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CA-9.11.4

For banks applying the surcharge, the total market risk measure will equal a minimum of three times the internal model's general and specific risk measure plus a surcharge in the amount of either:

(a) The specific risk portion of the value-at-risk measure which should be isolated26; or, at the bank's option,
(b) The value-at-risk measures of sub-portfolios of debt and equity positions that contain specific risk27.

Banks using option (b) above are required to identify their sub-portfolios structure ahead of time and should not change it without the Central Bank's prior written consent.


26Techniques for separating general market risk and specific risk would include the following:

Equities:

The market should be identified with a single factor that is representative of the market as a whole, for example, a widely accepted broadly based stock index for the country concerned.

Banks that use factor models may assign one factor of their model, or a single linear combination of factors, as their general market risk factor.

Bonds:

The market should be identified with a reference curve for the currency concerned. For example, the curve might be a government bond yield curve or a swap curve; in any case, the curve should be based on a well-established and liquid underlying market and should be accepted by the market as a reference curve for the currency concerned.

Banks may select their own technique for identifying the specific risk component of the value-at-risk measure for purposes of applying the multiplier of 4. Techniques would include:

•   Using the incremental increase in value-at-risk arising from the modelling of specific risk factors;
•   Using the difference between the value-at-risk measure and a measure calculated by substituting each individual equity position by a representative index; or
•   Using an analytic separation between general market risk and specific risk by a particular model.

27 This would apply to sub-portfolios containing positions that would be subject to specific risk under the standardised approach.

October 07