Banks Act, 1990 (Act No. 94 of 1990) Regulations Regulations relating to Banks' Financial Instrument Trading Chapter 4 : Position Risk 15. Method 2: Calculation of position risk: building-block method

 

 

Table 4

 

[Regulation 15(1)(a) and Table 4 substituted by regulation 2 of Notice No. R. 1006, GG 22737, dated 5 October 2001]

 

 

Table 5

 

 

 

modified duration = duration (D) / (1 + r)

 

where:

 

 

where:

 

 

Table 6

 

 

 

 

Table 7

 

 

and

 

 

Table 8

 

 

 

 

Table 9

 

 

* (Working day zero shall be the working day on which a bank becomes unconditionally committed to accepting a known quantity of securities at an agreed price); and

 

 

 

 

 

A bank shall assign its net positions to the appropriate categories set out in Table 4 of the Regulations, which table relates to interest-rate products in terms of the building block method, on the basis of the net positions' residual maturities. The specific risk- capital requirement shall be determined by multiplying the absolute values of the net positions by the respective risk weights.

 

When a credit-derivative contract is concluded in respect of a single reference asset or reference entity, the protection buyer has' a short position in the reference asset or reference entity, whereas the protection seller has a long position in the reference asset or reference entity.

 

For the specific-risk position to be reported as a qualifying debt item, the reference asset shall meet the standard conditions for a qualifying debt item relating to interest-rate products.

 

When the protection seller provides cash or collateral to the protection buyer, the protection seller has to create a long specific-risk position in respect of such collateral.

 

With respect to multiple-name structures, the level of specific risk is dependent upon the structure concerned.

 

In the case of a proportional structure, the reference assets or reference entities shall be risk-weighted according to the assets/entities in the basket in the same proportion as determined in the credit-derivative contract.

 

Netting of trading-book positions

 

Banks may net notional positions in reference assets created by credit-derivative contracts with positions in underlying assets or other notional positions created by other similar types of credit derivative contract if all the following conditions are met:

 

The specific risk-capital requirement arising from different credit derivative contracts shall not be netted.

 

Offsetting positions in the trading-book

 

Offsetting positions encompass long and short credit-derivative positions relating to a reference asset or reference entity, which positions are matched in all respects specified in the aforementioned paragraph relating to netting of trading-book positions, except that the long and short credit-derivative positions have different maturities.

 

When a bank has offsetting positions in its trading book, that is, when—

a single specific risk-capital requirement shall be maintained in respect of the position with the higher capital requirement.

 

Reporting requirements

 

The manner in which credit default-swap contracts, total return-swap contracts and credit-linked note contracts shall be reported is set out in further detail below.

 

(i)        Credit default-swap contracts

 

A credit default-swap contract shall be reported as a notional position in the reference asset or reference entity and shall be subject to a specific-risk charge only. For credit-default products, there will be no requirement for general market risk relating to the reference asset or reference entity.

 

A bank that is a protection buyer in a first-to-default product shall record a short position in a reference asset or reference entity of its choice.

 

A bank that is a protection seller in a first-to-default product shall record a long position in respect of each reference asset or reference entity in the basket, since the protection seller has no knowledge as to which asset or entity could default. The risk weightings shall be applied to the maximum payment in terms of the credit-derivative contract for each of the reference assets or reference entities in the basket. The total capital requirement for this type of product will be limited to an amount equal to a deduction from capital.

 

 

A total return-swap contract shall be reported as two legs to a single transaction.

 

The first leg to the transaction shall be a notional position in the reference asset, to which reference asset the general-risk requirement and the specific-risk requirement shall apply.

 

The second leg to the transaction shall represent the interest payments in terms of the swap contract and shall be reported as a notional position in a government bond with the appropriate fixed or floating rate.

 

The protection buyer shall report a short position in the reference asset and a long position as a financing component.

 

The protection seller shall report a long position in the reference asset and a short position as a financing component.

 

When a total-return swap is referenced to multiple reference assets, and the return on assets is exchanged according to the proportions of the assets in the basket, the reporting bank shall record long or short positions in all the reference assets according to the proportions underlying the swap contract.

 

(iii)        Credit linked-note contracts

 

A credit linked-note contract shall be reported as a position in the note itself with an embedded credit-default swap.

 

A bank that is a protection seller shall calculate a specific-risk requirement in respect of the issuer of the note.

 

The embedded credit-default swap creates a notional position in the specific risk of the reference asset with no general market-risk requirement.

 

(b)        General risk

 

A bank shall calculate its capital requirement for general risk in accordance with the directives and instructions for interest-rate products set out in subregulation (1)(b).

 

Generally, credit default-swap instruments do not create a general market-risk position for either the protection seller or the protection buyer, since these products relate to the potential default of one counterparty only. Consequently, there is no risk exposure to market-price movements.

 

Periodic premium or interest payments due in terms of the credit- default swap shall be reported as a notional position in a government bond with the appropriate fixed or floating rate.

 

Total-return products create a long or short position in the reference asset, as well as a short or long position in the notional bond representing the interest rate leg of the contract. These positions shall be incorporated into the calculation of the general-risk requirement.

 

For a protection seller, a credit-linked note creates a general market-risk position in respect of the coupon or interest rate of the note.

 

No general market-risk requirement shall be calculated in respect of the embedded credit-default swap in a credit-linked note.

 

[Regulation 15(5) substituted by regulation 6(a) of Notice No. R. 1465, GG 24088, dated 22 November 2002]

 

(6)        In the case of other investments in—

[Regulation 15(6) inserted by regulation 6(b) of Notice No. R. 1465, GG 24088, dated 22 November 2002]