CA-14.11.9

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Subject to CBB approval, a bank may incorporate its correlation trading portfolio in an internally developed approach that adequately captures not only incremental default and migration risks, but all price risks ("comprehensive risk measure"). The value of such products is subject in particular to the following risks which must be adequately captured:

(a) The cumulative risk arising from multiple defaults, including the ordering of defaults, in tranched products;

(b) Credit spread risk, including the gamma and cross-gamma effects;

(c) Volatility of implied correlations, including the cross effect between spreads and correlations;

(d) Basis risk, including both

(i) The basis between the spread of an index and those of its constituent single names; and

(ii) The basis between the implied correlation of an index and that of bespoke portfolios;

(e) Recovery rate volatility, as it relates to the propensity for recovery rates to affect tranche prices; and

(f) To the extent the comprehensive risk measure incorporates benefits from dynamic hedging, the risk of hedge slippage and the potential costs of rebalancing such hedges.

The approach must meet all of the requirements specified in Paragraphs CA-14.11.8, CA-14.11.10 and CA-14.11.11. This exception only applies to banks that are active in buying and selling these products. For the exposures that the bank does incorporate in this internally developed approach, the bank will be required to subject them to the capital charge for specific risk according to the standardised measurement method or the treatment according to Paragraph CA-14.11.8, as applicable. It must, however, incorporate them in both the value-at-risk and stressed value-at-risk measures.

Added: January 2012