General Market Risk for Sukuk — Duration Method
CA-5.4.3A
With the CBB's prior written approval, an
Islamic bank licensee with the necessary capability may use the more accurate "duration" method. This method calculates the price sensitivity of each position of Sukuk held separately. This method must be used consistently by anIslamic bank licensee , unless a change is approved by the CBB. The steps involved in the calculation using this method are outlined in Paragraphs CA-5.4.3B to CA-5.4.3D.January 2015CA-5.4.3B
Calculate the price sensitivity of each Sukuk position (called "weighted positions") in terms of a change in profit rates between 0.6 and 1 percentage points depending on the maturity of the Sukuk and subject to supervisory guidance. Slot the resulting sensitivity measures into a duration-based ladder with 13 time bands as set out in Table 1 below. Subject long positions in each time band to a 5% vertical disallowance on the smaller of offsetting positions (i.e. a matched position) in each time band.
Table 1 Duration Method: Time Bands and Assumed Changes in Yield
Zone Time Band (Expected profit rate >=3%) Time Band (Expected profit rate <3%) Assumed Change in Expected Yield (%) Zone 1 1 month or less 1 month or less 1.00 >11–3 months >1–3 months 1.00 >3–6 months >3–6 months 1.00 >6–12 months >6–12 months 1.00 Zone 2 >1–2 years >1.0–1.9 years 0.90 >2–3 years >1.9–2.8 years 0.80 >3–4 years >2.8–3.6 years 0.75 Zone 3 >4–5 years >3.6–4.3 years 0.75 >5–7 years >4.3–5.7 years 0.70 >7–10 years >5.7–7.3 years 0.65 >10–15 years >7.3–9.3 years 0.60 >15–20 years >9.3–10.6 years 0.60 >20 years >10.6–12 years 0.60 >12–20 years 0.60 >20 years 0.60 January 2015CA-5.4.3C
From the results of the above calculations, two sets of weighted positions — the net long position in each time band — are produced. The maturity ladder is then divided into three zones, as follows: zone 1, 0–1 year; zone 2, >1–4 years; and zone 3, >4 years.
Islamic bank licensees are required to conduct two further rounds of offsetting: (i) between the net time band positions in each of the three zones; and (ii) between the net positions across the three different zones (i.e. between adjacent zones and non-adjacent zones). The residual net positions are then carried forward and offset against opposite positions in other zones when calculating net positions between zones 2 and 3, and 1 and 3. The offsetting is subject to a scale of disallowances (horizontal disallowances) expressed as a fraction of matched position, subject to a second set of disallowance factors (Table 2).Table 2 Duration Method: Horizontal Disallowances
Zone Time Band Within the Zone Between Adjacent Zones Between Zones 1 and 3 Zone 1 <=1 month 40% 40% 100% >1–3 months >3–6 months >6–12 months Zone 2 >1–2 years 30% >2–3 years 40% >3–4 years Zone 3 >4–5 years 30% >5–7 years >7–10 years >10–15 years >15–20 years >20 years January 2015CA-5.4.3D
The general
market risk capital charge is the aggregation of three charges: net position, vertical disallowances and horizontal disallowances (Table 3 below).Table 3 General Risk Capital Charge Calculation
The sum of: Net position Net long weighted position x100% Vertical disallowances Matched weighted positions (i.e. the smaller of the absolute value of the short and long positions with each time band) in all maturity bands x 10% Horizontal disallowances Matched weighted positions within Zone 1 x 40% Matched weighted positions within Zone 2 x 30% Matched weighted positions within Zone 3 x 30% Matched weighted positions between Zones 1 & 2 x 40% Matched weighted positions between Zones 2 & 3 x 40% Matched weighted positions between Zones 1 & 3 x100% January 2015
