CA-14.5.1
The following minimum quantitative standards 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 must be used;
(c) In calculating the value-at-risk , an instantaneous price shock equivalent to a 10-day movement in prices must be used, i.e., the minimum "holding period" is ten trading days. Conventional bank licensees 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 conventional bank licensee using this approach must justify the reasonableness of its approach to the satisfaction of the CBB during the annual model review process performed by the external auditor;
(d) The minimum historical observation period (sample period) for calculating value-at-risk is one year. For conventional bank licensees 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 aconventional bank licensee to calculate its value-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
(e) Conventional bank licensees must update their data sets no less frequently than once every week and must 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 conventional bank licensee , as set out in Section CA-14.4, conventional bank licensees is free to use models based, for example, on variance-covariance matrices, historical simulations, or Monte Carlo simulations;
(g) Conventional bank licensees must 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). Conventional bank licensees are not permitted to recognise empirical correlations across broad risk categories without the prior approval of the CBB. Conventional bank licensees 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 conventional bank licensee's system for measuring those correlations;
(h) Conventional bank licensees' models must accurately capture the unique risks associated with options within each of the broad risk categories. The following criteria apply to the measurement of options risk:
(i) Conventional bank licensees' models must capture the non-linear price characteristics of options positions;
(ii) Conventional bank licensees must 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, conventional bank licensees may adjust their capital measure for options risk through other methods, e.g., periodic simulations or stress testing;
(iii) Each conventional bank licensee'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. Conventional bank licensees with relatively large and/or complex options portfolios must have detailed specifications of the relevant volatilities. This means that conventional bank licensees must measure the volatilities of options positions broken down by different maturities;
(i) In addition, a conventional bank licensee 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 conventional bank licensee's current portfolio if the relevant market factors were experiencing a period of stress; and must 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 conventional bank licensee'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 conventional bank licensee;
(j) As no particular model is prescribed under Subparagraph (f), 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, conventional bank licensees must 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 must be calculated at least weekly;
(k) Each conventional bank licensee must meet, on a daily basis, a capital requirement expressed as the sum of:
(i) 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 (VaR avg), multiplied by a multiplication factor (mc); plus.
(ii) 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};
Therefore, the capital requirement (c) is calculated according to the following formula:
c =max {VaRt-1; mc · VaRavg} + max { sVaRt-1; ms · sVaRavg};
(l) The multiplication factors mc and ms is set by the CBB, separately for each individual conventional bank licensee , on the basis of the CBB's assessment of the quality of the conventional bank licensee's risk management system, subject to an absolute minimum of 3 for mc and an absolute minimum of 3 for ms. Conventional bank licensees 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 conventional bank licensee'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 conventional bank licensee 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. Conventional bank licensees must strictly comply with this approach; and
(m) As stated earlier in Section CA-14.1, conventional bank licensees applying models are also 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.
January 2015