Regulations > Regulations relating to Banks > Chapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof > 28. Market risk > Directives and interpretations for completion of monthly return concerning market risk (Form BA 320) > Subregulation (7) Method 1: standardised approach > Subregulation (7)(b) Matters relating to debt securities and other interest rate related instruments > Subregulation (7)(b)(ii) Matters relating to specific risk

(ii)	Matters relating to specific risk

A bank that adopted the standardised approach for the measurement of the bank's exposure to market risk—

(A)

may in the calculation of the bank's risk position offset matching positions in respect of identical instruments, including any relevant position arising from a derivative instrument, that is, even when the issuer of instruments is the same, the bank shall not offset positions arising from different issues since, for example, differences in coupon rates, liquidity or call features may cause prices to diverge in the short-term;

(B)	shall in respect of any relevant net short or long position relating to a government, qualifying, specified non-qualifying or other exposure calculate the bank's capital requirement relating to specific risk in accordance with the relevant requirements specified in table 1 below:

Table 1

Position in respect of—	Description of position and specific risk capital requirement
Government' 2	External credit assessment						Unrated
	AAA to AA-	A+ to BBB-			BB+ to B-	Below B-
		Residual term to maturity of—
		Up to 6 months	More than 6 months but less than or equal to 24 months	More than 24 months
	0%	0.25%	1%	1.60%	8%	12%	8%
Central government or central bank of RSA 1, 2, 3	0%
Qualifying 4	Residual term to maturity of—
	Up to 6 months		More than 6 months but less than or equal to 24 months			More than 24 months
	0.25%		1%			1.60%
Specified non-qualifying issuers5	Capital requirement calculated in accordance with the relevant requirements specified in item (C) below
Other	External credit assessment						Unrated
	BB+ to BB-			Below BB-
	8%			12%			8%

1.	Includes forms of government that qualify for a risk weight of zero per cent in terms of the provisions of regulation 23(6).

2.	Includes instruments such as bonds and treasury bills and other short-term instruments.

3.	Provided that the relevant instrument is denominated, and funded by the bank, in Rand.

Includes—

(a)	securities issued by public sector entities and multilateral development banks;

(b)	any instrument rated investment grade, that is, a rating of BBB- or an equivalent rating, or a better rating, which rating shall be issued in respect of the relevant instrument by no less than two eligible institutions;

(c)	any instrument rated investment grade, that is, a rating of BBB- or an equivalent rating, by one eligible institution, and not less than investment grade by another eligible institution;

(d)

any unrated instrument issued by any institution rated investment grade, that is, a rating of BBB- or an equivalent rating, or a better rating, provided that the said institution shall be subject to comparable supervisory and regulatory arrangements than banks in the RSA, including, in particular, risk-based capital requirements and regulation and supervision on a consolidated basis, and the bank has no reason to suspect that the said unrated instrument is of a lesser quality than investment grade;

(e)	subject to such conditions as may be specified in writing by the Registrar, any other unrated or other instrument specified in writing by the Registrar.

5.	Includes instruments issued in respect of a securitization scheme, such as a first-loss credit-enhancement facility, an unrated liquidity facility or a letter of credit.

(C)	shall in the case of a securitisation or resecuritisation exposure calculate the bank's specific risk capital requirement in accordance with the relevant requirements specified in regulation 23(6)(h), 23(8)(h), 23(11) or 23(13), as the case may be, provided that—

(i)

in respect of the relevant net securitization or resecuritisation position held in the bank's trading book, a bank that adopted the standardized approach for the measurement of the bank's exposure to credit risk shall in the case of a securitization or resecuritisation exposure that is externally rated calculate its capital requirement relating to specific risk in accordance with the relevant requirements specified in table 2 below:

Table 2

Specific risk capital requirement based on external rating

External credit assessment 1	Long-term rating 1
External credit assessment 1	AAA to AA-	A+ to A-	BBB+ to BBB-	BB+ to BB-	Below BB- or unrated
Securitisation exposure	1.6%	4%	8%	28%	100%
Resecuritisation exposure	3.2%	8%	18%	52%	100%

External credit assessment 1	Short-term rating 1
External credit assessment 1	A-1 / P-1	A-2 / P-2	A-3 / P3	Below A-3/ P-3 or unrated
Securitisation exposure	1.6%	4%	8%	100%
Resecuritisation exposure	3.2%	8%	18%	100%

The notations used in this table relate to the ratings applied by a particular credit assessment institution. The use of the rating scale of a particular credit assessment institution does not mean that any preference is given to a particular credit assessment institution, and the assessments/ rating scales of other external credit assessment institutions, recognised as eligible institutions in South Africa, may have been used instead.

[Regulation 28(7)(b)(ii)(C)(i), Table 2, substituted by regulation 12 of Notice No. 297, GG 40002, dated 20 May 2016]

(ii)

in respect of the relevant net securitization or resecuritisation position held in the bank's trading book, a bank that adopted the IRB approach for the measurement of the bank's exposure to credit risk shall in the case of a rated securitization or resecuritisation exposure calculate its capital requirement relating to specific risk in accordance with the relevant requirements specified in table 3 below:

Table 3

Specific risk capital requirement based on external rating

External long-term rating 1	Securitisation exposure			Resecuritisation exposure
External long-term rating 1	Senior granular position 2, 3	Non-senior granular 5	Non-granular 4	Senior 6	Non-senior
AAA	0.56%	0.96%	1.60%	1.60%	2.40%
AA	0.64%	1.20%	2.00%	2.00%	3.20%
A+	0.80%	1.44%	2.80%	2.80%	4.00%
A	0.96%	1.60%		3.20%	5.20%
A-	1.60%	2.80%		4.80%	8.00%
BBB+	2.80%	4.00%		8.00%	12.00%
BBB	4.80%	6.00%		12.00%	18.00%
BBB-	8.00%			16.00%	28.00%
BB+	20.00%			24.00%	40.00%
BB	34.00%			40.00%	52.00%
BB-	52.00%			60.00%	68.00%
Below BB-	100% [Column substituted by regulation 3(b) of Notice No. R. 261 dated 27 March 2015]
External short-term rating 1	Securitisation exposure			Resecuritisation exposure
External short-term rating 1	Senior granular position 2, 3	Non-senior granular 5	Non-granular 4	Senior 6	Non-senior
A-1/P-1	0.56%	0.96%	1.60%	1.60%	2.40%
A-2/P-2	0.96%	1.60%	2.80%	3.20%	5.20%
A-3/P-3	4.80%	6.00%		12.00%	18.00%
Below A-3/P-3-	100% [Column substituted by regulation 3(c) of Notice No. R. 261 dated 27 March 2015]

The notations used in this table relate to the ratings used by a particular credit assessment institution. The use of the rating scale of a particular credit assessment institution does not mean that any preference is given to a particular credit assessment institution. The assessments/ rating scales of other external credit assessment institutions, recognised as eligible institutions in the RSA, may have been used instead.

Relates to senior positions in a securitisation scheme that consists of an effective number of underlying exposures of no less than 6, which effective number of exposures shall be calculated in accordance with the relevant requirements specified in regulation 23(11)(n), and where senior position means an effective first claim in respect of the entire amount of the assets/exposures in the underlying securitised pool. For example, in the case of—

(a)	a synthetic securitisation scheme the "super-senior" tranche shall be treated as a senior position, provided that the bank complies with the relevant conditions specified in regulation 23(11)(f) to infer a rating from a lower tranche.

(b)

a traditional securitisation scheme, in which scheme all tranches above the first-loss position are rated, the highest rated position shall be treated as a senior position, provided that when several tranches share the same rating the most senior position in the waterfall of payment shall be treated as the senior position.

3.	Including eligible senior exposures that comply with the relevant requirements specified in regulations 23(11)(g) and 23(11)(h) relating to the internal assessment approach.

4.	Relates to a senior position in a securitisation scheme in which the effective number of underlying exposures, calculated in accordance with the relevant requirements specified in regulation 23(11)(n), is less than 6.

5.	Relates to all positions other than a senior position, such as a position/facility that, in economic substance, constitutes a mezzanine position and not a senior position in respect of the underlying pool.

Means a resecuritisation exposure that is a senior position and none of the underlying exposures are resecuritisation exposures, that is, any resecuritisation exposure in respect of which the underlying exposure includes a resecuritisation exposure shall be categorised as a non-senior resecuritisation position or exposure.

(iii)

subject to any conditions specified in writing by the Registrar, in respect of an unrated position—

(aa)

a bank that obtained the approval of the Registrar to apply the IRB approach for the relevant asset classes related to the underlying exposures, may apply the standard formula approach specified in regulation 23(11)(i), provided that, when estimating the relevant PDs and LGDs for the calculation of KIRB, the bank shall comply with the relevant minimum requirements related to the IRB approach;

(bb)

to the extent that the bank obtained the approval of the Registrar to apply the bank's internally developed VaR model that incorporates specific risk related to the underlying exposures, as envisaged in regulation 28(8)(h) of these Regulations, and the bank derives estimates for PDs and LGDs from the said internally developed VaR model, the bank may use the aforesaid estimates for the calculation of KIRB, and consequently for applying the standard formula approach;

(cc)	other than the unrated positions specifically referred to above, the bank shall calculate the relevant required amount of capital and reserve funds related to specific risk as follows:

(i)	multiply the weighted average risk weight that would be applied to the securitised exposures under the standardised approach with eight per cent; and

(ii)

multiply the aforesaid product, calculated in accordance with the provisions of sub-item (i) above, with a concentration ratio, which concentration ratio shall be calculated as the sum of the nominal or notional amounts of all the relevant tranches divided by the sum of the nominal or notional amounts of the tranches junior to or ranking pari passu with the tranche in which the position is held, including that tranche itself, provided that when the said concentration ratio is equal to 12.5, or higher, the bank shall assign to the relevant position a risk weight of 1250 per cent;

[Regulation (7)(b)(ii)(C)(iii)(cc)(ii) substituted by regulation 3(d) of Notice No. R. 261, GG 38616, dated 27 March 2015]

Provided that the bank's required amount of capital and reserve funds related to specific risk in respect of an unrated position shall in no case be lower than the specific risk capital requirement related to a rated more senior tranche. When the bank is unable to determine the specific risk capital requirement as described hereinbefore or prefers not to apply the treatment specified above, the bank shall deduct from its common equity tier 1 capital and reserve funds the relevant amount of the unrated position.

(iv)

during such transition period as may be directed by the Registrar in writing, in respect of any relevant securitisation position not included in the bank's correlation trading portfolio, a bank's required amount of capital and reserve funds for specific risk arising from securitisation positions held in the bank's trading book shall be calculated separately from the bank's relevant required amount of capital and reserve funds related to its correlation trading portfolio, and shall be the higher of—

(aa)	the bank's total required amount of capital and reserve funds for specific risk arising from the bank's relevant net long securitisation positions held in the trading book; or

(bb)	the bank's total required amount of capital and reserve funds for specific risk arising from the bank's relevant net short securitisation positions held in the trading book;

(v)

any position risk weighted at 1250 per cent in accordance with the provisions of sub-items (i) to (iii) of this item (C), may be excluded from the bank's calculation of its required amount of capital and reserve funds for general market risk, irrespective whether the bank applies the standardised measurement method or internal models method;

[Sub-item (v) of subregulation (7)(b)(ii)(C) substituted by regulation 3(e) of Notice No. R. 261 dated 27 March 2015]

(vi)	in respect of the bank's correlation trading portfolio, the bank shall calculate its specific risk capital requirement in accordance with the relevant requirements specified in item (F) below;

(D)

shall in respect of any relevant position hedged by a credit-derivative instrument, other than an n-th-to-default credit derivative instrument, calculate the bank's specific risk capital requirement in accordance with the relevant requirements specified in this item (D), provided that in the case of an n-th-to-default credit derivative instrument the bank shall calculate its specific risk capital requirement in accordance with the relevant requirements specified in item (E) below.

When—

(i)	the values of the relevant long leg and short leg always move in opposite directions, and materially to the same extent, that is, when—

(aa)	the two legs consist of identical instruments, or

(bb)

a long cash position is hedged by a total return swap, or vice versa, and an exact match exists between the reference obligation and the underlying exposure, that is, the cash position, irrespective whether or not the maturity of the said swap contract differs from the maturity of the relevant underlying exposure,

the reporting bank may fully offset the two sides of the position, that is, the reporting bank shall be exempted from any specific risk capital requirement in respect of the said hedged position.

(ii)

the values of the relevant long leg and short leg always move in opposite directions, but not to the same extent, that is, when a long cash position is hedged by a credit default swap or credit linked note, or vice versa, and in all cases an exact match exists in respect of the reference obligation, the maturity of the reference obligation and the credit derivative instrument, and the currency to the underlying exposure, the reporting bank may apply an eighty per cent specific risk offset in respect of the side of the transaction with the higher capital requirement, and a specific risk requirement of zero in respect of the other leg, provided that—

(aa)	the key features of the credit derivative contract, such as the credit event definitions and settlement mechanism, shall not cause the price movement of the credit derivative instrument materially to deviate from the price movement of the cash position; and

(bb)	based on matters such as restrictive payout provisions, such as fixed payouts and materiality thresholds, the transaction shall materially transfer risk.

(iii)

values of the relevant long leg and short leg usually move in the opposite direction, that is—

(aa)

a long cash position is hedged by a total return swap, or vice versa, as envisaged in sub-item (i) above, but an asset mismatch exists between the reference obligation and the underlying exposure, and the requirements relating to an asset mismatch specified in regulation 23(9)(d)(xi)(B)(xviii) are met;

(bb)	the relevant two legs relate to identical instruments as envisaged in sub-item (i) above but a currency or maturity mismatch exists between the credit protection and the underlying asset;

(cc)	the relevant positions meet the relevant requirements specified in sub-item (ii) above except that a currency or maturity mismatch exists between the credit protection and the underlying asset; or

(dd)	the relevant positions meet the relevant requirements specified in sub-item (ii) above but an asset mismatch exists between the cash position and the credit derivative instrument, and the underlying asset is included in the deliverable obligations in terms of the credit derivative documentation,

the reporting bank shall calculate and maintain a capital requirement only in respect of the side of the transaction with the highest capital requirement, that is, instead of adding the specific risk capital requirements for each side of the relevant transaction in respect of the credit protection and the underlying asset the reporting bank shall calculate and maintain a capital requirement only in respect of the side of the transaction that requires the highest capital requirement.

(iv)	the relevant hedged position relates to a position other than the positions envisaged in sub-items (i) to (iii) above, the reporting bank shall calculate and maintain a capital requirement in respect of both sides of the relevant transaction;

(E)

shall in the case of an n-th-to-default credit derivative instrument, that is, a contract or instrument in respect of which the payment or payoff is based on the n-th asset to default in the basket of underlying reference assets or instruments, calculate the bank's specific risk capital requirement in accordance with the relevant requirements specified in this item (E).

The bank's capital requirement for specific risk shall in the case of a first-to-default credit derivative instrument be the lesser of the sum of the specific risk capital requirements for the individual reference assets or credit instruments in the basket, or the maximum possible credit event payment in terms of the contract, provided that—

(i)

when the bank has a risk position in one of the reference assets or credit instruments underlying the first-to-default credit derivative instrument, and the said credit derivative instrument hedges the bank's risk position, the bank may reduce both the capital requirement for specific risk for the relevant reference asset or credit instrument and that part of the capital requirement for specific risk for the credit derivative instrument that relates to the particular reference credit instrument, provided that when the bank has multiple risk positions in reference assets or credit instruments underlying a first-to–default credit derivative instrument the offset shall be allowed only in respect of the underlying asset or reference credit instrument with the lowest specific risk capital requirement;

(ii)

when "n" is greater than one, the bank's capital requirement for specific risk shall be the lesser of the sum of the specific risk capital requirements for the individual reference assets or credit instruments in the basket, but disregarding the "n-1" obligations with the lowest specific risk capital requirement, or the maximum possible credit event payment in terms of the contract, provided that in the case of n-th-to-default credit derivative instruments where "n" is greater than 1 no offset of the capital requirement for specific risk with any underlying reference asset or credit instrument shall be allowed;

(iii)

when a first or other n-th-to-default credit derivative instrument is externally rated, a bank that acts as a protection seller shall calculate its specific risk capital requirement based on the said rating issued in respect of the derivative instrument and the relevant securitisation risk weights specified in item (C) above;

(iv)	the capital requirement shall apply in respect of each net n-th-to- default credit derivative position, irrespective whether the bank has a long position or short position, that is, irrespective whether the bank obtains or provides protection;

(F)	shall in respect of the bank's correlation trading portfolio calculate its relevant required amount of capital and reserve funds for specific risk in accordance with the relevant requirements specified in this item (F).

The—

(i)	bank shall separately calculate the relevant required amount of capital and reserve funds related to specific risk in respect of its net long positions, that is, based on its net long correlation trading exposures combined;

(ii)	bank shall separately calculate the relevant required amount of capital and reserve funds related to specific risk in respect of its net short positions, that is, based on its net short correlation trading exposures combined;

(iii)

bank's required amount of capital and reserve funds for specific risk in respect of its correlation trading portfolio shall be the higher amount of sub-item (i) or sub-item (ii), of this item (F).

Provided that a bank may limit the required amount of capital and reserve funds in respect of any relevant individual position in a credit derivative or securitisation instrument to the maximum possible loss, that is—

(A)	a bank shall calculate a maximum possible loss amount for each relevant individual position;

(B)	in the case of a short risk position the limit may be calculated as a change in value due to the underlying names immediately becoming default risk-free;

(C)	in the case of a long risk position, the maximum possible loss amount may be calculated as the change in value in the event that all the underlying names were to default with a zero or no recovery.

Banks Act, 1990 (Act No. 94 of 1990)

Regulations

Regulations relating to Banks

Chapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof

28. Market risk

Directives and interpretations for completion of monthly return concerning market risk (Form BA 320)

Subregulation (7) Method 1: standardised approach

Subregulation (7)(b) Matters relating to debt securities and other interest rate related instruments

Subregulation (7)(b)(ii) Matters relating to specific risk