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  • CA-10.1 CA-10.1 Introduction

    • 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.

      January 2015

    • 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:

      (a) Common stocks, whether voting or non-voting;
      (b) Depository receipts (which should be included in the measurement framework in terms of the underlying shares);
      (c) Convertible preference securities (non-convertible preference securities are treated as bonds);
      (d) Convertible debt securities which convert into equity instruments and are, therefore, treated as equities (see Paragraph CA-10.1.3 below);
      (e) Commitments to buy or sell equity securities; and
      (f) Derivatives based on the above instruments.
      January 2015

    • CA-10.1.3

      Convertible debt securities must be treated as equities where:

      (a) The first date at which the conversion may take place is less than three months ahead, or the next such date (where the first date has passed) is less than a year ahead; and
      (b) The convertible is trading at a premium of less than 10%, where the premium is defined as the current marked-to-market value of the convertible less the marked-to-market value of the underlying equity, expressed as a percentage of the latter.

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

      January 2015

    • 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.

      January 2015

    • 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.

      January 2015

    • 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.

      January 2015

    • 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.

      January 2015