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  • Specific Risk on Positions in Equity Indices

    • CA-10.5.4

      Positions in highly liquid equity indices whether they arise directly or through derivatives, attract a 2% capital charge in addition to the general market risk, to cover factors such as execution risk.

      January 2015

    • CA-10.5.5

      For positions in equity indices not regarded as highly liquid, the specific risk capital charge is the highest specific risk charge that would apply to any of its components, as set out in Section CA-10.3.

      January 2015

    • CA-10.5.6

      In the case of the futures-related arbitrage strategies set out below, the specific risk capital charge described above may be applied to only one index with the opposite position exempt from a specific risk capital charge. The strategies are as follows:

      (a) Where a conventional bank licensee takes an opposite position in exactly the same index, at different dates or in different market centres; and
      (b) Where a conventional bank licensee takes opposite positions in contracts at the same date in different but similar indices, provided the two indices contain at least 90% common components.
      January 2015

    • CA-10.5.7

      Where a conventional bank licensee engages in a deliberate arbitrage strategy, in which a futures contract on a broad-based index matches a basket of stocks, it is allowed to carve out both positions from the standardised methodology on the following conditions:

      (a) The trade has been deliberately entered into, and separately controlled; and
      (b) The composition of the basket of stocks represents at least 90% of the index when broken down into its notional components.

      In such a case, the minimum capital requirement is limited to 4% (i.e. 2% of the gross value of the positions on each side) to reflect divergence and execution risks. This applies even if all of the stocks comprising the index are held in identical proportions. Any excess value of the stocks comprising the basket over the value of the futures contract or vice versa is treated as an open long or short position.

      January 2015