).

CA-9.4.2

The steps in the calculation of the general market risk for interest rate positions, under this method, are set out below:

Maturity Method: Time-Bands and Risk Weights

CA-9.5.1

The duration method is an alternative approach to measuring the exposure to parallel and non-parallel shifts in the yield curve, and recognises the use of duration as an indicator of the sensitivity of individual positions to changes in market yields. Under this method, conventional bank licensees may use a duration-based system for determining their general interest rate risk capital requirements for traded debt instruments and other sources of interest rate exposures including derivatives. A worked example of the duration method is included in Appendix CA-12. The various time-bands and assumed changes in yield, relevant to the duration method, are illustrated below.

Duration Method: Time-Bands and Assumed Changes in Yield

CA-9.5.2

Conventional bank licensees must notify the CBB of the circumstances in which they elect to use this method. Once chosen, the duration method must be consistently applied, in accordance with the requirements of Section CA-9.3.

CA-9.5.3

Where a conventional bank licensee has chosen to use the duration method, it is possible that it will not be suitable for certain instruments. In such cases, the conventional bank licensee must seek the advice of the CBB or obtain approval for application of the maturity method to the specific category(ies) of instruments, in accordance with the provisions of Section CA-9.3.

CA-9.5.4

The steps in the calculation of the general market risk for interest rate positions, under this method, are set out below:

(b) The conventional bank licensee must calculate, for each debt instrument, the modified duration (M) on the basis of the following formula:

M = D / (1+r)

where,

D (duration) =


r = YTM % per annum expressed as a decimal
C = Cash flow at time t
t = time at which cash flows occur, in years
m = time to maturity, in years

CA-9.6.1

Conventional bank licensees which propose to use internal models to measure the interest rate risk inherent in derivatives must seek the prior written approval of the CBB for applying those models. The use of internal models to measure market risk, and the CBB's rules applicable to them, are discussed in detail in Chapter CA-14.

CA-9.6.2

Where a conventional bank licensee, with the prior written approval of the CBB, uses an interest rate sensitivity model, the output of that model is used, by the duration method, to calculate the general market risk as described in Section CA-9.5.

CA-9.6.3

Where a conventional bank licensee does not propose to use models, it must use the techniques described in the following Paragraphs, for measuring the market risk on interest rate derivatives. The measurement system must include all interest rate derivatives and off-balance-sheet instruments in the trading book which react to changes in interest rates (e.g. forward rate agreements, other forward contracts, bond futures, interest rate and cross-currency swaps, options and forward foreign exchange contracts). Where a conventional bank licensee has obtained the approval of the CBB for the use of non-interest rate derivatives models, the embedded interest rate exposures must be incorporated in the standardised measurement framework described in Sections CA-9.7 to CA-9.9.

CA-9.6.4

Derivative positions attract specific risk only when they are based on an underlying instrument or security. For instance, where the underlying exposure is an interest rate exposure, as in a swap based upon inter-bank rates, there is no specific risk, but only counterparty risk. A similar treatment applies to FRAs, forward foreign exchange contracts and interest rate futures. However, for a swap based on a bond yield, or a futures contract based on a debt security or an index representing a basket of debt securities, the credit risk of the issuer of the underlying bond generates a specific risk capital requirement. Future cash flows derived from positions in derivatives generate counterparty risk requirements related to the counterparty in the trade, in addition to position risk requirements (specific and general market risk) related to the underlying security.

CA-9.6.5

A summary of the rules for dealing with interest rate derivatives (other than options) is set out in Section CA-9.9. The treatment of options, being a complex issue, is dealt with in detail in Chapter CA-13.

CA-9.7.1

The derivatives must be converted to positions in the relevant underlying and become subject to specific and general market risk charges as described in Sections CA-9.2 and CA-9.3, respectively. For the purpose of calculation by the standard formulae, the amounts reported are the market values of the principal amounts of the underlying or of the notional underlying. For instruments where the apparent notional amount differs from the effective notional amount, conventional bank licensees must use the latter.

CA-9.7.2

The remaining Paragraphs in this Section include the guidelines for the calculation of positions in different categories of interest rate derivatives. Conventional bank licensees which need further assistance in the calculation, particularly in relation to complex instruments, should contact the CBB in writing.

Forward Foreign Exchange Contracts

Deposit Futures and FRAs

Bond Futures and Forward Bond Transactions

Swaps

Permissible Offsetting of Fully Matched Positions for Both Specific and General Market Risk

Permissible Offsetting of Closely Matched Positions for General Market Risk Only

CA-9.9.1

After calculating the derivatives positions, taking account of the permissible offsetting of matched positions, as explained in Section CA-9.8, the capital charges for specific and general market risk for interest rate derivatives are calculated in the same manner as for cash positions, as described earlier in this Chapter.

Summary of Treatment of Interest Rate Derivatives

CA-10.1.1

This Chapter sets out the minimum capital requirements to cover the risk of holding or taking positions in equities in the conventional bank licensee's trading book.

CA-10.1.2

For the guidance of the conventional bank licensees, and without being exhaustive, the following list includes financial instruments in the trading book, including forward positions, to which equity position risk capital requirements apply:

CA-10.1.3

Convertible debt securities must be treated as equities where:

In other instances, convertibles must be treated as either equity or debt securities, based reasonably on their market behaviour.

CA-10.1.4

For instruments that deviate from the structures described in Paragraphs CA-10.1.2 and CA-10.1.3, or which could be considered complex, each conventional bank licensees must agree on a written policy statement with the CBB 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 must 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 CBB in cases of doubt, particularly when a conventional bank licensee is trading an instrument for the first time.

CA-10.1.5

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 currency exposure from the other leg of the contract must be included in the measurement framework as described in Chapters CA-9 and CA-11, respectively.

CA-10.1.6

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.

CA-10.1.7

Conventional bank licensees must follow the standardised approach to calculate the equity position risk capital requirement, as set out in detail in this Chapter.

CA-10.2.1

A conventional bank licensee may net long and short positions in the same equity instrument, arising either directly or through derivatives, to generate the individual net position in that instrument. For example, a future in a given equity may be offset against an opposite cash position in the same equity, albeit the interest rate risk arising out of the future must be calculated separately in accordance with the rules set out in Chapter CA-9.

CA-10.2.2

A conventional bank licensee may net long and short positions in one tranche of an equity instrument against another tranche only where the relevant tranches:

CA-10.2.3

Positions in depository receipts may only be netted against positions in the underlying stock if the stock is freely deliverable against the depository receipt. If a conventional bank licensee takes a position in depository receipts against an opposite position in the underlying equity in different markets (i.e. arbitrage), it may offset the position provided that any costs on conversion are fully taken into account. Furthermore, the foreign exchange risk arising out of these positions must be included in the measurement framework as set out in Chapter CA-11.

CA-10.2.4

More detailed guidance on the treatment of equity derivatives is set out in Section CA-10.5.

CA-10.2.5

Equity positions, arising either directly or through derivatives, must be allocated to the country in which each equity is listed. Where an equity is listed in more than one country, the conventional bank licensee must discuss the appropriate country allocation with the CBB.

CA-10.3.1

Specific risk is defined as the conventional bank licensee's gross equity positions (i.e. the sum of all long equity positions and of all short equity positions), and is calculated for each country or equity market. For each national market in which the conventional bank licensee holds equities, it must sum the market values of its individual net positions as determined in accordance with Section CA-10.2, irrespective of whether they are long or short positions, to produce the overall gross equity position for that market.

CA-10.3.2

The capital charge for specific risk is 8%.

CA-10.4.1

The general market risk is the difference between the sum of the long positions and the sum of the short positions (i.e. the overall net position) in each national equity market. In other words, to calculate the general market risk, the conventional bank licensee must sum the market value of its individual net positions for each national market, as determined in accordance with Section CA-10.2, taking into account whether the positions are long or short.

CA-10.4.2

The general market equity risk measure is 8% of the overall net position in each national market.

CA-10.5.1

For the purpose of calculating the specific and general market risk by the standardised approach, equity derivative positions must be converted into notional underlying equity positions, whether long or short. All equity derivatives and off-balance-sheet positions which are affected by changes in equity prices must be included in the measurement framework. This includes futures and swaps on both individual equities and on stock indices.

CA-10.5.2

The following guidelines apply to the calculation of positions in different categories of equity derivatives. Conventional bank licensees which need further assistance in the calculation, particularly in relation to complex instruments, must contact the CBB:

CA-10.5.3

A summary of the treatment of equity derivatives is set out in Paragraph CA-10.5.8.

Specific Risk on Positions in Equity Indices

Counterparty Risk

Summary of Treatment of Equity Derivatives

CA-11.1.1

A conventional bank licensee which holds net open positions (whether long or short) in foreign currencies is exposed to the risk that exchange rates may move against it. The open positions may be either trading positions or, simply, exposures caused by the conventional bank licensee's overall assets and liabilities.

CA-11.1.2

This Chapter describes the standardised method for calculation of the conventional bank licensee's foreign exchange risk, and the capital required against that risk. The measurement of the foreign exchange risk involves, as a first step, the calculation of the net open position in each individual currency including gold⁴⁸ and, as a second step, the measurement of the risks inherent in the conventional bank licensee's mix of long and short positions in different currencies.

⁴⁸ Positions in gold must be treated as if they were foreign currency positions, rather than as commodity positions, because the volatility of gold is more in line with that of foreign currencies and most banks manage it in similar manner to foreign currencies.

CA-11.1.3

The open positions and the capital requirements are calculated with reference to the entire business, i.e. the banking and trading books combined.

CA-11.1.4

The open positions are calculated with reference to the conventional bank licensee's base currency, which will be either BD or US$.

CA-11.1.5

Conventional bank licensees which have the intention and capability to use internal models for the measurement of their foreign exchange risk and, hence, for the calculation of the capital requirement, must obtain the prior written approval of the CBB for those models. The CBB's detailed rules for the recognition and use of internal models are included in chapter CA-14. Conventional bank licensees which do not use internal models must follow the standardised approach, as set out in detail in this Chapter.

CA-11.1.6

In addition to foreign exchange risk, positions in foreign currencies may be subject to interest rate risk and credit risk which must be treated separately.

CA-11.1.7

For the purposes of calculating "Foreign Exchange Risk" only, positions in those GCC currencies which are pegged to US$, are treated as positions in US$.

CA-11.2.1

A conventional bank licensee doing negligible business in foreign currencies and which does not take foreign exchange positions for its own account may, at the discretion of the CBB evidenced by the CBB's prior written approval, be exempted from calculating the capital requirements on these positions.

CA-11.2.1A

The CBB is likely to be guided by the following criteria in deciding to grant exemption to any conventional bank licensee under Paragraph CA-11.2.1:

CA-11.2.2

The criteria listed in Paragraph CA-11.2.1A are only intended to be guidelines, and a conventional bank licensee will not automatically qualify for exemptions upon meeting them. The CBB may also, in its discretion, fix a minimum capital requirement for a conventional bank licensee which is exempted from calculating its foreign exchange risk capital requirement, to cover the risks inherent in its foreign currency business.

CA-11.2.3

The CBB may, at a future date, revoke an exemption previously granted to a conventional bank licensee, if the CBB is convinced that the conditions on which the exemption was granted no longer exist.

CA-11.3.1

A conventional bank licensee's exposure to foreign exchange risk in any currency is its net open position in that currency, which is calculated by summing the following items:

CA-11.3.2

All assets and liabilities, as described in Paragraph CA-11.3.1, must be included at closing mid-market spot exchange rates. Marked-to-market items must be included on the basis of the current market value of the positions. However, conventional bank licensees which base their normal management accounting on net present values must use the net present values of each position, discounted using current interest rates and valued at current spot rates, for measuring their forward currency and gold positions.

CA-11.3.3

Net positions in composite currencies, such as the SDR, may either be broken down into the component currencies according to the quotas in force and included in the net open position calculations for the individual currencies, or treated as a separate currency. In any case, the mechanism for treating composite currencies must be consistently applied.

CA-11.3.4

For calculating the net open position in gold, the conventional bank licensee must first express the net position (spot plus forward) in terms of the standard unit of measurement (i.e. ounces or grams) and, then, convert it at the current spot rate into the base currency.

CA-11.3.5

Forward currency and gold positions must be valued at current spot market exchange rates. Applying forward exchange rates is inappropriate as it will result in the measured positions reflecting current interest rate differentials, to some extent.

CA-11.3.6

Where gold is part of a forward contract (i.e. quantity of gold to be received or to be delivered), any interest rate or foreign currency exposure from the other leg of the contract must be reported as set out in Chapter CA-9 or Section CA-11.1, respectively.

Structural Positions

Derivatives

CA-11.4.1

The net long or short position in each currency is converted, at the spot rate, into the reporting currency. The overall net open position is measured by aggregating the following:

CA-11.4.2

Where the conventional bank licensee is assessing its foreign exchange risk on a consolidated basis, it may be technically impractical in the case of some marginal operations to include the currency positions of a foreign branch or subsidiary of the conventional bank licensee. In such cases, the internal limit for that branch/subsidiary, in each currency, may be used as a proxy for the positions. The branch/subsidiary limits must be added, without regard to sign, to the net open position in each currency involved. When this simplified approach to the treatment of currencies with marginal operations is adopted, the conventional bank licensee must adequately monitor the actual positions of the branch/subsidiary against the limits, and revise the limits, if necessary, based on the results of the ex-post monitoring.

CA-11.5.1

The capital charge is 8% of the overall net open position.

CA-11.5.2

The table below illustrates the calculation of the overall net open position and the capital charge:

Example of the Calculation of the Foreign Exchange Overall Net Open Position and the Capital Charge

CA-12.1.1

This Chapter sets out the minimum capital requirements to cover the risk of holding or taking positions in commodities, including precious metals, but excluding gold (which is treated as a foreign currency according to the methodology explained in Chapter CA-11).

CA-12.1.2

The commodities position risk and the capital charges are calculated with reference to the entire business of a conventional bank licensee, i.e., the banking and trading books combined.

CA-12.1.3

The price risk in commodities is often more complex and volatile than that associated with currencies and interest rates. Commodity markets may also be less liquid than those for interest rates and currencies and, as a result, changes in supply and demand can have a more dramatic effect on price and volatility. Conventional bank licensees need also to guard against the risk that arises when a short position falls due before the long position. Owing to a shortage of liquidity in some markets, it might be difficult to close the short position and the conventional bank licensee might be "squeezed by the market". All these market characteristics, of commodities, can make price transparency and the effective hedging of risks more difficult.

CA-12.1.4

For spot or physical trading, the directional risk arising from a change in the spot price is the most important risk. However, conventional bank licensees applying portfolio strategies involving forward and derivative contracts are exposed to a variety of additional risks, which may well be larger than the risk of a change in spot prices (directional risk). These include:

CA-12.1.5

The capital charges for commodities risk envisaged by the rules within this Chapter are intended to cover the risks identified in Paragraph CA-12.1.4. In addition, however, conventional bank licensees face credit counterparty risk on over-the-counter derivatives, which must be incorporated into their credit risk capital requirements. Furthermore, the funding of commodities positions may well open a conventional bank licensee to interest rate or foreign exchange risk which is captured within the measurement framework set out in Chapters CA-9 and CA-11, respectively.⁴⁹

⁴⁹ Where a commodity is part of a forward contract (i.e.. a quantity of commodity to be received or to be delivered), any interest rate or foreign exchange risk from the other leg of the contract must be captured, within the measurement framework set out in Chapters CA-9 and CA-11, respectively. However, positions which are purely of a stock financing nature (i.e., a physical stock has been sold forward and the cost of funding has been locked in until the date of the forward sale) may be omitted from the commodities risk-calculation although they will be subject to the interest rate and counterparty risk capital requirements.

CA-12.1.6

Conventional bank licensees which have the intention and capability to use internal models for the measurement of their commodities risks and, hence, for the calculation of the capital requirement, must seek the prior written approval of the CBB for those models. The CBB's detailed rules for the recognition and use of internal models are included in Chapter CA-14. It is essential that the internal models methodology captures the directional risk, forward gap and interest rate risks, and the basis risk which are defined in Paragraph CA-12.1.4. It is also particularly important that models take proper account of market characteristics, notably the delivery dates and the scope provided to traders to close out positions.

CA-12.1.7

Conventional bank licensees which do not propose to use internal models must adopt either the maturity ladder approach or the simplified approach to calculate their commodities risk and the resultant capital charges. Both these approaches are described in Sections CA-12.3 and CA-12.4, respectively.

Netting

Derivatives

CA-12.3.1

A worked example of the maturity ladder approach is set out in Appendix CA-13 and the table in Paragraph CA-12.3.2 illustrates the maturity time-bands of the maturity ladder for each commodity.

CA-12.3.2

The steps in the calculation of the commodities risk by the maturity ladder approach are:

⁵² For instruments, the maturity of which is on the boundary of two maturity time-bands, the instrument must be placed into the earlier maturity band. For example, instruments with a maturity of exactly one year are placed into the 6 to 12 months time-band.

CA-12.4.1

By the simplified approach, the capital charge of 15% of the net position, long or short, in each commodity is applied to capture directional risk. Net positions in commodities are calculated as explained in Section CA-12.2.

CA-12.4.2

An additional capital charge equivalent to 3% of the conventional bank licensee's gross positions, long plus short, in each commodity is applied to protect the conventional bank licensee against basis risk, interest rate risk and forward gap risk. In valuing the gross positions in commodity derivatives for this purpose, conventional bank licensees must use the current spot price.

CA-13.1.1

It is recognised that the measurement of the price risk of options is inherently a difficult task, which is further complicated by the wide diversity of conventional bank licensees' activities in options. The CBB has decided that the following approaches must be adopted to the measurement of options risks:

CA-13.1.2

The scenario approach and the internal models approach are generally regarded as more satisfactory for managing and measuring options risk, as they assess risk over a range of outcomes rather than focusing on the point estimate of the 'Greek' risk parameters as in the delta-plus approach. The more significant the level and/or complexity of the conventional bank licensee's options trading activities, the more the conventional bank licensee will be expected to use a sophisticated approach to the measurement of options risks. The CBB will monitor the conventional bank licensees' options trading activities, and the adequacy of the risk measurement framework adopted.

CA-13.1.3

Where written option positions are hedged by perfectly matched long positions in exactly the same options, no capital charge for market risk is required in respect of those matched positions.

CA-13.2.1

In the simplified approach, positions for the options and the associated underlying (hedges), cash or forward, are entirely omitted from the calculation of capital charges by the standardised methodology and are, instead, "carved out" and subject to separately calculated capital charges that incorporate both general market risk and specific risk. The capital charges thus generated are then added to the capital charges for the relevant risk category, i.e., interest rate related instruments, equities, foreign exchange and commodities as described in Chapters CA-9, CA-10, CA-11 and CA-12 respectively.

CA-13.2.2

The capital charges for the carved out positions are as set out in the table below. As an example of how the calculation would work, if a conventional bank licensee holds 100 shares currently valued at $ 10 each, and also holds an equivalent put option with a strike price of $11, the capital charge would be as follows:
[$ 1,000 x 16%⁵³] minus [($ 11 – $ 10)⁵⁴ x 100] = $ 60
A similar methodology applies to options whose underlying is a foreign currency, an interest rate related instrument or a commodity.

⁵³ 8% specific risk plus 8% general market risk.

⁵⁴ The amount the option is "in the money".

Simplified Approach: Capital Charges

⁵⁵ In some cases such as foreign exchange, it may be unclear which side is the "underlying instrument"; this must be taken to be the asset which would be received if the option were exercised. In addition, the nominal value must be used for items where the market value of the underlying instrument could be zero, e.g., caps and floors, swaptions etc.

⁵⁶ Some options (e.g., where the underlying is an interest rate, a currency or a commodity) bear no specific risk, but specific risk is present in the case of options on certain interest rate related instruments (e.g., options on a corporate debt security or a corporate bond index — see Chapter CA-9 for the relevant capital charges), and in the case of options on equities and stock indices (see Chapter CA-10 for the relevant capital charges). The capital charge for currency options is 8% and for options on commodities is 15%.

⁵⁷ For options with a residual maturity of more than six months, the strike price must be compared with the forward, not the current, price. A bank unable to do this must take the "in the money" amount to be zero.

⁵⁸ Where the position does not fall within the trading book options on certain foreign exchange and commodities positions not belonging to the trading book), it is acceptable to use the book value instead of the market value.

CA-13.3.1

Conventional bank licensees which write options are allowed to include delta-weighted option positions within the standardised methodology set out in Chapters CA-9 through CA-12. Each option must be reported as a position equal to the market value of the underlying multiplied by the delta. The delta must be calculated by an adequate model with appropriate documentation of the process and controls, to enable the CBB to review such models, if considered necessary. A worked example of the delta-plus method is set out in Appendix CA-14.

CA-13.3.2

Since delta does not sufficiently cover the risks associated with options positions, there will be additional capital buffers to cover gamma (which measures the rate of change of delta) and vega (which measures the sensitivity of the value of an option with respect to a change in volatility), in order to calculate the total capital charge. The gamma and vega buffers must be calculated by an adequate exchange model or the conventional bank licensee's proprietary options pricing model, with appropriate documentation of the process and controls, to enable the CBB to review such models, if considered necessary.

Treatment of Delta

Where the Underlying is a Debt Security or an Interest Rate

Where the Underlying is an Equity Instrument

Options on Foreign Exchange and Gold Positions

Options on Commodities

Calculation of the Gamma and Vega Buffers

CA-13.4.1

As stated in Section CA-13.1, conventional bank licensees which have a significant level of options trading activities, or have complex options trading strategies, must use more sophisticated methods for measuring and monitoring the options risks. Conventional bank licensees with the appropriate capability will be permitted, with the prior approval of the CBB, to base the market risk capital charge for options portfolios and associated hedging positions on scenario matrix analysis. Before giving its approval, the CBB will closely review the accuracy of the analysis that is constructed. Furthermore, like in the case of internal models, the conventional bank licensees' use of scenario analysis as part of the standardised methodology will also be subject to external validation, and to those of the qualitative standards listed in Chapter CA-14 which are appropriate given the nature of the business.

CA-13.4.2

The scenario matrix analysis involves specifying a fixed range of changes in the option portfolio's risk factors and calculating changes in the value of the option portfolio at various points along this "grid" or "matrix". For the purpose of calculating the capital charge, the conventional bank licensee must revalue the option portfolio using matrices for simultaneous changes in the option's underlying rate or price and in the volatility of that rate or price. A different matrix is set up for each individual underlying as defined in Section CA-13.3. As an alternative, in respect of interest rate options, conventional bank licensees which are significant traders in such options are permitted to base the calculation on a minimum of six sets of time- bands. When applying this alternative method, not more than three of the time-bands as defined in Chapter CA-9 must be combined into any one set.

CA-13.4.3

The first dimension of the matrix involves a specified range of changes in the option's underlying rate or price. The CBB has set the range, for each risk category, as follows:

For all risk categories, at least seven observations (including the current observation) must be used to divide the range into equally spaced intervals.

CA-13.4.4

The second dimension of the matrix entails a change in the volatility of the underlying rate or price. A single change in the volatility of the underlying rate or price equal to a shift in volatility of ±25% is applied.

CA-13.4.5

The CBB will closely monitor the need to reset the parameters for the amounts by which the price of the underlying instrument and volatility must be shifted to form the rows and columns of the scenario matrix. The parameters set, as above, only reflect general market risk (see Paragraphs CA-13.4.10 to CA-13.4.12).

CA-13.4.6

After calculating the matrix, each cell contains the net profit or loss of the option and the underlying hedge instrument. The general market risk capital charge for each underlying is then calculated as the largest loss contained in the matrix.

CA-13.4.7

In addition to the capital charge calculated as above, the specific risk capital charge is determined separately by multiplying the delta-equivalent of each option position by the specific risk weights set out in Chapters CA-9 through CA-12.

CA-13.4.8

To summarise, capital requirements for, say OTC options, applying the scenario approach are as follows:

CA-13.4.9

Conventional bank licensees doing business in certain classes of complex exotic options (e.g. barrier options involving discontinuities in deltas etc.), or in options at the money that are close to expiry, are required to use either the scenario approach or the internal models approach, both of which can accommodate more detailed revaluation approaches. The CBB expects the concerned conventional bank licensees to work with it closely to produce an agreed method, within the framework of these rules. If a conventional bank licensee uses scenario matrix analysis, it must be able to demonstrate that no substantially larger loss could fall between the nodes.

CA-13.4.10

In drawing up the delta-plus and the scenario approaches, the CBB's present set of rules do not attempt to capture specific risk other than the delta-related elements (which are captured as explained in Paragraphs CA-13.4.7 and CA-13.4.11). The CBB recognises that introduction of those other specific risk elements will make the measurement framework much more complex. On the other hand, the simplifying assumptions used in these rules will result in a relatively conservative treatment of certain options positions.

CA-13.4.11

In addition to the options risks described earlier in this Chapter, the CBB is conscious of the other risks also associated with options, e.g., rho or interest rate risk (the rate of change of the value of the option with respect to the interest rate) and theta (the rate of change of the value of the option with respect to time). While not proposing a measurement system for those risks at present, the CBB expects conventional bank licensees undertaking significant options business, at the very least, to monitor such risks closely. Additionally, conventional bank licensees are permitted to incorporate rho into their capital calculations for interest rate risk, if they wish to do so.

CA-13.4.12

The CBB will closely review the treatment of options for the calculation of market risk capital charges, particularly in the light of the aspects described in Paragraphs CA-13.4.10 and CA-13.4.11.

CA-14.1.1

As stated in Chapter CA-1, as an alternative to the standardised approach to the measurement of market risks (which is described in Chapters CA-9 through CA-13), and subject to the explicit prior approval of the CBB, conventional bank licensees will be allowed to use risk measures derived from their own internal models.

CA-14.1.2

This Chapter describes the seven sets of conditions that should be met before a conventional bank licensee is allowed to-use the internal models approach, namely:

CA-14.1.3

The standardised methodology, described in Chapters CA-9 through CA-13, uses a "building-block" approach in which the specific risk and the general market risk arising from debt and equity positions are calculated separately. The focus of most internal models is a conventional bank licensee's general market risk exposure, typically leaving specific risk (i.e., exposures to specific issuers of debt securities and equities) to be measured largely through separate credit risk measurement systems. Conventional bank licensees applying models are subject to separate capital charges for the specific risk not captured by their models, which must be calculated by the standardised methodology.

CA-14.1.4

While the models recognition criteria described in this chapter are primarily intended for comprehensive Value-at-Risk (VaR) models, nevertheless, the same set of criteria will be applied, to the extent that it is appropriate, to other pre-processing or valuation models the output of which is fed into the standardised measurement system, e.g., interest rate sensitivity models (from which the residual positions are fed into the duration ladders) and option pricing models (for the calculation of the delta, gamma and vega sensitivities).

CA-14.1.5

As a number of strict conditions are required to be met before internal models can be recognised by the CBB, including external validation. Conventional bank licensees that are contemplating applying internal models must submit their detailed written proposals for the CBB's approval.

CA-14.1.6

As the model approval process will encompass a review of both the model and its operating environment, it is not the case that a commercially produced model which is recognised for one conventional bank licensee will automatically be recognised for another bank.

CA-14.2.1

The CBB will give its approval for the use of internal models to measure market risks only if, in addition to the detailed requirements described later in this chapter, it is satisfied that the following general criteria are met:

CA-14.3.1

In order to ensure that conventional bank licensees using models have market risk management systems that are conceptually sound and implemented with integrity, the CBB has set the following qualitative criteria that conventional bank licensees are required to meet before they are permitted to use the models-based approach for calculating capital charge. Apart from influencing the CBB's decision to permit a conventional bank licensee to use internal models, where such permission is granted, the extent to which the conventional bank licensee meets the qualitative criteria will further influence the level at which the CBB will set the multiplication factor for that conventional bank licensee, referred to in Section CA-14.5. Only those conventional bank licensees whose models, in the CBB's judgement, are in full compliance with the qualitative criteria will be eligible for application of the minimum multiplication factor of 3. The qualitative criteria include the following:

CA-14.4.1

An important part of a conventional bank licensee's internal market risk measurement system is the specification of an appropriate set of market risk factors, i.e. the market rates and prices that affect the value of the conventional bank licensee's trading positions. The risk factors contained in a market risk measurement system must be sufficient to capture the risks inherent in the conventional bank licensee's portfolio of on- and off-balance-sheet trading positions. Conventional bank licensees must follow the CBB's guidelines, set out below, for specifying the risk factors for their internal models. Where a conventional bank licensee has difficulty in specifying the risk factors for any currency or market within a risk category, in accordance with the following guidelines, the conventional bank licensee must immediately contact the CBB. The CBB will review and discuss the specific circumstances of each such case with the concerned bank, and will decide alternative methods of calculating the risks which are not captured by the conventional bank licensee's model:

CA-14.5.1

The following minimum quantitative standards apply for the purpose of calculating the capital charge:

CA-14.6.1

The contents of this Section outline the key requirements as set out in Appendix 15. The appendix presents in detail the approach to be followed for back-testing by the conventional bank licensees.

Key Requirements

CA-14.7.1

Conventional bank licensees that use the internal models approach for calculating market risk capital requirements must have in place a rigorous and comprehensive stress testing programme. Stress testing to identify events or influences that could greatly impact the conventional bank licensee is a key component of a conventional bank licensee's assessment of its capital position.

CA-14.7.2

Conventional bank licensees' stress scenarios must cover a range of factors that can create extraordinary losses or gains in trading portfolios, or make the control of risk in those portfolios very difficult. These factors include low-probability events in all major types of risks, including the various components of market, credit and operational risks. Stress scenarios must shed light on the impact of such events on positions that display both linear and non-linear characteristics (i.e., options and instruments that have option-like characteristics).

CA-14.7.3

Conventional bank licensees' stress tests must be both of a quantitative and qualitative nature, incorporating both market risk and liquidity aspects of market disturbances. Quantitative criteria must identify plausible stress scenarios to which conventional bank licensees could be exposed. Qualitative criteria must emphasise that two major goals of stress testing are to evaluate the capacity of the conventional bank licensee's capital to absorb potential large losses and to identify steps the conventional bank licensee can take to reduce its risk and conserve capital. This assessment is integral to setting and evaluating the conventional bank licensee's management strategy and the results of stress testing must be routinely communicated to senior management and, periodically, to the conventional bank licensee's board of directors.

CA-14.7.4

Conventional bank licensees must combine the use of stress scenarios as advised under Subparagraphs (a), (b) and (c) by the CBB, with stress tests developed by the conventional bank licensees themselves to reflect their specific risk characteristics. The CBB may ask conventional bank licensees to provide information on stress testing in three broad areas, as follows:

CA-14.7.5

Once a stress scenario has been identified, it must be used for conducting stress tests at least once every quarter, as long as the scenario continues to be relevant to the conventional bank licensee's portfolio.

CA-14.7.6

The results of all stress tests must be reviewed by senior management within 15 days from the time they are available, and must be promptly reflected in the policies and limits set by management and the board of directors. Moreover, if the testing reveals particular vulnerability to a given set of circumstances, the CBB requires the conventional bank licensee to take prompt steps to manage those risks appropriately (e.g., by hedging against that outcome or reducing the size of its exposures).

CA-14.7.7

Conventional bank licensees must conduct, at least weekly, a set of pre-determined stress-tests for the correlation trading portfolio encompassing shocks to default rates, recovery rates, credit spreads, and correlations. Appendix CA-19 provides guidance on the stress testing that must be undertaken to satisfy this requirement.

CA-14.8.1

Before granting its approval for the use of internal models by a conventional bank licensee, the CBB requires that the models be validated by both the internal and external auditors of the conventional bank licensee. The CBB will review the validation procedures performed by the internal and external auditors, and may independently carry out further validation procedures.

CA-14.8.2

The internal validation procedures to be carried out by the internal auditor are set out in Section CA-14.3. As stated in that Section, the internal auditor's review of the overall risk management process must take place at regular intervals (not less than once every six months). The internal auditor must make a report to senior management and the board of directors, in writing, of the results of the validation procedures. The report must be made available to the CBB for its review.

CA-14.8.3

The validation of the models by the external auditor must include, at a minimum, the following steps:

CA-14.8.4

The external auditor must carry out their validation/review procedures, at a minimum, once every year. Based on the above procedures, the external auditor must make a report, in writing, on the accuracy of the conventional bank licensee's models, including all significant findings of their work. The report must be addressed to the senior management and/or the board of directors of the conventional bank licensee, and a copy of the report must be made available to the CBB. The mandatory annual review by the external auditor must be carried out during the third quarter of the calendar year, and the CBB expects to receive their final report by 30 September of each year. The results of additional validation procedures carried out by the external auditor at other times during the year must be made available to the CBB promptly.

CA-14.8.5

Conventional bank licensees are required to ensure that external auditors and the CBB's representatives are in a position to have easy access, whenever they judge it necessary and under appropriate procedures, to the models' specifications and parameters as well as to the results of, and the underlying inputs to, their value-at-risk calculations.

CA-14.9.1

As stated in Section CA-14.1, conventional bank licensees which propose to use internal models for the calculation of their market risk capital requirements must submit their detailed proposals, in writing, to the CBB. The CBB will review these proposals, and upon ensuring that the conventional bank licensee's internal models meet all the criteria for recognition set out earlier in this Chapter, and after satisfying itself with the results of validation procedures carried out by the internal and external auditors and/or by itself, will issue a letter of model recognition to the conventional bank licensees.

CA-14.9.2

The letter of model recognition is specific. It will set out the products covered, the method for calculating capital requirements on the products and the conditions of model recognition. In the case of preprocessing models, the conventional bank licensee will also be told how the output of recognised models must feed into the processing of other interest rate, equity, foreign exchange and commodities risk. The conditions of model recognition may include additional reporting requirements. The CBB's prior written approval must be obtained for any modifications proposed to be made to the models previously recognised by the CBB. In cases where a conventional bank licensee proposes to apply the model to new but similar products, it must obtain the CBB's prior approval. In some cases, the CBB may be able to give provisional approval for the model to be applied to a new class of products, in others it will be necessary to revisit the conventional bank licensee.

CA-14.9.3

The CBB may withdraw its approval granted for any conventional bank licensee's model if it believes that the conditions based on which the approval was granted are no longer valid or have changed significantly.

CA-14.10.1

Unless a conventional bank licensee's exposure to a particular risk factor is insignificant, the internal models approach, in principle, require conventional bank licensees to have an integrated risk measurement system that captures the broad risk factor categories (i.e., interest rates, exchange rates (which includes gold), equity prices and commodity prices, with related options volatilities being included in each risk factor category). Thus, conventional bank licensees which start to use models for one or more risk factor categories, over a reasonable period of time, must extend the models to all their market risks.

CA-14.10.2

A conventional bank licensee which has obtained the CBB's approval for the use of one or more models is no longer able to revert to measuring the risk measured by those models according to the standardised methodology (unless the CBB withdraws its approval for the model(s), as explained in Section CA-14.9). However, what constitutes a reasonable period of time for an individual conventional bank licensee which uses a combination of internal models and the standardised methodology to move to a comprehensive model, will be decided by the CBB after taking into account the relevant circumstances of the conventional bank licensee.

CA-14.10.3

Notwithstanding the goal of moving to comprehensive internal models as set out in Paragraph CA-14.10.1, for conventional bank licensees which, for the time being, will be applying a combination of internal models and the standardised methodology, the following conditions apply:

CA-14.11.1

The conventional bank licensee is allowed to include its securitisation exposures and n-th-to-default credit derivatives in the trading book in its value-at-risk measure. Notwithstanding, it is still required to hold additional capital for these products according to the standardised measurement methodology.

[Paragraphs CA-14.11.1A to CA-14.11.12 were deleted in January 2015.]

CA-14.12.1

It is important that conventional bank licensees have processes in place to ensure that their internal models have been adequately validated by suitably qualified parties independent of the development process to ensure that they are conceptually sound and adequately capture all material risks. This validation must be conducted when the model is initially developed and when any significant changes are made to the model. The validation must also be conducted on a periodic basis but especially where there have been any significant structural changes in the market or changes to the composition of the portfolio which might lead to the model no longer being adequate. More extensive model validation is particularly important where specific risk is also modelled and is required to meet the further specific risk criteria. As techniques and best practices evolve, conventional bank licensees must avail themselves of these advances. Model validation must not be limited to back-testing, but must, at a minimum, also include the following:

CA-15.1.1

The requirements in this Chapter are applicable to Bahraini conventional bank licensees.

Scope and Factors Leading to Leverage

Leverage Ratio Requirement and Computational Details

General Measurement Principles

On-balance Sheet Exposures

Securities Financing Transaction Exposures (SFTs)

General Treatment (Bank Acting as Principal)

Sale Accounting Transactions

Bank Acting as Agent

Derivative Exposures

Bilateral Netting

Treatment of Related Collateral

Treatment of Cash Variation Margin

Add-on Factors for Determining PFE

Treatment of Clearing Services

Additional Treatment for Written Credit Derivatives

Off-balance Sheet Items (OBS)

Bilateral Netting

Securities Financing Transaction Exposures 37

Off-balance Sheet Items

CA-15.5.1

Bahraini Conventional Bank Licensees shall implement the requirements of this Module with effect from 30th June 2019. Quarterly reporting of leverage ratio to the CBB and in public disclosures shall commence with reference to the quarter ending on 30th June 2019.

CA-15.6.1

A higher ratio may be required for any Bahraini conventional bank licensee if warranted by its risk profile or circumstances. The CBB may use stress testing as a complementing tool to adjust the leverage ratio requirement at the macro- and/or individual Bahraini conventional bank licensee-level.

CA-15.6.2

The leverage ratio can be used for both micro- and macro prudential surveillance; for example, as a macro prudential tool, a consistent leverage ratio can be applied for all Bahraini conventional bank licensees as an indicator for monitoring vulnerability. As a micro prudential tool, it can be used as a trigger for increased surveillance or capital requirements for specific licensees under the supervisory review process.

CA-15.7.1

The content of this Section is applicable to all retail branches of foreign banks.

Measurement

Gearing Limit

CA-16.1.1

This Section provides conventional bank licensees with guidance on prudent valuation for positions that are accounted for at fair value, whether they are in the trading book or in the banking book. This guidance is especially important for positions without actual market prices or observable inputs to valuation, as well as less liquid positions which, although they will not be excluded from the trading book solely on grounds of lesser liquidity, raise supervisory concerns about prudent valuation. The valuation guidance set forth below is not intended to require conventional bank licensees to change valuation procedures for financial reporting purposes. The CBB will assess a conventional bank licensee's valuation procedures for consistency with this guidance. One factor in the CBB's assessment of whether a conventional bank licensee must take a valuation adjustment for regulatory purposes under Paragraphs CA-16.1.11A to CA-16.1.13 is the degree of consistency between the conventional bank licensee's valuation procedures and these guidelines.

CA-16.1.2

A framework for prudent valuation practices must at a minimum include the following:

Systems and Controls

Valuation Methodologies

CA-16.1.12

Bearing in mind that the assumptions made about liquidity in the market risk capital charge may not be consistent with the conventional bank licensee's ability to sell or hedge out less liquid positions, where appropriate, conventional bank licensees must take an adjustment to the current valuation of these positions, and review their continued appropriateness on an on-going basis. Reduced liquidity may have arisen from market events. Additionally, close-out prices for concentrated positions and/or stale positions must be considered in establishing the adjustment. Conventional bank licensees must consider all relevant factors when determining the appropriateness of the adjustment for less liquid positions. These factors may include, but are not limited to, the amount of time it would take to hedge out the position/risks within the position, the average volatility of bid/offer spreads, the availability of independent market quotes (number and identity of market makers), the average and volatility of trading volumes (including trading volumes during periods of market stress), market concentrations, the aging of positions, the extent to which valuation relies on marking-to-model, and the impact of other model risks not included in Paragraph CA-16.1.11A.

CA-16.1.12A

For complex products including, but not limited to, securitisation exposures and n-th-to-default credit derivatives, conventional bank licensees must explicitly assess the need for valuation adjustments to reflect two forms of model risk: the model risk associated with using a possibly incorrect valuation methodology; and the risk associated with using unobservable (and possibly incorrect) calibration parameters in the valuation model.

CA-16.1.13

The adjustment to the current valuation of less liquid positions made under Paragraph CA-16.1.12 must impact Tier 1 regulatory capital and may exceed those valuation adjustments made under financial reporting standards and Paragraphs CA-16.1.10 and CA-16.1.11.