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.