CA-14.5.1
The following minimum quantitative standards will apply for the purpose of calculating the capital charge:
(a) "Value-at-risk " must be computed on a daily basis;
(b) In calculating the value-at-risk , a 99th percentile, one-tailed confidence interval is to be used;
(c) In calculating the value-at-risk , an instantaneous price shock equivalent to a 10-day movement in prices is to be used, i.e., the minimum "holding period" will be ten trading days. Banks may use value-at-risk numbers calculated according to shorter holding periods scaled up to ten days, for example, by the square root of time (for the treatment of options , also see (h) below). A bank using this approach must justify the reasonableness of its approach to the satisfaction of the CBB during the annual model review process preformed by the external auditor;
(d) The minimum historical observation period (sample period) for calculating value-at-risk is one year. For banks which use a weighting scheme or other methods for the historical observation period, the "effective" observation period must be at least one year (i.e., the weighted average time lag of the individual observations cannot be less than 6 months), and the method results in a capital charge at least equivalent to a one year observation period.
The CBB may, as an exceptional case, require a bank to calculate itsvalue-at-risk applying a shorter observation period if, in the CBB's judgement, this is justified by a significant upsurge in price volatility;
The CBB may, as an exceptional case, require a bank to calculate its
(e) Banks must update their data sets no less frequently than once every week and should also reassess them whenever market prices are subject to material changes. The updating process must be flexible enough to allow for more frequent updates;
(f) No particular type of model is prescribed by the CBB. So long as each model used captures all the material risks run by the bank, as set out in Section CA-14.4, banks will be free to use models based, for example, on variance-covariance matrices, historical simulations, or Monte Carlo simulations;
(g) Banks shall have discretion to recognise empirical correlations within broad risk categories (i.e., interest rates, exchange rates, equity prices and commodity prices, including related options volatilities in each risk factor category). Banks are not permitted to recognise empirical correlations across broad risk categories without the prior approval of the CBB. Banks may apply, on a case-by-case basis, for empirical correlations across broad risk categories to be recognised by the CBB, subject to its satisfaction with the soundness and integrity of the bank's system for measuring those correlations;
(h) Banks' models must accurately capture the unique risks associated with options within each of the broad risk categories. The following criteria shall apply to the measurement of options risk:
• Banks' models must capture the non-linear price characteristics of options positions;
• Banks are expected to ultimately move towards the application of a full 10-day price shock to options positions or positions that display option -like characteristics. In the interim period, banks may adjust their capital measure for options risk through other methods, e.g., periodic simulations or stress testing;
• Each bank's risk measurement system must have a set of risk factors that captures the volatilities of the rates and prices underlying the option positions, i.e., vega risk. Banks with relatively large and/or complex options portfolios should have detailed specifications of the relevant volatilities. This means that banks must measure the volatilities of options positions broken down by different maturities.
(i) In addition, a bank must calculate a 'stressed value-at-risk' measure. This measure is intended to replicate a value-at-risk calculation that would be generated on the bank's current portfolio if the relevant market factors were experiencing a period of stress; and should therefore be based on the 10-day, 99th percentile, one-tailed confidence interval value-at-risk measure of the current portfolio, with model inputs calibrated to historical data from a continuous 12-month period of significant financial stress relevant to the bank's portfolio. The period used must be approved by the CBB and regularly reviewed. As an example, for many portfolios, a 12-month period relating to significant losses in 2007/2008 would adequately reflect a period of such stress; although other periods relevant to the current portfolio must be considered by the bank.
(j) As no particular model is prescribed under Paragraph (f) above, different techniques might need to be used to translate the model used for value-at-risk into one that delivers a stressed value-at-risk. For example, banks should consider applying anti-thetic data, or applying absolute rather than relative volatilities to deliver an appropriate stressed value-at-risk. The stressed value-at-risk should be calculated at least weekly.
(k) Each bank must meet, on a daily basis, a capital requirement expressed as the sum of:
• The higher of (1) its previous day's value-at-risk number measured according to the parameters specified in this Section (VaRt-1); and (2) an average of the daily value-at-risk measures on each of the preceding sixty business days (VaRavg), multiplied by a multiplication factor (mc); plus.
• The higher of (1) its latest available stressed-value-at-risk number calculated according to (i) above (sVaRt-1); and (2) an average of the stressed value-at-risk numbers calculated according to (i) above over the preceding sixty business days (sVaRavg), multiplied by a multiplication factor (ms).
Therefore, the capital requirement (c) is calculated according to the following formula:
c =max {VaRt-1; mc · VaRavg} + max { sVaRt-1; ms · sVaRavg}
c =max {VaRt-1; mc · VaRavg} + max { sVaRt-1; ms · sVaRavg}
(l) The multiplication factors mc and ms will be set by the CBB, separately for each individual bank, on the basis of the CBB's assessment of the quality of the bank's risk management system, subject to an absolute minimum of 3 for mc and an absolute minimum of 3 for ms. Banks must add to these factors set by the CBB, a "plus" directly related to the ex-post performance of the model, thereby introducing a built-in positive incentive to maintain the predictive quality of the model. The plus will range from 0 to 1 based on the outcome of the bank's back-testing. The back-testing results applicable for calculating the plus are based on value-at-risk only and not stressed value-at-risk. If the back-testing results are satisfactory and the bank meets all of the qualitative standards referred in Section CA-14.3 above, the plus factor could be zero. Appendix 15 presents in detail the approach to be followed for back-testing and the plus factor. Banks are expected to strictly comply with this approach; and
(m) As stated earlier in Section CA-14.1, banks applying models will also be subject to a capital charge to cover specific risk (as defined under the standardised approach) of interest rate related instruments and equity instruments. The manner in which the specific risk capital charge is to be calculated is set out in Section CA-14.10.
Amended: January 2012
Amended: April 2011
Apr 08
Amended: April 2011
Apr 08