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  • CA-9.2 CA-9.2 Specific Risk Calculation

    • 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.

      January 2015

    • 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.

      January 2015

    • 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:

      Categories External credit assessment Specific risk capital charge
      Government (including GCC governments) AAA to AA-

      A+ to BBB-








      BB+ to B-

      Below B-

      Unrated       		0%

      0.25% (residual term to final maturity 6 months or less)

      1.00% (residual term to final maturity greater than 6 and up to and including 24 months)

      1.60% (residual term to final maturity exceeding 24 months)

      8.00%

      12.00%

      8.00%
      Qualifying   0.25% (residual term to final maturity 6 months or less)

      1.00% (residual term to final maturity greater than 6 and up to and including 24 months)

      1.60% (residual term to final maturity exceeding 24 months)
      Other Similar to credit risk charges under the standardised approach, e.g.:

      BB+ to BB-

      Below BB-

      Unrated       		8.00%

      12.00%

      8.00%
      January 2015

    • 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.

      January 2015

    • CA-9.2.5

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

      January 2015

    • 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.

      January 2015

    • 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:

      (a) Rated investment grade by at least two internationally recognised credit rating agencies (to be agreed with the CBB);
      (b) Deemed to be of comparable investment quality by the reporting bank, provided that the issuer is rated investment grade by at least two internationally recognised credit rating agencies (to be agreed with the CBB);
      (c) Rated investment grade by one credit rating agency and not less than investment grade by any internationally recognised credit rating agencies (to be agreed with the CBB); or
      (d) Unrated (subject to the approval of the CBB), but deemed to be of comparable investment quality by the reporting bank and where the issuer has securities listed on a recognised stock exchange, may also be included.
      January 2015

    • Specific Risk Rules for Unrated Debt Securities

      • CA-9.2.8

        Unrated securities may be included in the "qualifying" category when they are (subject to CBB's approval) unrated, but deemed to be of comparable investment quality by the reporting bank, and the issuer has securities listed on a recognised stock exchange.

        January 2015

    • Specific Risk Rules for Non-qualifying Issuers

      • CA-9.2.9

        Instruments issued by a non-qualifying issuer receive the same specific risk charge as a non-investment grade corporate borrower under the standardised approach for credit risk under Chapter CA-4.

        January 2015

      • CA-9.2.10

        However, since this may in certain cases considerably underestimate the specific risk for debt instruments which have a high yield to redemption relative to government debt securities, CBB will have the discretion, on a case by case basis:

        (a) To apply a higher specific risk charge to such instruments; and/or
        (b) To disallow offsetting for the purposes of defining the extent of general market risk between such instruments and any other debt instruments.
        January 2015

      • CA-9.2.11

        In that respect, securitisation exposures subject to the securitisation framework set forth in Chapter CA-6 (e.g. equity tranches that absorb first loss), as well as securitisation exposures that are unrated liquidity lines or letters of credit must be subject to a capital charge that is no less than the charge set forth in the securitisation framework.

        January 2015

    • Specific Risk Rules for Positions Covered under the Securitisation Framework

      • CA-9.2.11A

        The specific risk of securitisation positions as defined in Paragraphs CA-6.1.1 to CA-6.1.6 which are held in the trading book is to be calculated according to the method used for such positions in the banking book unless specified otherwise below. To that effect, the risk weight has to be calculated as specified below and applied to the net positions in securitisation instruments in the trading book. The total specific risk capital charge for the correlation trading portfolio is to be computed according to Paragraph CA-9.2.17, and the total specific risk capital charge for securitisation exposures is to be computed according to Paragraph CA-9.1.4.

        January 2015

      • CA-9.2.11B

        The specific risk capital charges for positions covered under the standardised approach for securitisation exposures are defined in the table below. These charges must be applied by conventional bank licensees using the standardised approach for credit risk. For positions with long-term ratings of B+ and below and short-term ratings other than A-1/P-1, A-2/P-2, A-3/P-3, a 1,250% risk weighting as defined in Paragraph CA-6.4.8 is required. A 1,250% weighting is also required for unrated positions with the exception of the circumstances described in Paragraphs CA-6.4.12 to CA-6.4.16. The operational requirements for the recognition of external credit assessments outlined in Paragraph CA-6.4.6 apply.

        January 2015

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

      External Credit Assessment AAA to AA- A-1/P-1 A+ to A- A-2/P-2 BBB+ BBB- A-3/P-3 BB+ to BB- Below BB- and below A-3/P-3 or unrated
      Securitisation Exposures 1.6% 4% 8% 28% Deduction
      Re-securitisation Exposures 3.2% 8% 18% 52% Deduction
      January 2015

      • CA-9.2.11C

        The specific risk capital charges for unrated positions under the securitisation framework as defined in Paragraphs CA-6.1.1 to CA-6.1.6 must be calculated as set out below, subject to CBB approval. The capital charge can be calculated as 12% of the weighted average risk weight that would be applied to the securitised exposures under the standardised approach, multiplied by a concentration ratio. If the concentration ratio is 12.5 or higher the position has to be deducted from capital as defined in Paragraph CA-6.4.2. This concentration ratio is equal to the sum of the nominal amounts of all the tranches divided by the sum of the nominal amounts of the tranches junior to or pari passu with the tranche in which the position is held including that tranche itself.

        The resulting specific risk capital charge must not be lower than any specific risk capital charge applicable to a rated more senior tranche. If a conventional bank licensee is unable to determine the specific risk capital charge as described above or prefers not to apply the treatment described above to a position, it must deduct that position from capital.

        January 2015

      • CA-9.2.11D

        A position subject to deduction according to Paragraphs CA-9.2.11B to CA-9.2.11C may be excluded from the calculation of the capital charge for general market risk.

        January 2015

      • CA-9.2.11E

        [This Paragraph was deleted in January 2015.]

        January 2015

    • Specific Risk Capital Charges for Positions Hedged by Credit Derivatives

      • CA-9.2.12

        Full allowance will be recognised when the values of two legs (i.e. long and short) always move in the opposite direction and broadly to the same extent. This would be the case in the following situations:

        (a) The two legs consist of completely identical instruments; or
        (b) A long cash position is hedged by a total rate of return swap (or vice versa) and there is an exact match between the reference obligation and the underlying exposure (i.e. the cash position)46.

        In these cases, no specific risk capital requirement applies to both sides of the position.

        46 The maturity of the swap itself may be different from that of the underlying exposure.

        January 2015

      • CA-9.2.13

        An 80% offset will be recognised when the value of two legs (i.e. long and short) always moves in the opposite direction but not broadly to the same extent. This would be the case when a long cash position is hedged by a credit default swap or a credit linked note (or vice versa) and there is an exact match in terms of the reference obligation, the maturity of both the reference obligation and the credit derivative, and the currency to the underlying exposure. In addition, key features of the credit derivative contract (e.g. credit event definitions, settlement mechanisms) should not cause the price movement of the credit derivative to materially deviate from the price movements of the cash position. To the extent that the transaction transfers risk (i.e. taking account of restrictive payout provisions such as fixed payouts and materiality thresholds), an 80% specific risk offset will be applied to the side of the transaction with the higher capital charge, while the specific risk requirement on the other side will be zero.

        January 2015

      • CA-9.2.14

        Partial allowance will be recognised when the value of the two legs (i.e. long and short) usually moves in the opposite direction. This would be the case in the following situations:

        (a) The position is captured in Paragraph CA-9.2.12 under (b), but there is an asset mismatch between the reference obligation and the underlying exposure. Nonetheless, the position meets the requirements in Paragraph CA-4.5.3 (g);
        (b) The position is captured in Paragraph CA-9.2.12 under (a) or CA-9.2.13 but there is a currency or maturity mismatch47 between the credit protection and the underlying asset; or
        (c) The position is captured in Paragraph CA-9.2.13 but there is an asset mismatch between the cash position and the credit derivative. However, the underlying asset is included in the (deliverable) obligations in the credit derivative documentation.

        47 Currency mismatches should feed into the normal reporting of foreign exchange risk.

        January 2015

      • CA-9.2.15

        In each of these cases in Paragraphs CA-9.2.12 to CA-9.2.14, the following rule applies. Rather than adding the specific risk capital requirements for each side of the transaction (i.e. the credit protection and the underlying asset) only the higher of the two capital requirements will apply.

        January 2015

      • CA-9.2.16

        In cases not captured in Paragraphs CA-9.2.12 to CA-9.2.14, a specific risk capital charge must be assessed against both sides of the position.

        January 2015

      • CA-9.2.17

        An n-th-to-default credit derivative is a contract where the payoff is based on the n-th asset to default in a basket of underlying reference instruments. Once the n-th default occurs the transaction terminates and is settled:

        (a) The capital charge for specific risk for a first-to-default credit derivative is the lesser of (1) the sum of the specific risk capital charges for the individual reference credit instruments in the basket, and (2) the maximum possible credit event payment under the contract. Where a conventional bank licensee has a risk position in one of the reference credit instruments underlying a first-to-default credit derivative and this credit derivative hedges the conventional bank licensee's risk position, the conventional bank licensee is allowed to reduce with respect to the hedged amount both the capital charge for specific risk for the reference credit instrument and that part of the capital charge for specific risk for the credit derivative that relates to this particular reference credit instrument. Where a conventional bank licensee has multiple risk positions in reference credit instruments underlying a first-to-default credit derivative this offset is allowed only for that underlying reference credit instrument having the lowest specific risk capital charge;
        (b) The capital charge for specific risk for an n-th-to-default credit derivative with n greater than one is the lesser of (1) the sum of the specific risk capital charges for the individual reference credit instruments in the basket but disregarding the (n-1) obligations with the lowest specific risk capital charges; and (2) the maximum possible credit event payment under the contract. For n-th-to-default credit derivatives with n greater than 1 no offset of the capital charge for specific risk with any underlying reference credit instrument is allowed;
        (c) If a first or other n-th-to-default credit derivative is externally rated, then the protection seller must calculate the specific risk capital charge using the rating of the derivative and apply the respective securitisation risk weights as specified in Paragraph CA-9.2.11B; and
        (d) The capital charge against each net n-th-to-default credit derivative position applies irrespective of whether the conventional bank licensee has a long or short position, i.e. obtains or provides protection.
        January 2015