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)(iv) Matters relating to interest rate derivative instruments
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(iv)Matters relating to interest rate derivative instruments

 

(A)Irrespective of the measurement system adopted by the reporting bank for the measurement of the bank's exposure to market risk the bank shall include in its calculation of market risk exposure all interest rate derivative instruments and off-balance sheet instruments that respond to changes in interest rates, which instruments are held by the bank in its trading book, including any forward rate agreement, any other forward contract, any bond future, any interest rate or cross-currency swap contract or any forward foreign exchange position, provided that the reporting bank—

 

(i)shall calculate all relevant positions in accordance with the relevant requirements specified in item (B) below;

 

(ii)shall calculate all relevant capital requirements relating to derivative instruments in accordance with the relevant requirements specified in item (C) below.

 

(B)Matters relating to the calculation of positions in interest rate derivative instruments

 

A bank that adopted the standardised method for the measurement of the bank's exposure to market risk shall convert all relevant transactions in derivative instruments into positions in the relevant underlying instrument and calculate the relevant specific risk and general risk requirements in accordance with the relevant requirements specified in this paragraph (b), provided that—

 

(i)the bank shall base all relevant calculations on the market value of the principal amount relating to the relevant underlying or notional underlying;

 

(ii)in the case of any instrument in respect of which the notional amount differs from the effective notional amount, the bank shall use the effective notional amount;

 

(iii)in the case of any future contract on a corporate bond index, the bank shall include the relevant positions at the market value of the notional underlying portfolio of securities;

 

(iv)in the case of any future or forward contract, including any forward rate agreement, the bank shall treat the contract as a combination of a long position and a short position in a notional government security, provided that the maturity of the said future or forward rate agreement shall be the period until delivery or exercise of the contract plus the life of the underlying instrument when relevant. For example, a long position in a June three month interest rate future, which contract is concluded in April, shall be reported as a long position in a government security with a maturity of five months and a short position in a government security with a maturity of two months.

 

When a range of deliverable instruments may be delivered to fulfil the relevant requirements of a contract, the bank may decide which deliverable security should be included in the maturity or duration ladder, provided that the bank shall take into consideration any conversion factor defined by the relevant exchange.

 

(v)in the case of any swap contract the bank shall treat the relevant positions as two notional positions in government securities with relevant maturities. For example, an interest rate swap contract in terms of which the reporting bank receives floating rate interest and pays fixed interest shall be treated as a long position in a floating rate instrument of maturity equivalent to the period until the next interest fixing and a short position in a fixed-rate instrument of maturity equivalent to the residual life of the swap contract;

 

(vi)in the case of a swap contract that pays or receives a fixed or floating interest rate against some other reference price, such as a stock index, the bank shall include the interest rate component in the relevant repricing maturity category, with the equity component being included in the equity framework in accordance with the relevant requirements specified in paragraph (c) below;

 

(vii)in the case of a cross-currency swap contract the bank shall report the relevant separate legs of the contract in the relevant maturity ladders relating to the currencies concerned.

 

(C)Matters relating to the calculation of capital requirements relating to positions in interest rate derivative instruments

 

In respect of specific risk and general risk a bank may exclude from the relevant interest rate maturity framework long positions and short positions, irrespective whether the said positions are actual or notional positions, in respect of identical instruments issued by the same issuer and which instruments have the same coupon and maturity and are denominated in the same currency, including any matched position in respect of a future or forward and its corresponding underlying, provided that—

 

(i)in the case of a future contract the bank shall report the relevant leg that represents the time to expiry of the said future contract;

 

(ii)when the future or forward contract comprises a range of deliverable instruments the reporting bank shall only offset positions in the said future or forward contract and its relevant underlying when a readily identifiable underlying security that is most profitable for the person with the short position to deliver, exists, the price of which security, often referred to as the "cheapest-to-deliver", and the price of the said future or forward contract are likely to move in close alignment;

 

(iii)the reporting bank shall in no case apply offsetting between positions in different currencies, that is, the reporting bank shall include in the relevant calculation of each currency the relevant separate legs relating to any cross-currency swap or forward foreign exchange contract, which legs shall be recorded as notional positions in the relevant instruments;

 

(iv)the reporting bank may fully offset opposite positions in the same category of instruments, including the relevant delta-equivalent value in respect of options, provided that the said positions shall relate to the same underlying instruments, be of the same nominal value and be denominated in the same currency, and in the case of—
(aa)any future contract the offsetting positions in the notional or underlying instruments to which the future contract relates shall be for identical products and mature within seven days of each other;
(bb)any floating rate position arising from a swap or FRA contract the reference rate shall be identical and the coupon shall be closely matched, that is, the coupon shall be within 15 basis points;
(cc)any swap, FRA or forward contract, the next interest fixing date or, in the case of any fixed coupon position or forward, the residual maturity—
(i)shall be the same day for positions less than one month hence;
(ii)shall be within seven days for positions between one month and one year hence;
(iii)shall be within thirty days for positions over one year hence;

 

(v)subject to the prior written approval of and such conditions as may be specified in writing by the Registrar, a bank with a large swap book may use alternative formulae in order to calculate the swap positions to be included in the relevant maturity or duration ladder specified in this paragraph (b), provided that—
(aa)all relevant positions shall be denominated in the same currency;
(bb)the calculated positions shall fully reflect the sensitivity of the cash flows to interest rate changes; and
(cc)the reporting bank shall capture all relevant calculated positions in the appropriate time bands.

 

For example, a bank may first convert the payments required by the swap into the respective present values by discounting each payment using zero coupon yields, in which case, based on the relevant requirements, general risk framework and time band specified above, the bank shall capture a single net amount relating to the present value of the cash flows in the appropriate time band by applying the relevant procedures that apply to zero or low coupon bonds. Alternatively the reporting bank may calculate the sensitivity of the net present value implied by the change in yield specified in the maturity or duration method and allocate the said sensitivity measures into the relevant time bands specified in this paragraph (b).

 

(vi)in the case of any interest rate or currency swap, FRA, forward foreign exchange contract, interest rate future or future on an interest rate index such as JIBAR, no specific risk requirement shall apply;

 

(vii)in the case of any future contract in respect of which the underlying instrument is a debt security, or an index representing a basket of debt securities, the reporting bank shall, based on the credit risk of the issuer and the relevant requirements specified in this paragraph (b), calculate the relevant specific risk requirement;

 

(viii)subject to the specific exemptions specified in this item (C), based on the relevant requirements specified in this paragraph (b), the reporting bank shall calculate a general risk requirement in respect of all relevant positions in derivative instruments, in a manner similar to any cash position.