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)(c) Matters relating to equity instruments and equity position risk
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(c)Matters relating to equity instruments and equity position risk

 

(i)Based on the relevant requirements specified in this paragraph (c), in  respect of any relevant long or short equity position held by the reporting bank in its trading book—

 

(A)including—
(i)any instrument that exhibits market behaviour similar to equities;
(ii)any ordinary shares, irrespective whether or not the said shares have voting rights attached to them;
(iii)any commitment to buy or sell equity securities;
(iv)any convertible instrument that trades in a manner similar to an equity instrument,

 

(B)excluding non-convertible preference shares, which preference shares are subject to the requirements specified in paragraph (b) above,

the reporting bank shall separately calculate the relevant minimum required amount of capital and reserve funds relating to specific risk and general risk, provided that, unless specifically otherwise provided in this paragraph (c), the bank may report long positions and short positions in respect of the same issue on a net basis.

 

(ii)Matters relating to specific risk

 

In respect of a bank's gross equity positions, that is, the sum of all relevant long equity positions and all relevant short equity positions, held in the bank's trading book, a bank that adopted the standardised approach for the measurement of the bank's exposure to market risk shall on a market by market basis, that is, in respect of each relevant national market or currency in which the reporting bank holds equities, calculate and maintain a minimum required amount of capital and reserve funds relating to specific risk, which required amount of capital and reserve funds—

 

(A)shall in the case of a less liquid equity portfolio that complies with such requirements or criteria as may be specified in writing by the Registrar be equal to twelve per cent of the said gross equity position;

 

(B)shall in all other cases be equal to eight per cent of the said gross equity position.

 

(iii)Matters relating to general risk

 

In respect of a bank's net position in a specific equity market or equity index, that is, the difference between the sum of all relevant long equity positions and the sum of all relevant short equity positions in a particular national equity market or equity index, held in the bank's trading book, a bank that adopted the standardised approach for the measurement of the bank's exposure to market risk shall calculate and maintain a minimum required amount of capital and reserve funds relating to general risk equal to eight per cent of the said net equity position.

 

(iv)Matters relating to equity derivative instruments

 

A bank that adopted the standardised approach for the measurement of the bank's exposure to market risk shall include in its measurement system all equity derivative instruments and off-balance sheet positions that are affected by changes in equity prices, including any future or swap contract on individual equities or stock indices, provided that—

 

(A)the bank shall measure and report any equity position arising from an option contract in accordance with the relevant requirements specified in paragraph (f) below instead of in accordance with the requirements specified in this paragraph (c);

 

(B)the reporting bank shall convert all relevant derivative positions into notional equity positions in the relevant underlying instruments;

 

(C)when equities form part of a forward contract, a future contract or an option contract, irrespective whether equities are to be received or delivered, the reporting bank shall report the relevant leg of the contract that relates to any interest rate or foreign currency exposure in accordance with the relevant requirements specified in this subregulation (7);

 

(D)the reporting bank shall report any future or forward contract relating to an individual equity at the current market price;

 

(E)the reporting bank shall report futures relating to stock indices as the marked-to-market value of the relevant notional underlying equity portfolio;

 

(F)the reporting bank shall treat any equity swap contract as two notional positions.

 

For example, the bank shall treat an equity swap contract in terms of which the bank receives an amount based on the change in value of one particular equity or stock index and pays a different index as a long position in the former and a short position in the latter.

 

When one of the legs involves receiving/paying a fixed or floating interest rate, the bank shall report the relevant exposure in accordance with the relevant requirements for interest rate related instruments specified in paragraph (b) above.

 

(G)the reporting bank shall either "carve out" any equity option or stock index option with its associated underlying or, based on the relevant requirements of the delta-plus method specified in paragraph (f)(iii) below, incorporate the relevant position in the measure of general market risk.

 

(v)Matters relating to the calculation of minimum required capital and reserve funds

 

In calculating its minimum required amount of capital and reserve funds relating to specific risk and general risk, a bank that adopted the standardised approach for the measurement of the bank's exposure to market risk may fully offset matched positions in respect of each identical equity or stock index in each relevant market in order to obtain a single net short or long position to which the bank shall apply the relevant requirements specified for specific risk and general market risk, that is, the bank, for example, may fully offset a future in a particular equity instrument against an opposite cash position in the same equity instrument, provided that—

 

(A)the bank shall report any related interest rate risk arising from a derivative contract in accordance with the relevant requirements specified in paragraph (b);

 

(B)the bank shall in respect of any relevant net long or short position relating to an index contract maintain a specific risk capital requirement of 8 per cent in addition to the general market risk requirement of 8 per cent and the further capital requirement of 2 per cent to make provision for factors such as execution risk.

[Item (B) of subregulation (7)(c)(v) substituted by regulation 3(f) of Notice No. R. 261 dated 27 March 2015]

 

(C)when the reporting bank implements a futures related arbitrage strategy, that is, when the bank—
(i)enters into an opposite position in exactly the same index at different dates, or in different market centres; or
(ii)established an opposite position in contracts at the same date in different but similar indices, and the two indices contain sufficient common components that justify offsetting,

the bank may apply the additional two per cent capital requirements specified in item (B) only to one index, that is, the opposite position shall be exempted from the said capital requirement;

[Item (C) of subregulation (7)(c)(v) substituted by regulation 3(g) of Notice No. R. 261 dated 27 March 2015]

 

(D)when the bank implements an arbitrage strategy, in terms of which strategy a futures contract on a broadly-based index matches a basket of instruments, the bank may "carve out" both positions from the standardised method and apply a minimum capital requirement equal to four per cent, that is, two per cent of the gross value of positions on each side in order to reflect divergence and execution risks, even when all instruments comprising the index are held in identical proportions, provided that—
(i)the bank shall deliberately enter into and separately control the relevant exposure;
(ii)the composition of the basket of instruments shall represent at least 90 per cent of the index when broken down into its notional components;
(iii)the bank shall treat any excess value of the instruments comprising the basket over the value of the futures contract or excess value of the futures contract over the value of the basket as an open long or short position;

 

(E)the bank also may offset the relevant position when the bank establishes a position in depository receipts against an opposite position in the underlying equity or identical equities in different markets, provided that the bank—
(i)shall fully take into account any relevant costs on conversion;
(ii)shall report any foreign exchange risk arising from the relevant positions in accordance with the relevant requirements specified in paragraph (d) below.