A revised version of this standard was published in January 2019. https://www.bis.org/bcbs/publ/d457.pdf Basel Committee on Banking Supervision STANDARDS Minimum capital requirements for market risk January 2016 A revised version of this standard was published in January 2019. https://www.bis.org/bcbs/publ/d457.pdf This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2015. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9197-399-6 (print) ISBN 978-92-9197-416-0 (online) A revised version of this standard was published in January 2019. https://www.bis.org/bcbs/publ/d457.pdf Minimum capital requirements for Market Risk Contents Preamble ............................................................................................................................................................................................... 5 Minimum capital requirements for market risk ..................................................................................................................... 5 A. The boundary between the trading book and banking book and the scope of application of the minimum capital requirements for market risk ........................................................................................................... 5 1. Scope of application and methods of measuring market risk ...................................................................... 5 2. Definition of the trading book ................................................................................................................................... 6 3. Risk management policies for trading book instruments ............................................................................... 7 4. Definition of the trading desk .................................................................................................................................... 9 5. Restrictions on moving instruments between the regulatory books ....................................................... 10 6. Treatment of internal risk transfers ....................................................................................................................... 11 7. Treatment of counterparty credit risk in the trading book .......................................................................... 13 8. Transitional arrangements ......................................................................................................................................... 13 B. Market Risk – The Standardised Approach ................................................................................................................. 13 1. General provisions ........................................................................................................................................................ 13 2. Structure of the standardised approach .............................................................................................................. 14 (i) Overview of the structure of the standardised approach .................................................................... 14 (ii) Sensitivities-based Method: main definitions .......................................................................................... 14 (iii) Sensitivities-based Method: instruments subject to delta, vega and curvature risks .............. 15 (iv) Sensitivities-based Method: delta and vega ............................................................................................. 15 (v) Sensitivities-based Method: curvature ........................................................................................................ 16 (vi) Sensitivities-based Method: correlation scenarios and aggregation of risk charges ............... 18 (vii) The Default Risk Charge .................................................................................................................................... 18 (viii) The Residual Risk Add-On ................................................................................................................................ 19 3. Sensitivities-based Method: risk factor and sensitivity definitions ........................................................... 20 (i) Risk factor definitions......................................................................................................................................... 20 (ii) Sensitivity definitions ......................................................................................................................................... 25 (iii) Treatment of index instruments and multi-underlying options ....................................................... 27 (iv) Requirements on sensitivity computations ............................................................................................... 28 4. Sensitivities-based Method: delta risk weights and correlations............................................................... 28 (i) Delta GIRR ............................................................................................................................................................... 28 (ii) Delta CSR non-Securitisations ........................................................................................................................ 30 A revised version of this standard was published in January 2019. https://www.bis.org/bcbs/publ/d457.pdf (iii) Delta CSR Securitisations (correlation trading portfolio) ..................................................................... 32 (iv) Delta CSR Securitisations (non-correlation trading portfolio) ........................................................... 33 (v) Equity risk ................................................................................................................................................................ 35 (vi) Commodity risk ..................................................................................................................................................... 37 (vii) Foreign exchange risk ........................................................................................................................................ 40 5. Sensitivities-based Method: vega risk weights and correlations ............................................................... 40 6. Sensitivities-based Method: curvature risk weights and correlations ...................................................... 42 7. The Default Risk Charge ............................................................................................................................................. 42 (i) Default Risk Charge for non-securitisations .............................................................................................. 43 (ii) Default Risk Charge for securitisations (non-correlation trading portfolio) ................................. 46 (iii) Default Risk Charge for securitisations (correlation trading portfolio) .......................................... 47 C. Market risk – The Internal Models Approach ............................................................................................................. 50 1. General criteria ............................................................................................................................................................... 50 2. Qualitative standards ................................................................................................................................................... 50 3. Quantitative standards ................................................................................................................................................ 52 4. Model validation standards ...................................................................................................................................... 55 5. Determining the eligibility of trading activities ................................................................................................. 56 6. Interaction with the standardised approach methodology ......................................................................... 58 7. Specification of market risk factors ........................................................................................................................ 59 8. Default risk ....................................................................................................................................................................... 60 9. Capitalisation of risk factors ...................................................................................................................................... 63 10. Stress testing ................................................................................................................................................................... 65 11. External validation ......................................................................................................................................................... 66 Appendix A: Trading desk definitions ..................................................................................................................................... 68 Appendix B: Supervisory framework for the use of backtesting and profit and loss attribution in conjunction with the internal models approach to market risk capital requirements ......................................... 70 D. Treatment for illiquid positions .......................................................................................................................................