CA-1.4 CA-1.4 Measuring market risks
Trading book
CA-1.4.1
The trading book means the bank's positions in financial instruments (including off-balance sheet instruments that are intentionally held for short-term resale and/or which are taken on by the bank with the intention of benefiting in the short-term from actual and/or expected differences between their buying and selling prices, or from other price variations, and positions in financial instruments arising from matched principal brokering and market making). Treatment of risks associated with any option transactions should be agreed in advance with the Central Bank, who will consider the issue on a case by case basis.
October 07CA-1.4.2
Each bank should agree to a written policy statement with the Central Bank as to which activities are normally considered trading and constitute part of the trading book. Trading book's definition should be consistently applied by the bank from year to year.
October 07CA-1.4.3
It is expected that the trading activities will be managed and monitored by a separate unit and that such activities should be identifiable because of their intent, as defined in Paragraph CA-1.4.1 above.
October 07Equity risk
CA-1.4.4
The capital charges for equities will apply based on the current market values of items in a bank's trading book.
October 07Foreign exchange and commodities risk
CA-1.4.5
The capital charges for foreign exchange risk and for commodity risk will apply to a bank's total currency and commodity positions, with the exception of structural foreign exchange positions in accordance with Section CA-5.3 of these regulations.
October 07Exemptions
CA-1.4.6
Banks will be allowed certain de minimis exemptions from the capital requirements for foreign exchange risk, as described in Section CA-5.2 of these regulations. For the time being, there shall be no exemptions from the trading requirements, or from the capital requirements for commodity risk.
October 07Bank's own fund and Profit and Loss Sharing Investment Accounts (PSIA)
CA-1.4.7
Banks must compute capital charges for own funds subject to market risk, as well as those of the PSIA. For the purpose of computing the capital adequacy ratio, 50% of the bank's market risk weighted assets relating to the PSIA (restricted and unrestricted) must be included in accordance with AAOIFI's Statement on Purpose and Calculation of the Capital Adequacy Ratio for Islamic Banks.
October 07Consolidation
CA-1.4.8
As with the credit risk capital requirements, the market risk capital requirements apply on a worldwide consolidated basis. Only a bank, which is running a global consolidated book, may apply the offsetting rules contained in the remainder of these regulations, on a consolidated basis with the prior written agreement of the Central Bank. However, where it would not be prudent to offset or net positions within the group, for example where there are obstacles to the quick repatriation of profits from a foreign subsidiary or where there are legal and procedural difficulties in carrying out the timely management of risks on a consolidated basis, the Central Bank will require the bank to take individual positions into account without any offsetting.
October 07CA-1.4.9
Notwithstanding that the market risk capital requirements apply on a worldwide consolidated basis, the Central Bank also monitors the market risks of banks on a non-consolidated basis to ensure that significant imbalances within a group do not escape supervision. The Central Bank is particularly vigilant to ensure that banks do not pass positions on reporting dates in such a way as to escape measurement.
October 07Approach to measurement
CA-1.4.10
For the measurement of their market risks, banks will measure the risks in a standardised manner, using the measurement framework described in Chapters CA-4 to CA-6.
October 07CA-1.4.11
The standardised methodology uses a 'building block' in which the capital charge for each risk Category is determined separately. For equity positions risk, separate capital charge for specific risk and the general market risk arising from these positions are calculated. The specific market risk is defined as the risk of loss caused by an adverse price movement of a security/ units due principally to factors related to the issuer. The general market risk is defined as the risk of loss arising from adverse changes in aggregate market prices. For commodities and foreign exchange, there is only one general market risk capital requirement.
October 07CA-1.4.12
All transactions, including forward sales and purchases, shall be included in the calculation of capital requirements as from the date on which they were entered into.
October 07Monitoring
CA-1.4.13
Formal reporting, to the Central Bank, of the market risk exposure and capital adequacy shall take place as at the end of each calendar quarter. The returns relating to any quarter should be submitted to the Central Bank by the 20th day of the first month of the following quarter. Furthermore, banks are expected to manage their market risk in such a way that the capital requirements for market risk are being met on a continuous basis (i.e. at the close of each business day and not merely at the end of each calendar quarter). Banks are also expected to maintain strict risk management systems to ensure that their intra-day exposures are not excessive.
October 07CA-1.4.14
Banks' daily compliance with the capital requirements for market risk will be verified by the independent risk management department and the internal auditor. It is expected that the external auditors will perform appropriate tests of the bank's daily compliance with the capital requirements for market risk. Where a bank fails to meet the minimum capital requirements for market risk on any business day, the Central Bank must be informed in writing. The Central Bank will then seek to ensure that the bank takes immediate measures to rectify the situation.
October 07CA-1.4.15
Besides what is stated in Paragraph CA-1.4.14 above, the Central Bank will consider a number of other appropriate and effective measures to ensure that banks do not 'window dress' by showing significantly lower market risk positions on reporting dates.
October 07
