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  • CA-9.6 CA-9.6 Derivatives

    • 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.

      January 2015

    • 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.

      January 2015

    • 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.

      January 2015

    • 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.

      January 2015

    • 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.

      January 2015