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Minimum Capital Requirements for Market Risk

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Minimum Capital Requirements for Market Risk This standard has been integrated into the consolidated Basel Framework: https://www.bis.org/basel_framework/ Basel Committee on Banking Supervision Minimum capital requirements for market risk January 2019 (rev. February 2019) This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2019. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9259-237-0 (online) Contents Minimum capital requirements for market risk ..................................................................................................................... 1 Introduction ......................................................................................................................................................................................... 1 RBC25 Boundary between the banking book and the trading book ....................................................................... 3 Scope of the trading book .......................................................................................................................................... 3 Standards for assigning instruments to the regulatory books ..................................................................... 3 Supervisory powers ........................................................................................................................................................ 5 Documentation of instrument designation .......................................................................................................... 6 Restrictions on moving instruments between the regulatory books ......................................................... 6 Treatment of internal risk transfers ......................................................................................................................... 7 MAR10 Market risk terminology ............................................................................................................................................. 10 General terminology .................................................................................................................................................... 10 Terminology for financial instruments ................................................................................................................. 10 Terminology for market risk capital requirement calculations ................................................................... 10 Terminology for risk metrics ..................................................................................................................................... 11 Terminology for hedging and diversification .................................................................................................... 11 Terminology for risk factor eligibility and modellability ............................................................................... 11 Terminology for internal model validation ......................................................................................................... 12 Terminology for credit valuation adjustment risk ............................................................................................ 12 MAR11 Definitions and application of market risk .......................................................................................................... 13 Definition and scope of application ...................................................................................................................... 13 Methods of measuring market risk ........................................................................................................................ 15 MAR12 Definition of a trading desk ...................................................................................................................................... 16 MAR20 Standardised approach: general provisions and structure ........................................................................... 19 General provisions ........................................................................................................................................................ 19 Structure of the standardised approach .............................................................................................................. 19 Definition of correlation trading portfolio .......................................................................................................... 20 MAR21 Standardised approach: sensitivities-based method ...................................................................................... 21 Main concepts of the sensitivities-based method ........................................................................................... 21 Instruments subject to each component of the sensitivities-based method ....................................... 21 Process to calculate the capital requirement under the sensitivities-based method ........................ 22 Sensitivities-based method: risk factor and sensitivity definitions ........................................................... 26 Sensitivities-based method: definition of delta risk buckets, risk weights and correlations .......... 37 Minimum capital requirements for market risk iii Sensitivities-based method: definition of vega risk buckets, risk weights and correlations ........... 51 Sensitivities-based method: definition of curvature risk buckets, risk weights and correlations . 52 MAR22 Standardised approach: default risk capital requirement ............................................................................. 54 Main concepts of default risk capital requirements ........................................................................................ 54 Instruments subject to the default risk capital requirement ........................................................................ 54 Overview of DRC requirement calculation .......................................................................................................... 54 Default risk capital requirement for non-securitisations ............................................................................... 55 Default risk capital requirement for securitisations (non-CTP) ................................................................... 59 Default risk capital requirement for securitisations (CTP) ............................................................................. 61 MAR23 Standardised approach: residual risk add-on .................................................................................................... 64 Introduction ..................................................................................................................................................................... 64 Instruments subject to the residual risk add-on ............................................................................................... 64 Calculation of the residual risk add-on ................................................................................................................ 65 MAR30 Internal models approach: general provisions .................................................................................................. 66 General criteria ............................................................................................................................................................... 66 Qualitative standards ................................................................................................................................................... 67 Model validation standards ...................................................................................................................................... 69 External validation ......................................................................................................................................................... 70 Stress testing ................................................................................................................................................................... 70 MAR31 Internal models approach: model requirements .............................................................................................. 72 Specification of market risk factors ........................................................................................................................ 72 Model eligibility of risk factors ................................................................................................................................ 74 MAR32 Internal models approach: backtesting and P&L attribution test requirements ................................. 81 Backtesting requirements .......................................................................................................................................... 81 PLA test requirements ................................................................................................................................................. 83 Treatment for exceptional situations .................................................................................................................... 87 MAR33 Internal models approach: capital requirements calculation....................................................................... 89 Calculation of expected shortfall ............................................................................................................................ 89 Calculation
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