Banks Act, 1990 (Act No. 94 of 1990)RegulationsRegulations relating to Banks' Financial Instrument TradingChapter 4 : Position Risk12. Principles of calculation |
| (1) | For measuring position risk, the bank shall, at its discretion, use one of the following alternative methodologies— |
| (a) | the first alternative shall be to measure the position risks in a standardised manner, using one of the measurement frameworks prescribed in regulation 13, read with regulations 14 and 15; or |
| (b) | the second alternative, which is subject to the fulfilment of certain conditions and the use of which is conditional upon the prior written approval of the Registrar, is prescribed in chapter 7. This method allows the bank to use risk measurements derived from the internal risk-management model only, or a combination of such an internal model and one of the standardised methodologies set out in regulations 14 and 15, respectively. |
| (2) | One of the standardised methodologies employs a "building-block" approach whereby specific risk and the general market risk arising from debt and equity positions are calculated separately. The focus of most internal models is the general market-risk exposure, typically leaving specific risk (that is, exposures to specific issuers of debt securities or equities) to be measured mainly through the separate credit-risk measurement system. |
| (3) | A separate charge for specific risk shall apply when the internal model is used to the extent that the model does not cover specific risk. The total specific risk charge applied to debt securities or to equities using the internal model should not be less than half the specific risk charge calculated according to the standardised method. |
| (4) | In the measurement of the price risk for options under the standardised approach, the rule shall apply that the more a bank is engaged in writing options, the more sophisticated its measurement method shall have to be. In the longer term, banks that are significant traders in options shall be expected to change to comprehensive value-at-risk models and shall become subject to the full range of quantitative and qualitative standards set out in chapter 7. |
| (5) | When a bank is required, in terms of subregulation (4) above, to change to a comprehensive value-at-risk model, the bank shall be expected to monitor and report the level of position risk against which the capital requirement is to be applied. The overall minimum capital requirement shall then be— |
| (a) | the credit-risk requirements, excluding debt and equity securities in the trading book and all positions in commodities, but including the credit counterpart risk on all over-the-counter derivatives, whether in the trading or the banking book; plus |
| (b) | capital requirements for market risks described in regulations 14 and 15, summed arithmetically; or |
| (c) | the measure of market risk derived from the models approach set out in chapter 7; or |
| (d) | a combination of (b) and (c), aggregated arithmetically. |
| (6) | [Regulation 12(6) deleted by regulation 3 of Notice No. R. 1465, GG 24088, dated 22 November 2002] |