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30 January 2017

BIS: Frequently asked questions on market risk capital requirements

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The published document sets out the first set of FAQs on the revised market risk standard. The questions and answers include clarifications both to the standardised approach and the internal models approach.

The JTD equivalent is defined as the difference between the value of the security or product assuming that each single name referenced by the security or product, separately from the others, defaults (with zero recovery) and the value of the security or product assuming that none of the names referenced by the security or product default.

There is no discretion permitted to assign cash equity positions to any maturity between three months and one year. In determining the offsetting criterion, paragraph 148 specifies that the maturity of the derivatives contract be considered, not the maturity of the underlying instrument. Paragraph 149 further states that the maturity weighting applied to the JTD for any product with maturity of less than three months is floored at three months.

The concept of constant positions has changed in the standard Minimum capital requirements for market risk because the capital horizon is now meant to always be synonymous with the new definition of liquidity horizon and no new positions are added when positions expire during the capital horizon. For securities with a maturity under one year, a constant position can be maintained within the liquidity horizon but, much like under the Basel II.5 incremental risk charge (IRC), any maturity of a long or short position must be accounted for when the ability to maintain a constant position within the liquidity horizon cannot be contractually assured.

Full document

© BIS - Bank for International Settlements

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