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a"" #$he%u"e% Commer$ia" Ba &' Dear #ir, Pru%e (ia" )ui%e"i e' o Ca*i(a" +%e,ua$y- -m*"eme (a(io o! (he Ne. Ca*i(a" +%e,ua$y Frame.or& The Basel Committee on Banking Supervision (BCBS) has released the document, "International Convergence of Capital Measurement and Capital Standards: !evised "rame#ork" on $une %&, %''() The revised "rame#ork has *een designed to provide options for *anks and *anking s+stems, for determining the capital re,uirements for credit risk and operational risk and ena*les *anks - supervisors to select approaches that are most appropriate for their operations and financial markets) The "rame#ork is e.pected to promote adoption of stronger risk management practices in *anks) %) The !evised "rame#ork, popularl+ kno#n as Basel II, *uilds on the current frame#ork to align regulator+ capital re,uirements more closel+ #ith underl+ing risks and to provide *anks and their supervisors #ith several options for assessment of capital ade,uac+) Basel II is *ased on three mutuall+ reinforcing pillars / minimum capital re,uirements, supervisor+ revie#, and market discipline) The three pillars attempt to achieve comprehensive coverage of risks, enhance risk sensitivit+ of capital re,uirements and provide a menu of options to choose for achieving a refined measurement of capital re,uirements)
0) The !evised "rame#ork consists of three/mutuall+ reinforcing 1illars, vi2) minimum capital re,uirements, supervisor+ revie# of capital ade,uac+,
% and market discipline) 3nder 1illar 4, the "rame#ork offers three distinct options for computing capital re,uirement for credit risk and three other options for computing capital re,uirement for operational risk) These approaches for credit and operational risks are *ased on increasing risk sensitivit+ and allo#s *anks to select an approach that is most appropriate to the stage of development of *ank5s operations) The approaches availa*le for computing capital for credit risk are Standardised Based pproach, "oundation Internal !ating Based pproach and dvanced Internal !ating pproach) The approaches availa*le for computing capital for operational risk are Basic Indicator pproach, Standardised pproach and dvanced Measurement pproach) () 6ith a vie# to ensuring migration to Basel II in a non/disruptive manner, the !eserve Bank has adopted a consultative approach) foreign) has *een constituted #here Indian Banks5 Steering Committee comprising of senior officials from 4( *anks (private, pu*lic and ssociation is also represented) 7eeping in vie# the !eserve Bank5s goal to have consistenc+ and harmon+ #ith international standards it has *een decided that at a minimum, all *anks in India #ill adopt Standardi2ed risk and Basic Indicator pproach for credit pproach for operational risk #ith effect from
March 04, %''8) fter ade,uate skills are developed, *oth in *anks and at supervisor+ levels, some *anks ma+ *e allo#ed to migrate to I!B pproach after o*taining the specific approval of !eserve Bank) 9) :n the *asis of the inputs received from the Steering Committee 5draft5 guidelines for implementation of Basel II in India have *een prepared and are enclosed) Banks are re,uested to stud+ these guidelines and furnish their feed*ack to us #ithin three #eeks from the date of this letter) These draft guidelines are also placed on the #e*/site for #ider access and feed*ack) &) 1lease ackno#ledge receipt ;ours faithfull+, (C) !) Muralidharan)
0 Chief <eneral Manager/in/Charge
Ca*i(a" +%e.ua$y Frame.( Dra!( )ui%e"i e' !or -m*"eme (a(io o! (he Ne.or& !eserve Bank of India Mum*ai .
...........................6OTHER ADJUSTMENTS TO CAPITAL FUNDS...25 6EXTERNAL CREDIT ASSESSMENTS....17 5...................................................................................................................................................13HIGHER&RIS# CATEGORIES.....1ELIGIBLE CREDIT RATING AGENCIES.2SCOPE OF APPLICATION OF E'TERNAL RATINGS..............................................................................................................................25 5................................3MAPPING PROCESS........15 4...........23 5..............16 5CAPITAL CHARGE FOR CREDIT RISK .....12NON&PERFORMING ASSETS NPAS!....................7ISSUE OF SUBORDINATED DEBT FOR RAISING TIER II CAPITAL.....................23 5...........5INVESTMENT IN FINANCIAL ENTITIES..........GENERAL......1$ 5..31 ...............3CLAIMS ON FOREIGN SOVEREIGNS ..............10CLAIMS SECURED B% RESIDENTIAL PROPERT%..........18 5.....................................$CLAIMS INCLUDED IN THE REGULATOR% RETAIL PORTFOLIOS.....................14OTHER ASSETS.......................................................................................................................................20 5....................................................................................12 4..30 6..............................................................................................................................................................................18 5......................................................................................................10 4........23 5..............................................................................................30 6....................11CLAIMS SECURED B% COMMERCIAL REAL ESTATE....................................................................................................................9 T+B/0 OF CONT0NT# 1.....8 2APPROACH TO IMPLEMENTATION...............................6CLAIMS ON BAN#S..10 4CAPITAL FUNDS.....18 5.................5CLAIMS ON MDBS" BIS AND IMF ...........................................8 3SCOPE OF APPLICATION.............21 5.......................7CLAIMS ON PRIMAR% DEALERS...................................................8CLAIMS ON CORPORATES.......................4CLAIMS ON PUBLIC SECTOR ENTITIES PSES!...14 4...................................4ELEMENTS OF TIER 2 CAPITAL..................................................................................3ELEMENTS OF TIER 1 CAPITAL............................................10 4..................17 5.......................2CLAIMS ON DOMESTIC SOVEREIGNS..............20 5...........................................................30 6............
................................7TREATMENT OF POOLS OF CRM TECHNI)UES.4! 7...................4............................36 7........47 7.......34 6......................%(ange of eligible guarantors )counter*guarantors+................................................................8APPLICABILIT% OF ISSUE RATING TO ISSUER( OTHER CLAIMS ...........!...........2LEGAL CERTAINT%..30efinition of maturit.................3............37 7..............!.....................................................!..4Operational re#uirements for guarantees.....42 7..................................2Overall framework and minimum conditions..32 6.....$ /overeign guarantees and counter*guarantees.4% 7.................4 7....3MEASUREMENT OF CAPITAL CHARGE FOR INTEREST RATE RIS# ....................................32 6...............................-roportional cover....%&aircuts..................................................................... 7..........................................................................................3The comprehensive approach......................39 7........................................3......2SCOPE AND COVERAGE OF CAPITAL CHARGE FOR MAR#ET RIS#S.....................5CREDIT RIS# MITIGATION TECHNI)UES & GUARANTEES ........................................................%..................47 7.......................4Eligible financial collateral..........4CREDIT RIS# MITIGATION TECHNI)UES & ON&BALANCE SHEET NETTING.................4LONG TERM RATINGS................................!........4% 7....................9"urrenc.......................................3....................4......................47 7........4(isk weights for maturit................................34 6................................................................4$ 8CAPITAL CHARGE FOR MARKET RISK............................. 7....................................!'dditional operational re#uirements for guarantees..................49 7................!..........................3CREDIT RIS# MITIGATION TECHNI)UES & COLLATERALISED TRANSACTIONS.......!..........44 7.6MATURIT% MISMATCH....................................................................7USE OF MULTIPLE RATING ASSESSMENTS.....................& 6...............................................................1CREDIT RIS# MITIGATION & INTRODUCTION...................................................51 8.........................................................6USE OF UNSOLICITED RATINGS............................56 ...36 7....7(isk weights....................45 7....................!....................................37 7.......................................................4$ 7.....3...%..............................!"alculation of capital re#uirement.............50 8.......37 7................51 8... mismatches.......................................................34 7CREDIT RISK MITIGATION........5SHORT TERM RATINGS.............................................................. mismatches.............1INTRODUCTION........................50 8...............................................................48 7.3...............4MEASUREMENT OF CAPITAL CHARGE FOR E)UITIES......
..................60 10.......62 10..........63 10...............................................................................................61 10.........................................................................................................................................................77 ANNEX 3.........................58 10MARKET DISCIPLINE...................................82 .....................7MATERIALIT%...............................................................60 10.........8 8.............................4INTERACTION *ITH ACCOUNTING DISCLOSURES.......................57 $............62 10...............................................................................................5MEASUREMENT OF CAPITAL CHARGE FOR FOREIGN E'CHANGE AND GOLD OPEN POSITIONS.2THE MEASUREMENT METHODOLOGIES...................74 RAISING OF SUBORDINATED DEBT B% INDIAN BAN#S ................................................................................................57 9CAPITAL CHARGE FOR OPERATIONAL RISK.....3THE BASIC INDICATOR APPROACH...........12EFFECTIVE DATE OF DISCLOSURES........3ACHIEVING APPROPRIATE DISCLOSURE..................................................................................................................................................................................81 ILLUSTRATION ON CREDIT RIS# MITIGATION ...............................................................1DEFINITION OF OPERATIONAL RIS#............................74 ANNEX 2...........................................64 10...............................82 MEASUREMENT OF CAPITAL CHARGE FOR MAR#ET RIS#S IN RESPECT OF INTEREST RATE DERIVATIVES AND OPTIONS........................64 ANNEX 1....................11SCOPE OF APPLICATION......................................................57 $...........................................................................63 10.......................................................................................77 RAISING OF SUBORDINATED DEBT B% FOREIGN BAN#S .............................................................................................................................6VALIDATION.....................................81 ANNEX 4.........................................................................................................5SCOPE AND FRE)UENC% OF DISCLOSURES...6AGGREGATION OF THE CAPITAL CHARGE FOR MAR#ET RIS#S................8PROPRIETAR% AND CONFIDENTIAL INFORMATION..........58 $..........................10GENERAL DISCLOSURE PRINCIPLE............61 10.......56 8..........
uirements) The revised "rame#ork provides a range of options for determining the capital re.uirements for market risks) 2 %)4 +**roa$h (o im*"eme (a(io The !evised "rame#ork consists of three/mutuall+ reinforcing ccord to incorporate . non/funded items and other off/*alance sheet e.P12D0NT-+/ NO13# ON C+P-T+/ +D042+C5 1.posures are assigned prescri*ed risk #eights and *anks have to maintain unimpaired minimum capital funds e.uac+ measure) >ssentiall+. under the a*ove s+stem the *alance sheet assets.uirements for credit risk and operational risk to allo# *anks and supervisors to select approaches that are most appropriate for their operations and financial markets) The revised "rame#ork has kept unchanged the options provided for determining capital re. !eserve Bank of India decided in pril 4==% to introduce a risk asset ratio s+stem for *anks (including foreign *anks) in India as a capital ade. 4)4 )e era" 6ith a vie# to adopting the Basle Committee on Banking Supervision (BCBS) frame#ork on capital ade.uivalent to the prescri*ed ratio on the aggregate of the risk #eighted assets and other e.uac+ #hich takes into account the elements of credit risk in various t+pes of assets in the *alance sheet as #ell as off/*alance sheet *usiness and also to strengthen the capital *ase of *anks.posures on an ongoing *asis) !eserve Bank has issued guidelines to *anks in $une %''( on maintenance of capital charge for market risks on the lines of ? mendment to the Capital market risks@ issued *+ the BCBS in 4==&) 4)% The BCBS has released the "International Convergence of Capital Measurement and Capital Standards: !evised "rame#ork" on %& $une %''() The revised "rame#ork seeks to arrive at significantl+ more risk/sensitive approach to capital re.
vi2) mininum capital re.uac+ "rame#ork #ith effect from March 04. %''&) %)0 Banks #hich e.= 1illars. and market discipline) 3nder 1illar 4.uirement for credit risk and three other options for computing capital re.pect to meet the minimum re.uired to implement the revised capital ade.uac+. *anks in India shall. adopt Standardised pproach (S ) for credit risk and Basic Indicator pproach (BI ) for operational risk) 6ith a vie# to ensuring smooth transition to the revised "rame#ork and #ith a vie# to providing opportunit+ to *anks to streamline their s+stems and strategies. "oundation Internal !ating Based dvanced Internal !ating Based Indicator pproach.uirements for adopting the a*ove advanced approaches ma+ approach the !eserve Bank #ith a roadmap that has the approval of their Board of Airectors for migration to these approaches) The roadmap should clearl+ indicate specific . %''8) 6hile implementing the revised frame#ork. Standardised pproach and pproach) The approaches pproach and dvanced availa*le for computing capital for operational risk are Basic Measurement pproach) %)% Banks #ill *e re. at a minimum.uirement for operational risk) These approaches for credit and operational risks are *ased on increasing risk sensitivit+ and allo#s *anks to select an approach that is most appropriate to the stage of development of *ank5s operations) The approaches availa*le for computing capital for credit risk are Standardised pproach.uirements. ma+ evaluate the necessar+ processes) Banks that meet the minimum re.uirements for entr+ and on/going use of the Internal !ating Based for credit risk or the Standardisedpproaches (I!B ) dvanced Measurement pproach ( M ) for operational risk under the revised frame#ork. *anks in India are re. supervisor+ revie# of capital ade.uired to commence a parallel run of the revised "rame#ork #ith effect from pril 4. the "rame#ork offers three distinct options for computing capital re.
uac+ norms shall *e applica*le uniforml+ to all Scheduled Commercial Banks (e. statutor+ reserves. *oth at the solo level (glo*al position) as #ell as at the consolidated level) Consolidated *ank / defined as a group of entities #hich include a licensed *ank / should maintain a minimum Capital to !isk/#eighted ssets !atio (C! !) as applica*le to a *ank on an ongoing *asis) 4 ()4 Ca*i(a" !u %' Banks are re.imum of 4'' per cent of Tier 4 capital. after making the deductions. if an+) ii) Capital reserves representing surplus arising out of sale proceeds of assets) ()0)% "or foreign *anks in India.adBustments referred to in paragraphs ()9 to ()8) 4.3 0"eme (' o! Tier 1 $a*i(a" ()0)4 "or Indian *anks.uac+ norms) .4' milestones and plans for migration to the advanced approaches) Banks #ill *e allo#ed to adopt the advanced approaches onl+ after o*taining the specific approval of the !eserve Bank) 3 0)4 #$o*e o! +**"i$a(io The revised capital ade. and other disclosed free reserves.cept !egional !ural Banks).uired to maintain a minimum Capital to !isk/#eighted ssets !atio (C! !) of = percent on an ongoing *asis) ()% Capital funds are *roadl+ classified as Tier 4 and Tier % capital) >lements of Tier % capital #ill *e reckoned as capital funds up to a ma. Tier 4 capital #ould include the follo#ing elements: (i) Interest/free funds from Cead :ffice kept in a separate account in Indian *ooks specificall+ for the purpose of meeting the capital ade. Tier 4 capital #ould include the follo#ing elements: i) 1aid/up capital.
appeals are decided and do not include funds in the nature of provisions to#ards ta. if an+.44 (ii) (iii) Statutor+ reserves kept in Indian *ooks) !emitta*le surplus retained in Indian *ooks #hich is not repatria*le so long as the *ank functions in India) (iv) Capital reserve representing surplus arising out of sale of assets in India held in a separate account and #hich is not eligi*le for repatriation so long as the *ank functions in India) (v) Interest/free funds remitted from a*road for the purpose of ac. (if not alread+ done). an+ de*it *alance in Cead :ffice account #ill have to *e set/off against the capital) ()0)0 No(e'6 (i) The foreign *anks are re.uirements5 under 5Capital . in the inter/office account #ith Cead :ffice-overseas *ranches #ill not *e reckoned as capital funds) Co#ever.uisition of propert+ and held in a separate account in Indian *ooks) (vi) The net credit *alance. or for an+ other contingenc+ ma+ also *e furnished to !eserve Bank) sset !atio (C! !) !e. assessments are completed or ta. an undertaking to the effect that the *anks #ill not remit a*road the remitta*le surplus retained in India and included in Tier I capital as long as the *anks function in India) (ii) These funds ma+ *e retained in a separate account titled as 5 mount !etained in India for Meeting Capital to !isk/ #eighted "unds5) (iii) n auditor5s certificate to the effect that these funds represent surplus remitta*le to Cead :ffice once ta.uired to furnish to !eserve Bank.
pected losses depends mainl+ upon the level of certaint+ that can *e placed on estimates of the market values of the relevant assets.uidation at those values. conse.4% 4. if the+ represent accumulations of post/ta.pected losses and can *e included in capital. *ut the+ are less permanent in nature and cannot *e considered as ?Core Capital@) !evaluation reserves arise from revaluation of assets that are undervalued on the *ank@s *ooks.uit+ and disclosed reserves) These elements have the capacit+ to a*sor* une.tent to #hich the revaluation reserves can *e relied upon as a cushion for une. #hich permit redemption *+ the holder) ()()% 1e7a"ua(io re'er7e' These reserves often serve as a cushion against une.pected losses.uate care must *e taken to see that sufficient . t+picall+ *ank premises and marketa*le securities) The e.4 0"eme (' o! Tier 2 $a*i(a" ()()4 2 %i'$"o'e% re'er7e' a % $umu"a(i7e *er*e(ua" *re!ere $e 'hare' These often have characteristics similar to e. can *e included in Tier II capital) de. etc) Therefore. if the+ are not attri*uta*le to the actual diminution in value or identifia*le potential loss in an+ specific asset and are availa*le to meet une. it #ould *e prudent to consider revaluation reserves at a discount of 99 percent #hile determining their value for inclusion in Tier II capital) Such reserves #ill have to *e reflected on the face of the Balance Sheet as revaluation reserves) ()()0 )e era" *ro7i'io ' a % "o'' re'er7e' Such reserves. potential for actual li.uences of revaluation. profits and not encum*ered *+ an+ kno#n lia*ilit+ and should not *e routinel+ used for a*sor*ing normal loss or operating losses) Cumulative perpetual preference shares should *e full+ paid/up and should not contain clauses.uent deterioration in values under difficult market conditions or in a forced sale. ta.pected losses. the su*se.
and as the+ approach maturit+.ualit+ as capital) 6here these instruments have close similarities to e.imum of 4)%9 percent of total risk #eighted assets) ()()( 8ybri% %eb( $a*i(a" i '(rume (' In this categor+.uidation.uit+ and certain characteristics of de*t) >ach has a particular feature.uit+. the instrument should *e full+ paid/up. #hich can *e considered to affect its . free of restrictive clauses.ed maturit+. the+ ma+ *e included in Tier II capital) ()()9 #ubor%i a(e% %eb( (i) To *e eligi*le for inclusion in Tier II capital. for inclusion in Tier II capital) Instruments #ith an initial maturit+ of less than 9 +ears or #ith a remaining maturit+ of one +ear should not *e included as part of Tier II capital) Su*ordinated de*t instruments eligi*le to *e reckoned as Tier II capital #ill *e limited to 9' percent of Tier I capital) (ii) The su*ordinated de*t instruments shall *e su*Bected to discount at the rates sho#n *elo# and the discounted value shall *e eligi*le for inclusion in Tier II capital: . in particular #hen the+ are a*le to support losses on an ongoing *asis #ithout triggering li.40 provisions have *een made to meet all kno#n losses and foreseea*le potential losses *efore considering general provisions and loss reserves to *e part of Tier II capital) <eneral provisions-loss reserves #ill *e admitted up to a ma. fall a num*er of capital instruments. #hich com*ine certain characteristics of e. and should not *e redeema*le at the initiative of the holder or #ithout the consent of the !eserve Bank of India) The+ often carr+ a fi. unsecured. the+ should *e su*Bected to progressive discount. su*ordinated to the claims of other creditors.
posures@ #ill *e admitted as Tier II capital up to a ma. (ii) Investment a*ove 0' per cent in the paid up e.loss reserves@ and ?provisions held for countr+ e.5 .imum of 4)%9 per cent of the total risk/#eighted assets) 4.4( 1emai i 9 3a(uri(y o! .< 4'' E' &' (' %' ()()& The Investment "luctuation !eserve (I"!) #ould continue to *e ()9)4 In the case of investment in financial su*sidiaries and associates.'(rume (' Dess than one +ear :ne +ear and more *ut less than t#o +ears T#o +ears and more *ut less than three +ears Three +ears and more *ut less than four +ears "our +ears and more *ut less than five +ears treated as Tier II capital) ()()8 Banks are allo#ed to include the ?<eneral 1rovisions on Standard ssets@ and ?provisions held for countr+ e.uac+: (i) Investment up to 0' per cent in the paid up e.uit+ of financial entities #hich are not consolidated for capital purposes #ith the *ank shall *e assigned a 4'' per cent risk #eight.posures@ in Tier II capital) Co#ever.7e'(me ( i !i a $ia" e (i(ie' 1a(e o! Di'$ou ( :. the treatment #ill *e as under for the purpose of these guidelines on capital ade. the provisions on ?standard assets together #ith other ?general provisions.uit+ of financial entities #hich are not consolidated for capital purposes #ith the *ank and investments in other instruments eligi*le for capital status in those entities shall *e deducted at 9'F from Tier I and 9'F from Tier II capital) (iii) Banks should not recognise minorit+ interests that arise from consolidation of less than #holl+ o#ned *anking. .
uac+ purposes is as under: o Banks. should *e deducted from Tier I capital) ()&)0 *ank@s investments in all t+pes of instruments listed at ()8)( *elo#.6 O(her a%=u'(me (' (o $a*i(a" !u %' ()&)4 Intangi*le assets and losses in the current period and those *rought for#ard from previous periods. AT .uirements in the de/consolidated entit+ the shortfall shall also *e deducted at 9'F from Tier I capital and 9'F from Tier II capital) ()9)% n indicative list of institutions #hich ma+ *e deemed to *e financial institutions for capital ade. #hich are issued *+ other *anks .ceed 4' per cent of the investing *ank5s capital funds .GB"Cs . asset (AT ) results in an increase in Tier I capital of a *ank #ithout an+ tangi*le asset *eing added to the *anks@ *alance sheet) Therefore. o Mutual funds. o Gon/*anking financial companies.1rimar+ Aealers and are eligi*le for capital status for the investee entit+. #hich is an intangi*le asset."Is . o Cousing finance companies. o Insurance companies. should *e deducted from Tier I capital) ()&)% Creation of deferred ta. should not e.uirements) In case of an+ shortfall in the regulator+ capital re. o 1rimar+ dealers) 4.49 securities or other financial entities in consolidated capital) (iv) Banks should ensure that the entit+ that is not consolidated for capital purposes and for #hich the capital investment is deducted meets its respective regulator+ capital re. o Merchant *anking companies.
"Is5 investment in the follo#ing instruments #ill *e included in the prudential limit of 4' per cent referred to at ()8)0 a*ove) a) >. rate of interest together #ith a cop+ of the offer document. "Is and 1rimar+ Aealers #hich are not deducted from capital funds #ill attract a risk #eight of 4''F) ()&)( Banks5 .cess of this limit shall *e deducted at 9'F from Tier 4 and 9'F from Tier % capital) Investments in e.$a*i(a" ()8)4 The !eserve Bank has given autonom+ to Indian *anks to raise rupee su*ordinated de*t as Tier II capital."Is should not ac. su*Bect to strict compliance #ith the terms and conditions given in Annex 1) ()8)% "oreign *anks have also *een given autonom+ for raising su*ordinated de*t in foreign currenc+ through *orro#ings from Cead :ffice for inclusion in Tier II capital.uit+ sharesH *) 1reference shares eligi*le for capital statusH c) Su*ordinated de*t instrumentsH d) C+*rid de*t capital instrumentsH and e) n+ other instrument approved as in the nature of capital) ()&)9 Banks .uit+ or instruments eligi*le for capital status issued *+ *anks.uit+ shares. the investing *ank5s . soon after the issue is completed) . such as. if *+ such ac.uit+ capital) 4. su*Bect to strict compliance #ith the terms and conditions given in Annex 2. GB"Cs.4& (Tier I plus Tier II capital)) n+ investment in e.uire an+ fresh stake in a *ank5s e. maturit+ of the instrument. ()8)0 Banks should su*mit a report to !eserve Bank of India giving details of the Su*ordinated de*t issued for raising Tier II capital.ceeds 9 per cent of the investee *ank5s e."I5s holding e. amount raised.> -''ue o! 'ubor%i a(e% %eb( !or rai'i 9 Tier -.uisition.
ternal ratings as furnished in these draft guidelines) The mapping as presented in these guidelines are onl+ indicative and shall *e refined on the *asis of recognition process) 5.posures on the !eserve Bank of India. >C<C and Credit <uarantee "und Trust for Small Industries (C<TSI)) Investment in State <overnment guaranteed securities issued under the market *orro#ing programme #ill attract 2ero risk #eight) 9)%)% The a*ove risk #eights for <overnment guaranteed e.posures #ill also appl+ to the e.uac+ purposes) 1ending recognition of the e.ternal rating agencies *+ the !eserve Bank.48 ()E The elements of Tier 4 I Tier % capital shall not include foreign currenc+ loans granted to Indian parties) 5 9)4 Ca*i(a" Char9e !or Cre%i( 1i'& 3nder the Standardised pproach.ternal credit rating agencies #ill largel+ support the measure of credit risk) The !eserve Bank #ill determine #hether the e.ternal rating agencies for assigning risk #eights for capital ade.2 C"aim' o Dome'(i$ #o7erei9 ' 9)%)4 >.posures are classified as non/performing. *anks ma+ *e guided *+ the *road mapping of e. .posures #ill continue till the+ are classified as ?standard@ and performing assets) 6here these sovereign e.ternal credit rating agencies meet the eligi*ilit+ criteria specified under the revised "rame#ork) Banks ma+ rel+ upon the ratings assigned *+ the recognised e.posures to domestic sovereign #ill *e risk #eighted as under: #o7erei9 Central States Dire$( e?*o'ure' Jero Jero )uara (ee e?*o'ure' Jero %' F The risk #eight applica*le to central government e. the rating assigned *+ the eligi*le e.
uac+) 5. B 2 ra(e% 9)0)% >.3 C"aim' o Forei9 #o7erei9 ' 9)0)4 >. BBe"o.posures on foreign sovereigns #ill attract risk #eights as per the rating assigned *+ international rating agencies as follo#s: Cre%i( +''e''me ( o! # @ P 3oo%yB' +++ (o +++aa (o +a !isk #eight 'F %' F 9' F +A (o ++ BBBA (o BBBBaa BBA (o BBa (o B 4'' F 49' F 4'' F Be"o.posures in the *ooks of the foreign *ranches of the Indian *anks.uirements prescri*ed *+ the Cost Countr+ supervisors for computing capital ade. . #hich are detailed in 1aragraph 9)4%) 5.5 C"aim' o 3DB'.4E the+ #ould attract risk #eights as applica*le to G1 s. the+ ma+ adopt the re.4 C"aim' o *ub"i$ 'e$(or e (i(ie' :P#0'< 9)()4 Claims on domestic pu*lic sector entities #ill *e risk #eighted as Corporates) 5.uires a more conservative treatment to such e. B-# a % -3F 2ero per cent risk #eight #ill *e applied to the e. ho#ever. the International Monetar+ "und (IM") and the follo#ing eligi*le Multilateral development *anks (MABs) evaluated *+ the BCBS : • 6orld Bank <roup: IB!A and I"C.posures denominated in domestic currenc+ of the foreign sovereign met out of the resources in the same currenc+ raised in the Burisdiction of that sovereign #ill.posures on the Bank for International Settlements (BIS). in case a Cost Supervisor re. attract a risk #eight of 2ero percent) 9)0)0 Co#ever.
posures on other *anks #ill *e assigned a risk #eight of 4''F) 9)&)% The claims denominated in foreign currenc+ on *anks #ill *e risk #eighted as under as per the ratings assigned *+ international rating agencies) Cre%i( +''e''me ( o! # @P 3oo%yB' +++ (o +++aa (o +A (o ++ BBBA (o BBBBaa BBA (o BBa (o Be"o. Islamic Aevelopment Bank and Council of >urope Aevelopment Bank) 5. Cari**ean Aevelopment Bank. >uropean Investment "und. Inter/ merican Aevelopment Bank.6 C"aim' o ba &' 9)&)4 The claims denominated in Indian !upees on *anks operating in India #ill *e risk #eighted as under: (i) ll e.4= • • • • • • • • • • sian Aevelopment Bank. 2 ra(e% BBe"o. B . >uropean Bank for !econstruction I Aevelopment. Gordic Investment Bank. >uropean Investment Bank.posures to scheduled *anks. #ill *e assigned a risk #eight one categor+ less favoura*le than the Sovereign) Cence all claims on these *anks #ill *e risk #eighted at %'F) (ii) ll e. frican Aevelopment Bank.
ualit+ of unrated corporate claims held *+ individual *anks should #arrant a standard risk #eight higher than 4''F) . the claims denominated in foreign currenc+ on a *ank #hich is funded in that currenc+ #ill *e risk #eighted at %'F) 5. 2 ra(e% %' F 9' F 4'' F 49' F 4'' F 9)E)% The !eserve Bank #ould increase the standard risk #eight for unrated claims #here a higher risk #eight is #arranted *+ the overall default e.8 C"aim' o $or*ora(e' 9)E)4 The claims on corporates shall *e risk #eighted as per the ratings assigned *+ the rating agencies registered #ith the S>BI and recogni2ed *+ the !eserve Bank of India) The follo#ing ta*le indicates the risk #eight applica*le to claims on corporates) The standard risk #eight for unrated claims on corporates #ill *e 4''F) Go claim on an unrated corporate ma+ *e given a risk #eight preferential to that assigned to its sovereign of incorporation) Cre%i( +''e''me ( by %ome'(i$ ra(i 9 a9e $ie' !isk #eight +++ ++ + BBB a % be"o.perience) s part of the supervisor+ revie# process. the !eserve Bank #ould also consider #hether the credit .%' +a !isk #eight %' F 9' F 9' F B 4'' F 49' F 9' F Co#ever.> C"aim' o Primary Dea"er' Claims on 1rimar+ Aealers shall *e treated as claims on corporates) 5.
posure is to an individual person or persons or to a small *usinessH 1erson under this clause #ould mean an+ legal person capa*le of entering into contracts and #ould include *ut not *e restricted to individual.10. partnership firm.posure takes the form of an+ of the follo#ing: revolving credits and lines of credit (including credit cards and overdrafts).uities). #hether listed or not.tent that the+ . and mortgage loans to the e.%4 5.ceed ')%F of the overall regulator+ retail portfolio) ?Aggregate exposure@ means gross amount (i)e) not 1 Mortgage loans qualifying for treatment as claims secured by residential property is covered at paragraph 5. private limited companies. personal finance) and small *usiness facilities and commitments) (iii) Granularity criterion / Banks must ensure that the regulator+ retail portfolio is sufficientl+ diversified to a degree that reduces the risks in the portfolio. #arranting the 89F risk #eight) :ne #a+ of achieving this is that no aggregate e.posure to one counterpart should e. student and educational loans.cluded from this categor+) 9)=)% Kualif+ing criteria: (i) Orientation criterion / The e. auto loans and leases.C C"aim' i $"u%e% i (he re9u"a(ory re(ai" *or(!o"io' 9)=)4 Claims that meet all the four criteria listed *elo# ma+ *e included in a regulator+ retail portfolio and assigned a risk/#eighted of 89F) >. pu*lic limited companies. trust. co/operative societies etc) Small *usiness is one #here the total annual turnover is less than !s) 9' crore) (ii) Product criterion / The e. . personal term loans and leases (e)g) instalment loans.ualif+ for treatment as claims secured *+ residential propert+4 are specificall+ e. C3".posures *+ #a+ of investments in securities (such as *onds and e.
posure #ould mean sanctioned limit or the actual outstanding. the limit #ould appl+ to the *ank5s aggregated e.posures as appropriate from time/to/time) 2 Credit risk mitigation is explained in paragraph . e. ? one counterpart@ means one or several entities that ma+ *e considered as a single *eneficiar+ (e)g) in the case of a small *usiness that is affiliated to another small *usiness.i(h $a*i(a" !u %' o! 3p to !s) 0'' crore More than !s) 0'' crore up to !s) 9'' crore More than !s) 9'' crore Thre'ho"% "imi( !s) 4 crore !s) 0 crore !s) 9 crore 9)=)0 "or the purpose of ascertaining the a*solute threshold.posure shall mean the actual outstanding) 9)=)( The !eserve Bank #ould evaluate at periodic intervals the risk #eight assigned to the retail portfolio #ith reference to the default e. e. #here there is no scope for redra#ing an+ portion of the sanctioned amounts.posures (e)g) loans or commitments) that individuall+ satisf+ the three other criteria) In addition.posure to one counterpart should not e.posures. the+ should evolve ade.perience for these e.%% taking an+ *enefit for credit risk mitigation % into account) of all forms of de*t e. including all forms of off/*alance sheet e.uate s+stems to ensure strict adherence #ith this criterion) G1 s under retail loans are to *e e.posure concept for computing aggregate e. #hich ever is higher for all fund *ased and non/fund *ased facilities.posures) In the case of term loans and >MI *ased facilities.posure on *oth *usinesses)) 6hile *anks ma+ appropriatel+ use the group e.ceed the follo#ing a*solute threshold limit: Ba &' .imum aggregated retail e.cluded from the overall regulator+ retail portfolio #hen assessing the granularit+ criterion for risk/#eighting purposes) (iv) Low value of individual exposures ) The ma.
*anks should ensure that this concessionar+ #eight is applied restrictivel+ for residential purposes and in accordance #ith strict prudential criteria. such as the e.%0 5.11 C"aim' 'e$ure% by $ommer$ia" rea" e'(a(e Claims secured *+ mortgages on commercial real estate #ill attract a risk #eight of 4''F) 5. shall *e risk #eighted at 89F) Investment in mortgage/*acked securities issued *+ the housing finance companies regulated *+ the Gational Cousing Bank. #hich are *acked *+ mortgages of residential propert+ of the a*ove nature.12 No -*er!ormi 9 a''e(' :NP+'< (other than a . #ill *e risk/#eighted as follo#s: (i) 49'F risk #eight #hen specific provisions are less than . shall also *e risk #eighted at 89F) 9)4')% In appl+ing the 89F risk #eight. net of specific provisions (including partial #rite/ offs).ualif+ing residential 9)4%)4 The unsecured portion of G1 mortgage loan). or that is rented.istence of su*stantial margin of additional securit+ of at least %9 per cent over the amount of the loan *ased on strict valuation rules) ll other claims secured *+ residential propert+ #ould attract a higher risk #eight of 4''F) 9)4')0 !eserve Bank #ould increase the standard risk #eight #here the+ Budge the criteria are not met or #here the default e.10 C"aim' 'e$ure% by re'i%e (ia" *ro*er(y 9)4')4 Dending full+ secured *+ mortgages on residential propert+ that is or #ill *e occupied *+ the *orro#er.perience for claims secured *+ residential mortgages #arrant a higher risk #eight) !eserve Bank #ould revie# the standard risk #eight applica*le to claims secured *+ residential mortgage as appropriate from time to time) 5.
#hen provisions reach 49F of the outstanding amount: (i) Dand and *uilding #hich are valued *+ an e. asset classification is identified *orro#er/#ise and not facilit+/#ise) ccordingl+. #here a G1 is full+ secured *+ the follo#ing forms of collateral that are not recognised for credit risk mitigation purposes. eligi*le collateral and guarantees #ill *e the same as recognised for credit risk mitigation purposes (paragraphs 8)0)()) 9)4%)( In addition to the a*ove. all funded e. either independentl+ or along #ith other eligi*le collateral a 4''F risk #eight ma+ appl+.%( %'F of the outstanding amount of the G1 H (ii) 4''F risk #eight #hen specific provisions are at least %'F of the outstanding amount of the G1 H (iii) 9'F risk #eight #hen specific provisions are at least 9'F of the outstanding amount of the G1 ) 9)4%)% In terms of the prudential norms.posures of a single counterpart+ should *e reckoned) 9)4%)0 "or the purpose of defining the secured portion of the G1 . for the purpose of computing the level of specific provisions in G1 s for deciding the risk/#eighting purposes. net of specific provisions. and (ii) 1lant and machiner+ in good #orking condition at a value not higher than the depreciated value as reflected in the audited *alance sheet of the *orro#er) 9)4%)9 The a*ove collaterals #ill *e recogni2ed onl+ #here the *ank is having clear title to reali2e the sale proceeds thereof and appropriate the same to#ards the amounts due to the *ank) The *ank@s title to the collateral should also *e #ell documented) These forms of collaterals are not recognised an+#here else under the .pert valuer and #here the valuation is not more than three +ears old.
posures) 5. #arranties and stand*+ D-Cs related to 9' .15 O!!-ba"a $e 'hee( i(em' 9)49)4 The credit risk e. the risk #eight applica*le to the loan net of specific provisions #ill *e 89F) 5.posures #ill *e issued separatel+) 5.13 8i9her-ri'& $a(e9orie' !eserve Bank ma+.%9 standardised approach) 9)4%)& In the case of claims secured *+ residential propert+ as defined in paragraph 9)4')4. in due course. *id *onds.< 4'' Airect credit su*stitutes e)g) general guarantees of inde*tedness (including stand*+ D-Cs serving as financial guarantees for loans and securities) and acceptances (including endorsements #ith the character of acceptance)) %) Certain transaction/related contingent items (e)g) performance *onds. No. 4) . #hich are G1 the+ #ill *e risk #eighted at 4''F net of specific provisions) If the specific provisions in such loans are at least %'F of their outstanding amount.posure attached to off/Balance Sheet items has to *e first calculated *+ multipl+ing the face value of each of the off/ Balance Sheet items *+ ?credit conversion factor@ as indicated in the ta*le *elo#) This #ill then have to *e again multiplied *+ the #eights attri*uta*le to the relevant counter/part+ as specified a*ove) #r. that ma+ *e identified as high risk e.14 O(her +''e(' ll other assets #ill attract a uniform risk #eight of 4''F) The guidelines on treatment of securitisation e.'(rume (' Cre%i( Co 7er'io Fa$(or :. decide to appl+ a 49'F or higher risk #eight reflecting the higher risks associated #ith an+ e.posures.
%& #r. No. particular transactions)) 0) Short/term self/li,uidating trade/related contingencies (such as documentar+ credits collateralised *+ the underl+ing shipments) for *oth issuing *ank and confirming *ank) () 9) Sale and repurchase agreement and asset sales #ith recourse, #here the credit risk remains #ith the *ank) "or#ard asset purchases, for#ard deposits and partl+ paid shares and securities, #hich represent commitments #ith certain dra#do#n) &) 8) E) = Gote issuance facilities and revolving under#riting facilities) :ther commitments (e)g), formal stand*+ facilities and credit lines) #ith an original maturit+ of over one +ear) Similar commitments #ith an original maturit+ up to one +ear Commitments that are unconditionall+ cancella*le at an+ time *+ the *ank #ithout prior notice 4') Take/out "inance in the *ooks of taking/over institution (i) 3nconditional take/out finance (ii) Conditional take/out finance 9)49)% NOT0: In regard to off/*alance sheet items, the follo#ing transactions #ith non/*ank counterparties #ill *e treated as claims on *anks) (i) <uarantees issued *+ *anks against the counter guarantees of other *anks) (ii) !ediscounting of documentar+ *ills accepted *+ *anks) Bills discounted *+ *anks #hich have *een accepted *+ another *ank #ill *e treated as a funded claim on a *ank) In all the a*ove cases *anks should *e full+ satisfied that the risk e.posure is in fact on the other *ank) 4'' 9' %' ' 9' 9' 4'' 4'' %' - '(rume (' Cre%i( Co 7er'io Fa$(or :;<
%8 9)49)0 1i'& .ei9h(' !or !orei9 $urre $y a % i (ere'( ra(e %eri7a(i7e' (i) "or reckoning the minimum capital ratio, the computation of risk #eighted assets on account of e.change and interest rate derivatives should *e done as per the current e.posure method) Counterpart+ risk #eightings for :TC derivative transactions #ill not *e su*Bect to an+ specific ceiling) (ii) "oreign e.change contracts include the follo#ing: (a) Cross currenc+ interest rate s#aps (*) "or#ard foreign e.change contracts (c) Currenc+ futures (d) Currenc+ options purchased (e) :ther contracts of a similar nature (iii) Interest rate contracts include the follo#ing: (a) Single currenc+ interest rate s#aps (*) Basis s#aps (c) "or#ard rate agreements (d) Interest rate futures (e) Interest rate options purchased (f) :ther contracts of a similar nature
The Current >.posure Method to assess the e.posure on account of credit risk on interest rate and e.change rate derivative contracts re,uires periodical calculation of the current replacement cost *+ marking these contracts to market, thus capturing the current e.posure #ithout an+ need for estimation and then adding a factor (Ladd/ onM) to reflect the potential future e.posure over the remaining life of the contract) Therefore, in order to calculate the credit e.posure e,uivalent of off/*alance
%E sheet interest rate and e.change rate instruments under Current >.posure Method, a *ank #ould sum: • the total replacement cost (o*tained *+ Lmarking to marketM) of all its contracts #ith positive value (i)e) #hen the *ank has to receive mone+ from the counterpart+), and • an amount for potential future changes in credit e.posure calculated on the *asis of the total notional principal amount of the contract multiplied *+ the follo#ing credit conversion factors according to the residual maturit+ :
change transactions.posure Method consistentl+ for all derivative products) (vii) The e.posure method shall *e multiplied *+ the risk #eight allotted to the relevant counter/part+) (viii) reference ma+ *e made to paragraphs 8)0)9 for the calculation of risk/#eighted assets #here the credit converted e.posure of Aerivative 1roducts.posure is secured *+ eligi*le collateral) 9)49)( 2 'e(("e% (ra 'a$(io ' (i) 6ith regard to unsettled securities and foreign e.floating interest rate s#aps) The credit e. *anks are e. *anks #ere encouraged to follo# the Current >. irrespective of the *ooking or the .%= 1e'i%ua" 3a(uri(y Co 7er'io Fa$(or (o be a**"ie% o No(io a" Pri $i*a" +mou ( Interest Contract Rate Gil ')9F 0?$ha 9e Co (ra$( 4)' F 9)' F 1a(e /e'' (ha o e year O e year a % o7er (v) Banks #ould not *e re. #hich is an accurate method of measuring credit e.posed to counterpart+ credit risk from trade date.posure on these contracts #ould *e evaluated solel+ on the *asis of their mark/to/ market value) (vi) In terms of circular AB:A)Go)B1)BC)(E-%4)'0)'9(-'%/'0 dated Aecem*er 40.posure for single currenc+ floating . %''% on Measurement of Credit >.uired to calculate potential credit e.posure in a derivative product) Banks are no# advised to adopt the Current >.posure Method.posure as computed under the current e.
foreign e.0' accounting of the transaction) The BCBS has decided to defer the specification of a capital re.uirement for unsettled foreign e.1 0?(er a" $re%i( a''e''me (' 0"i9ib"e Cre%i( 1a(i 9 +9e $ie' !eserve Bank #ill.posure on the relevant counterpart+. #hose ratings ma+ *e used *+ the *anks for assigning the risk #eights for credit risk) In line #ith the provisions of the Ge# Capital de.change transactions does not appl+ to failed foreign e. in due course. for *oth risk #eighting and internal risk management purposes) Banks #ill not *e allo#ed to Lcherr+ pickM the assessments provided *+ different credit rating agencies) If a *ank has decided to use the ratings of some (sa+ &)%)4 Banks should use the recognised credit rating agencies and their .change and securities transactions) Banks must closel+ monitor these transactions starting from the da+ the+ fail) Since the failed transactions #ould convert into a fund *ased e. the risk #eight of the claim #ill *e *ased on this rating) 6.uac+ "rame#ork. *anks are encouraged to develop.change and securities transactions) In the interim.posure arising from unsettled transactions as appropriate for producing management information that facilitates action on a timel+ *asis) (ii) The deferral of a specific capital charge for unsettled securities. *anks should maintain capital appropriate to the risk #eight applica*le to the counterpart+ in terms of these guidelines) 6 6. #here the facilit+ provided *+ the *ank possesses rating assigned *+ an eligi*le credit rating agenc+.2 #$o*e o! a**"i$a(io o! e?(er a" ra(i 9' ratings consistentl+ for each t+pe of claim. undertake the detailed process of identif+ing the eligi*le credit rating agencies. implement and improve s+stems for tracking and monitoring the credit risk e.
#hose ratings the *ank has decided to use) >. unless the respective e.ternal assessments for one entit+ #ithin a corporate group cannot *e used to risk #eight other entities #ithin the same group) &)%)% Banks must disclose the names of the credit rating agencies that the+ use for the risk #eighting of their assets *+ t+pe of claims. #hile using another rating for another e. the risk #eights associated #ith the particular rating grades as determined *+ !eserve Bank through the mapping process for each eligi*le credit rating agenc+) &)%)0 "or assets in the *ank@s portfolio that have contractual maturit+ less than or e.04 t#o) of the recognised credit rating agencies for a given categor+ of e.uired to result in a risk #eight assignment consistent #ith that of the level of credit risk) &)0)% 1ending completion of the process of identif+ing the eligi*le rating agencies. a *road mapping of the credit ratings a#arded *+ the .posures.ual to one +ear.uac+ "rame#ork recommends development &)0)4 The Ge# Capital of a mapping process to assign the ratings issued *+ eligi*le credit rating agencies to the risk #eights availa*le under the Standardised risk #eighting frame#ork) The mapping process is re. despite the fact that some of its claims ma+ *e rated *+ the other recognised credit rating agencies) Banks shall not use one agenc+@s rating for one corporate *ond.3 3a**i 9 *ro$e'' de.posures are rated *+ onl+ one of the recognised credit rating agencies.posure to the same counter/part+. it can use onl+ the ratings of those t#o credit rating agencies. short term ratings accorded *+ the eligi*le credit rating agencies #ould *e relevant) "or other assets #hich have a contractual maturit+ of more than one +ear. long term ratings accorded *+ the eligi*le credit rating agencies #ould *e relevant) 6.
cept under the conditions mentioned in paragraph &)E) In no event can a short/term rating *e used to support a risk #eight for an unrated long/term claim) Short/term assessments ma+ onl+ *e used for short/term claims against *anks and corporates) &)9)4 "or risk/#eighting purposes.4 /o 9 (erm ra(i 9' &)()4 :n the *asis of the a*ove factors as #ell as the data made availa*le *+ the rating agencies.0% domestic rating agencies has *een attempted #hich #ould serve as a *road guide to the *anks in assigning risk #eights) 6. N or / #ould *e considered to *e in the rating categor+ and assigned 4''F risk #eight) 6. the corresponding main rating categor+ risk #eight should *e used) "or e.ample. the follo#ing tentative mapping of ratings issued *+ the domestic credit rating agencies #ith the risk #eights applica*le as per the Standardised approach under the revised "rame#ork has *een arrived at: Dong term !atings of Credit rating agencies operating in India Standardised approach !isk #eights %'F 9'F 4''F BBB I *elo# 3nrated 49'F 4''F &)()% 6here LNM or L/M notation is attached to the rating.5 #hor( (erm ra(i 9' issue/specific) The+ can onl+ *e used to derive risk #eights for claims arising from the rated facilit+) The+ cannot *e generalised to other short/term claims. e. short/term ratings are deemed to *e .
C A %'F 9'F 4''F 49'F 49'F 1i'& . the follo#ing *road principles #ill appl+) The unrated short term claim on a counter/part+ #ill attract a risk #eight of at least one level higher than the risk #eight applica*le to the rated claim) If a short/term rated facilit+ attracts a %'F or a 9'F risk/#eight.( 9 C+10 1D4 1D% 1D0 1D( 1D9 Fi($h "4 "% "0 B.0 (N. su*Bect to strict compliance #ith the provisions of paragraph &)E.4 %N. should also receive a 49'F risk #eight.ei9h(' &)9)9 The a*ove mappings (*oth long term and short term) are tentative and limited for the purposes of these draft guidelines) The mapping #ill *e re/visited #hile identif+ing the eligi*le domestic rating agencies and #ill *e issued in due course) The mapping done eventuall+ #ould *e revie#ed annuall+ *+ the !eserve Bank) .ues for such claims) &)9)( In respect of the short term ratings the follo#ing mapping ma+ *e used: #hor( (erm ra(i 9' C1-#-/ 14N 14 1%N 1% 10N-10 -C1+ 4N.00 &)9)% 6hen *anks generalise risk #eight applica*le to rated short term claims to other unrated short/term claims.% 0N. #hether long/ term or short/term. unless the *ank uses recognised credit risk mitigation techni. unrated short/ term claims cannot attract a risk #eight lo#er than 9'F or 4''F respectivel+) &)9)0 If an issuer has a short/term facilit+ #ith an assessment that #arrants a risk #eight of 49'F. all unrated claims.
*anks should use onl+ 'o"i$i(e% ra(i 9 !rom (he e"i9ib"e $re%i( ra(i 9 a9e $ie'. the follo#ing general principles #ill appl+: . that rating #ould *e used to determine the risk #eight of the claim) (ii) If there are t#o ratings accorded *+ eligi*le credit rating agencies #hich map into different risk #eights. Go ratings issued *+ the credit rating agencies on an unsolicited *asis should *e considered for risk #eight calculation as per the Standardised pproach) 6.uested the credit rating agenc+ for the rating and has accepted the rating assigned *+ the agenc+) s a general rule.> 2'e o! mu"(i*"e ra(i 9 a''e''me (' &)8)4 Banks shall *e guided *+ the follo#ing in respect of e.posureso*ligors having multiple ratings from the eligi*le credit rating agencies chosen *+ the *ank for the purpose of risk #eight calculation: (i) If there is onl+ one rating *+ an eligi*le credit rating agenc+ for a particular claim.8 +**"i$abi"i(y o! i''ue ra(i 9 (o i''uer/ o(her $"aim' &)E)4 6here a *ank invests in a particular issue that has an issue specific rating *+ an eligi*le credit rating agenc+ the risk #eight of the claim #ill *e *ased on this assessment) 6here the *ank@s claim is not an investment in a specific assessed issue.0( 6. the higher risk #eight should *e applied) (iii) If there are three or more ratings accorded *+ eligi*le credit rating agencies #ith different risk #eights.6 &)&)4 2'e o! u 'o"i$i(e% ra(i 9' rating #ould *e treated as solicited onl+ if the issuer of the instrument has re. the ratings corresponding to the t#o lo#est risk #eights should *e referred to and the higher of those t#o risk #eights should *e applied) 6.
the .posure to that *orro#er. no recognition of credit risk mitigation techni.ual to or higher than that #hich applies to unrated claims. it should *e e. #ill *e assigned the same risk #eight as is applica*le to the rated e.posure i)e).tend an issuer or an issue specific rating assigned *+ an eligi*le credit rating agenc+ to an+ other e.posure the *ank has #ith regard to that e. if this claim ranks pari passu or Bunior to the rated e.posure in all respects) (iii) 6here a *ank intends to e.posure.09 (i) In circumstances #here the *orro#er has a specific assessment for an issued de*t / *ut the *ank@s claim is not an investment in this particular de*t / the rating applica*le to the specific de*t (#here the rating maps into a risk #eight lo#er than that #hich applies to an unrated claim) ma+ *e applied to the *ank@s unassessed claim onl+ if this claim ranks pari passu or senior to the specific rated de*t in all respects and the maturit+ of the unassessed claim is not later than the maturit+ of the rated claim) If not.uivalent e.ues should *e taken into account if the credit enhancement is alread+ reflected in the issue specific rating accorded *+ an eligi*le credit rating agenc+ relied upon *+ the *ank) (v) 6here unrated e. a claim on the same counterpart+.tended to the entire amount of credit risk e. #hich is unrated *+ an+ eligi*le credit rating agenc+.posures are risk #eighted *ased on the rating of an e. the rating applica*le to the specific de*t cannot *e used and the unassessed claim #ill receive the risk #eight for unrated claims) (ii) If either the issuer or single issue has *een assigned a rating #hich maps into a risk #eight e.posure #hich the *ank has on the same counterpart+ and #hich meets the a*ove criterion. *oth principal and interest) (iv) 6ith a vie# to avoiding an+ dou*le counting of credit enhancement factors.
ues reduces or transfers credit risk.ues to mitigate the credit risks to #hich the+ are e.uirement than an other#ise identical transaction #here such techni.1.(ro%u$(io .ues meet the re.posed) The revised approach to credit risk mitigation allo#s a #ider range of credit risk mitigants to *e recognised for regulator+ capital purposes than is permitted under the 4=EE "rame#ork provided these techni.ues are used should receive a higher capital re.0& general rule is that foreign currenc+ ratings #ould *e used onl+ for e.uirements for legal certaint+ as descri*ed in paragraph 8)% *elo#) 8)4)% The general principles applica*le to use of credit risk mitigation techni. if separate.1 Cre%i( 1i'& 3i(i9a(io Cre%i( ri'& mi(i9a(io . no additional supervisor+ recognition of C!M for regulator+ capital purposes #ill *e granted on claims for #hich an issue/specific rating is used that alread+ reflects that C!M) (iii) 1rincipal/onl+ ratings #ill not *e allo#ed #ithin the C!M frame#ork) (iv) 6hile the use of C!M techni.posures in foreign currenc+) Aomestic currenc+ ratings. .ues are as under: (i) Go transaction in #hich Credit !isk Mitigation (C!M) techni. #ould *e used to risk #eight onl+ claims denominated in the domestic currenc+) > >. operational.1 Banks use a num*er of techni. it simultaneousl+ ma+ increase other risks (residual risks)) !esidual risks include legal..ues are not used) (ii) The effects of C!M #ill o( *e dou*le counted) Therefore.
uatel+ controlled.Co""a(era"i'e% (ra 'a$(io ' collateralised transaction is one in #hich: (i) *anks have a credit e.or& a % mi imum $o %i(io ' The !evised "rame#ork allo#s *anks to adopt either the simple approach.posure) (ii) *anks have a specific lien on the collateral and the re.uidit+ and market risks) Therefore.08 li. !eserve Bank ma+ impose additional capital charges or take other supervisor+ actions) The disclosure re.3 8)0)4 Cre%i( ri'& mi(i9a(io (e$h i.posure is hedged in #hole or in part *+ collateral posted *+ a counterpart+ or *+ a third part+ on *ehalf of the counterpart+) Cere. Lcounterpart+M is used to denote a part+ to #hom a *ank has an on/ or off/*alance sheet credit e. to verif+ this) Such verification should have a #ell founded legal *asis for reaching the conclusion a*out the *inding nature and enforcea*ilit+ of the documents) Banks should also undertake such further revie# as necessar+ to ensure continuing enforcea*ilit+) >.uirements of legal certaint+ are met) 8)0)% O7era"" !rame.uirements prescri*ed in Ta*le & must also *e o*served for *anks to o*tain capital relief in respect of an+ C!M techni. su*stitutes the risk .2 /e9a" Cer(ai (y In order for *anks to o*tain capital relief for an+ use of C!M techni. the follo#ing minimum standards for legal documentation must *e met) ll documentation used in collateralised transactions must *e *inding on all parties and legall+ enforcea*le in all relevant Burisdictions) Banks must have conducted sufficient legal revie#. #hich should *e #ell documented. it is imperative that *anks emplo+ ro*ust procedures and processes to control these risks) 6here these risks are not ade. similar to the 4=EE ccord.ues. #hich.ues) >.posure and that credit e.ue' .
posure amount *+ the value ascri*ed to the collateral) Banks in India ma+ adopt the Comprehensive pproach. e)g) *+ registering it #ith a registrar) (ii) In order for collateral to provide protection. *+ effectivel+ reducing the e.posure (generall+ su*Bect to a %'F floor).posures. in the event of the default. are allo#ed to reduce their credit e. #here applica*le. more specificall+ defined *elo#). the credit . insolvenc+ or *ankruptc+ (or one or more other#ise/defined credit events set out in the transaction documentation) of the counterpart+ (and.0E #eighting of the collateral for the risk #eighting of the counterpart+ for the collateralised portion of the e.uirements to take account of the risk mitigating effect of the collateral) Co#ever.posure to a counterpart+ #hen calculating their capital re.ualit+ of the counterpart+ and the value of the collateral must not have a material positive correlation) "or e. #hich allo#s fuller offset of collateral against e. or for the comprehensive approach. *+ effectivel+ reducing the e.uirements for legal certaint+.posures.posure amount *+ the value ascri*ed to the collateral) 3nder this approach. the legal mechanism *+ #hich collateral is pledged or transferred must ensure that the *ank has the right to li. *efore capital relief #ill *e granted the standards set out *elo# must *e met: (i) In addition to the general re.uirements under the la# applica*le to the *ank@s interest in the collateral for o*taining and maintaining an enforcea*le securit+ interest. in a timel+ manner. *anks #hich take eligi*le financial collateral (e)g) cash or securities.uidate or take legal possession of it.ample. securities issued *+ the counterpart+ / or *+ an+ related group entit+ / #ould provide little protection . of the custodian holding the collateral)) "urthermore *anks must take all steps necessar+ to fulfill those re. #hich allo#s fuller offset of collateral against e.
uired for declaring the default of the counterpart+ and li.0= and so #ould *e ineligi*le) (iii) Banks must have clear and ro*ust procedures for the timel+ li.uidation of collateral to ensure that an+ legal conditions re.posure to a counterpart+ for capital ade.posure to the counterpart+ and the value of an+ collateral received in support of that counterpart+ to take account of possi*le future fluctuations in the value of either.posure and the volatilit+ adBusted amount for the collateral #ill *e lo#er than the collateral. *anks must take reasona*le steps to ensure that the custodian segregates the collateral from its o#n assets) 8)0)0 The $om*rehe 'i7e a**roa$h (i) In the comprehensive approach. and that collateral can *e li. #hen taking collateral.uidated promptl+) (iv) 6here the collateral is held *+ a custodian.uired to adBust *oth the amount of the e. occasioned *+ market movements) These adBustments are referred to as ?haircuts@) The application of haircuts #ill produce volatilit+ adBusted amounts for *oth e.uidating the collateral are o*served. *anks #ill need to calculate their adBusted e.posure and collateral) The volatilit+ adBusted amount for the e. unless either side of the transaction is cash) (ii) dditionall+ #here the e.uac+ purposes in order to take account of the effects of that collateral) Banks are re.posure and collateral are held in different currencies an additional do#n#ards adBustment must *e made to the volatilit+ adBusted collateral amount .posure #ill *e higher than the e.
uirement is indicated in paragraph 8)0)9) 8)0)( 0"i9ib"e !i a $ia" $o""a(era" The follo#ing collateral instruments are eligi*le for recognition in the comprehensive approach: (i) Cash (as #ell as certificates of deposit or compara*le instruments issued *+ the lending *ank) on deposit #ith the *ank #hich is incurring the counterpart+ e.change rates) (iii) 6here the volatilit+/adBusted e. *anks shall calculate their risk/#eighted assets as the difference *et#een the t#o multiplied *+ the risk #eight of the counterpart+) The frame#ork for performing calculations of capital re. 7isan Oikas 1atra and Gational Savings Certificates (v) Dife insurance policies #ith a declared surrender value of an insurance compan+ #hich is regulated *+ an insurance sector regulator (vi) Ae*t securities rated *+ a recognised Credit !ating #here these are either: a) at least BB #hen issued *+ pu*lic sector entitiesH or *) at least #hen issued *+ other entities (including *anks genc+ and 1rimar+ Aealers)H or .posure) (ii) <old: <old #ould include *oth *ullion and Be#eller+) Co#ever.change risk).(' to take account of possi*le future fluctuations in e.posure amount is greater than the volatilit+/adBusted collateral amount (including an+ further adBustment for foreign e. the value of the collaterali2ed Be#eller+ should *e *enchmarked to ==)== purit+) (iii) (iv) Securities issued *+ Central and State <overnments Indira Oikas 1atra.
posure amount after risk mitigation is calculated as follo#s: ! "n equity #ould meet the test of liquidity if it is traded on the stock exchange$s% on at least &0' of the trading days during the preceding !(5 days.uoted dail+ i)e).) 3ndertakings for Collective Investments in Transfera*le Securities (3CITS) and mutual funds #here: • a price for the units is pu*licl+ .uities (including converti*le *onds) that are listed on a recognised stock e.0-1D0-"0 (as applica*le) andH f) Banks should *e sufficientl+ confident a*out the market li. #here the dail+ G O is availa*le in pu*lic domainH and • the 3CITS-mutual fund is limited to investing in the instruments listed in this paragraph) 8)0)9 Ca"$u"a(io o! $a*i(a" re.uidit+ of the securit+) (viii) >.uireme ( "or a collateralised transaction.(4 c) at least 1%N.changeH and c) classified as senior de*tH and d) all rated issues of the same seniorit+ *+ the issuing *ank that are rated at least or 1%N0-1D0-"0 *+ a recognised Credit !ating genc+H and e) the *ank holding the securities as collateral has no information to suggest that the issue Bustifies a rating *elo# or 1%N.change in respect of #hich the *anks should *e sufficientl+ confident a*out the market li. the e.uidit+ 0) (i. .0-1D0-"0 for short/term de*t instruments) (vii) (vii) Ae*t securities not rated *+ a recognised Credit !ating genc+ #here these are: a) issued *+ a *ankH and *) listed on a recognised e.
posure value after risk mitigation > Q current value of the e.posure for #hich the collateral .posure as #ell as the collateral) (ii) The Standard Supervisory Haircuts (assuming dail+ mark/to/ market. using *anks@ o#n internal estimates of market price volatilit+) Banks in India #ill *e allo#ed to use onl+ the standard supervisor+ haircuts for *oth the e. dail+ re/margining and a 4' *usiness da+ holding period) e.posure The e.posure CQ the current value of the collateral received CcQ haircut appropriate to the collateral Cf. using parameters set *+ the Committee. S> . >P) #ill *e multiplied *+ the risk #eight of the counterpart+ to o*tain the risk/#eighted asset amount for the collateralised transaction) 8)0)& 8air$u(' (i) In principle. (4 N Ce) / C .(% >P Q ma.ualifies as a risk mitigant CeQ haircut appropriate to the e.pressed as percentages are as under: .posure amount after risk mitigation (i)e). *anks have t#o #a+s of calculating the haircuts: (i) standard supervisor+ haircuts. and (ii) o#n/estimate haircuts.)TU #here: >PQ the e. R'. (4 / Cc / Cf.Q haircut appropriate for currenc+ mismatch *et#een the collateral and e.
uities (including converti*le *onds) listed on a recogni2ed e. e. Indira Oikas 1atras. 7isan Oikas 1atras. >C<C C<TSI etc) #hich are eligi*le for 2ero per cent risk #eight) (v) The standard supervisor+ haircut for currenc+ risk #here e. Gational Savings Certificates #ill *e the same as applica*le to securities) rated de*t (iv) Sovereign #ill include !eserve Bank of India.uities (including converti*le *onds) and <old :ther e. . X 9 +ears W 9 +ears N to BBB//%. 0.ample calculating the effect of Credit !isk Mitigation is furnished in nne.posuresecurities issued *+ the Central or State <overnments. X 9 +ears W 9 +ears ll #o7erei9 ' ')9 % ( 4 0 & 49 49 %9 Cighest haircut applica*le to an+ securit+ in #hich the fund can invest ' O(her i''ue' 4 ( E % & 4% Main inde.posure and collateral are denominated in different currencies is EF (also *ased on a 4'/*usiness da+ holding period and dail+ mark/to/market) (vi) Illustrative e.change 3CITs-Mutual funds Cash in the same currenc+ (iii) The standard supervisor+ haircuts applica*le to e. MABs./0-1/0 and 3nrated *ank securities BB N to BB/ X 4 +ear W 4 +ear.(0 -''ue ra(i 9 !or %eb( 'e$uri(ie' to /-V/4 1e'i%ua" 3a(uri(y W 4 +ear W 4 +ear.
(( (vii) 6here the collateral is a *asket of assets. the haircut on the *asket #ill *e.O -ba"a $e 'hee( e((i 9 :n/*alance sheet netting is confined to loans-advances and deposits. involving specific lien #ith proof of documentation) The+ ma+ calculate capital re.posures su*Bect to the follo#ing conditions: 6here a *ank.uenc+ of remargining or revaluation using the formula *elo#: #here: H Q haircut H10 Q 4'/*usiness da+ standard supervisor+ haircut for instrument N Q actual num*er of *usiness da+s *et#een remargining for capital market transactions or revaluation for secured transactions) !" Q minimum holding period for the t+pe of transaction >.uirements on the *asis of net credit e. . #here *anks have legall+ enforcea*le netting arrangements. a) has a #ell/founded legal *asis for concluding that the netting or offsetting agreement is enforcea*le in each relevant Burisdiction regardless of #hether the counterpart+ is insolvent or *ankruptH .ue' . the 4'/ *usiness da+ haircuts provided a*ove #ill *e the *asis and this haircut #ill *e scaled up or do#n depending on the t+pe of transaction and the fre. #here is the #eight of the asset (as measured *+ units of currenc+) in the *asket and the haircut applica*le to that asset) (viii) "or *anks using the standard supervisor+ haircuts.4 Cre%i( ri'& mi(i9a(io (e$h i.
(9 *) is a*le at an+ time to determine the loans-advances and deposits #ith the same counterpart+ that are su*Bect to the netting agreementH and c) monitors and controls the relevant e.posures on a net *asis, it ma+ use the net e.posure of loans-advances and deposits as the *asis for its capital ade,uac+ calculation in accordance #ith the formula in paragraph 8)0)9) Doans-advances are treated as e.posure and deposits as collateral) The haircuts #ill *e 2ero e.cept #hen a currenc+ mismatch e.ists) ll the re,uirements contained in paragraph 8)0)& and 8)& #ill also appl+) >.5 Cre%i( ri'& mi(i9a(io (e$h i,ue' - )uara (ee' *anks ma+ take account of such credit protection in calculating capital re,uirements) 8)9)% range of guarantors are recognised) s under the 4=EE ccord, a su*stitution approach #ill *e applied) Thus onl+ guarantees issued *+ entities #ith a lo#er risk #eight than the counterpart+ #ill lead to reduced capital charges since the protected portion of the counterpart+ e.posure is assigned the risk #eight of the guarantor, #hereas the uncovered portion retains the risk #eight of the underl+ing counterpart+) 8)9)0 Aetailed operational re,uirements for guarantees eligi*le for *eing treated as a C!M are as under: 8)9)( O*era(io a" re,uireme (' !or 9uara (ee' guarantee (counter/guarantee) must represent a direct claim on the protection provider and must *e e.plicitl+ referenced to specific e.posures or a pool of e.posures, so that the e.tent of the cover is clearl+ defined and incontroverti*le) The guarantee must *e irrevoca*leH there must *e no clause in the contract that #ould allo# the protection provider unilaterall+ to cancel the cover or that
8)9)4 6here guarantees are direct, e.plicit, irrevoca*le and unconditional
(& #ould increase the effective cost of cover as a result of deteriorating credit ,ualit+ in the guaranteed e.posure) The guarantee must also *e unconditionalH there should *e no clause in the guarantee outside the direct control of the *ank that could prevent the protection provider from *eing o*liged to pa+ out in a timel+ manner in the event that the original counterpart+ fails to make the pa+ment(s) due) 8)9)9 +%%i(io a" o*era(io a" re,uireme (' !or 9uara (ee' In addition to the legal certaint+ re,uirements in paragraphs 8)% a*ove, in order for a guarantee to *e recognised, the follo#ing conditions must *e satisfied: (i) :n the ,ualif+ing default-non/pa+ment of the counterpart+, the *ank ma+ in a timel+ manner pursue the guarantor for an+ monies outstanding under the documentation governing the transaction) The guarantor ma+ make one lump sum pa+ment of all monies under such documentation to the *ank, or the guarantor ma+ assume the future pa+ment o*ligations of the counterpart+ covered *+ the guarantee) The *ank must have the right to receive an+ such pa+ments from the guarantor #ithout first having to take legal actions in order to pursue the counterpart+ for pa+ment) The guarantee is an e.plicitl+ documented o*ligation assumed *+ the guarantor) >.cept as noted in the follo#ing sentence, the guarantee covers all t+pes of pa+ments the underl+ing o*ligor is e.pected to make under the documentation governing the transaction, for e.ample notional amount, margin pa+ments etc) 6here a guarantee covers pa+ment of principal onl+, interests and other uncovered pa+ments should *e treated as an unsecured amount in accordance #ith paragraph 8)9)E)
8)9)& 1a 9e o! e"i9ib"e 9uara (or' :$ou (er-9uara (or'< Credit protection given *+ the follo#ing entities #ill *e recognised: (i) sovereigns, sovereign entities (including BIS, IM", >uropean Central Bank and >uropean Communit+ as #ell as those MABs referred to in paragraph 9)9, >C<C
(8 and C<TSI), 1S>s, *anks and primar+ dealers #ith a lo#er risk #eight than the counterpart+H (ii) other entities rated or *etter) This #ould include guarantee cover provided *+ parent, su*sidiar+ and affiliate companies #hen the+ have a lo#er risk #eight than the o*ligor) 8)9)8 1i'& .ei9h(' The protected portion is assigned the risk #eight of the protection provider) >.posures covered *+ State <overnment guarantees #ill attract a risk #eight of %'F) The uncovered portion of the e.posure is assigned the risk #eight of the underl+ing counterpart+) 8)9)E Pro*or(io a" $o7er 6here the amount guaranteed, or against #hich credit protection is held, is less than the amount of the e.posure, and the secured and unsecured portions are of e,ual seniorit+, i)e) the *ank and the guarantor share losses on a pro/rata *asis capital relief #ill *e afforded on a proportional *asis: i)e) the protected portion of the e.posure #ill receive the treatment applica*le to eligi*le guarantees, #ith the remainder treated as unsecured) 8)9)= Curre $y mi'ma($he' 6here the credit protection is denominated in a currenc+ different from that in #hich the e.posure is denominated Y i)e) there is a currenc+ mismatch Y the amount of the e.posure deemed to *e protected #ill *e reduced *+ the application of a haircut C "Z, i)e) < Q < . (4/ C"Z) #here: < Q nominal amount of the credit protection C"Z Q haircut appropriate for currenc+ mismatch *et#een the credit protection and underl+ing o*ligation) Banks using the supervisor+ haircuts #ill appl+ a haircut of EF for currenc+ mismatch)
(E 8)9)4' #o7erei9 9uara (ee' a % $ou (er-9uara (ee' claim ma+ *e covered *+ a guarantee that is indirectl+ counter/ guaranteed *+ a sovereign) Such a claim ma+ *e treated as covered *+ a sovereign guarantee provided that: (i) (ii) the sovereign counter/guarantee covers all credit risk elements of the claimH *oth the original guarantee and the counter/guarantee meet all operational re. the C!M is not recognised for capital purposes) In other cases #here there is a maturit+ mismatch.uirements for guarantees.posure) 8)&)0 De!i i(io o! ma(uri(y The maturit+ of the underl+ing e. partial recognition is given to the C!M for regulator+ capital purposes as detailed *elo# in paragraphs 8)&)0 to 8)&)9) 8)&)4 6here the residual maturit+ of the C!M is less than that of the 8)&)% "or the purposes of calculating risk/#eighted assets.plicit to the original claimH and the cover should *e ro*ust and no historical evidence suggests that the coverage of the counter/guarantee is less than effectivel+ e.posure a maturit+ mismatch occurs) 6here there is a maturit+ mismatch and the C!M has an original maturit+ of less than one +ear.posure and the maturit+ of the collateral should *oth *e defined conservativel+) The effective maturit+ of the underl+ing should *e gauged as the longest possi*le remaining time *efore the counterpart+ is scheduled to fulfil its .6 3a(uri(y 3i'ma($h underl+ing credit e. a maturit+ mismatch occurs #hen the residual maturit+ of a collateral is less than that of the underl+ing e.uivalent to that of a direct sovereign guarantee) (iii) >. e.cept that the counter/guarantee need not *e direct and e.
the maturit+ of collateral for e.uired to su*divide the e.pressed in +ears T Q min (9.posure (e)g) a *ank has *oth collateral and guarantee partiall+ covering an e. em*edded options #hich ma+ reduce the term of the collateral should *e taken into account so that the shortest possi*le effective maturit+ is used) 8)&)( 1i'& .25< 6here: 1a Q value of the credit protection adBusted for maturit+ mismatch 1 Q credit protection (e)g) collateral amount.ue' In the case #here a *ank has multiple C!M techni.posures #ith original maturities of less than one +ear must *e matched to *e recognised) In all cases. collateral #ith maturit+ mismatches are onl+ recognised #hen their original maturities are greater than or e. collateral #ith maturit+ mismatches #ill no longer *e recognised #hen the+ have a residual maturit+ of three months or less) 8)&)9 6hen there is a maturit+ mismatch #ith recognised credit risk mitigants (collateral.ei9h(' !or ma(uri(y mi'ma($he' s outlined in paragraph 8)&)4. on/*alance sheet netting and guarantees) the follo#ing adBustment #ill *e applied) Pa D P ? :(-0.ual to one +ear) s a result.posure).25< / :T-0. taking into account an+ applica*le grace period) "or the collateral. guarantee amount) adBusted for an+ haircuts t Q min (T. residual maturit+ of the e.ues covering a single e. the *ank #ill *e re. residual maturit+ of the credit protection arrangement) e.posure) e.pressed in +ears >.posure into portions covered *+ each t+pe of C!M .(= o*ligation.> Trea(me ( o! *oo"' o! C13 (e$h i.
uirement are: (i) The risks pertaining to interest rate related instruments and e.change risk and gold open positions ggregation of capital charge for market risks #e$(io + .1 Ca*i(a" $har9e !or 3ar&e( 1i'& .9' techni.change risk (including open position in precious metals) throughout the *ank (*oth *anking and trading *ooks)) E)4)% The guidelines in this regard are organi2ed under the follo#ing seven sections: #e$(io + B C D 0 Par(i$u"ar' Scope and coverage of capital charge for market risks Measurement of capital charge for interest rate risk in the trading *ook Measurement of capital charge for e.ue (e)g) portion covered *+ collateral.(ro%u$(io E)4)4 Market risk is defined as the risk of losses in on/*alance sheet and off/*alance sheet positions arising from movements in market prices) The market risk positions su*Bect to capital charge re. portion covered *+ guarantee) and the risk/#eighted assets of each portion must *e calculated separatel+) 6hen credit protection provided *+ a single protection provider has differing maturities. the+ must *e su*divided into separate protection as #ell) 8 8.uities in the trading *ookH and (ii) "oreign e.uities in the trading *ook Measurement of capital charge for foreign e.
posures) E)%)% To *egin #ith.94 8. this #ould *e e.tended to all groups #here the controlling entit+ is a *ank) E)%)0 Banks are re.uities in the trading *ook and foreign e. e. and Aerivatives entered into for hedging trading *ook e.posures to market risks) #e$(io B 8.change risk (including gold and other precious metals) in *oth trading and *anking *ooks) Trading *ook for the purpose of these guidelines #ill include: (i) (ii) (iii) (iv) (v) (vi) Securities included under the Celd for Trading categor+ Securities included under the vaila*le for Sale categor+ :pen gold position limits :pen foreign e.uirements for market risks are *eing maintained on a continuous *asis.uired to maintain strict risk management s+stems to monitor and control intra/da+ e.change position limits Trading positions in derivatives.uired to manage the market risks in their *ooks on an ongoing *asis and ensure that the capital re.3 E)0)4 3ea'ureme ( o! $a*i(a" $har9e !or i (ere'( ra(e ri'& This section descri*es the frame#ork for measuring the risk of holding or taking positions in de*t securities and other interest rate related instruments in the %ome'(i$ $urre $y in the trading *ook) .2 #$o*e a % $o7era9e o! $a*i(a" $har9e !or mar&e( ri'&' E)%)4 These guidelines seek to address the issues involved in computing capital charges for interest rate related instruments in the trading *ook. capital charge for market risks is applica*le to *anks on a glo*al *asis) t a later stage. i)e) at the close of each *usiness da+) Banks are also re.
and (ii) L 9e era" mar&e( ri'&M charge to#ards interest rate risk in the portfolio.uirements for general market risk are designed to capture the risk of loss arising from changes in market interest . *anks using the standardised approach for credit risk in the *anking *ook #ill use the standardised approach risk #eights for counterpart+ risks in the trading *ook in a consistent manner) E)0)9 Banks shall.uities #ould appl+ to $urre ( mar&e( 7a"ue of these items in *ank@s trading *ook) Since *anks are re.uirement is e.tant !BI guidelines on valuation of investments) E)0)0 The minimum capital re. calculate the counterpart+ credit risk charge for :TC derivatives as part of capital for credit risk as per the Standardised pproach covered in paragraph 9 a*ove) <eneral Market !isk E)0)& The capital re.cept in derivatives) and long positions. (i) L '*e$i!i$ ri'&M charge for each securit+. #hich is akin to the conventional capital charge for credit risk. #here long and short positions (#hich is not allo#ed in India e.pressed in terms of t#o separatel+ calculated charges.uired to mark to market their trading positions on a dail+ *asis) The current market value #ill *e determined as per e.9% E)0)% The capital charge for interest rate related instruments and e.uirements in the *anking *ook) Thus. the+ are re.uired to maintain capital for market risks on an ongoing *asis. in addition to computing specific risk charge for :TC derivatives in the trading *ook.cept in derivatives) in different securities or instruments can *e offset) Specific risk E)0)( The capital charge for specific risk is designed to protect against an adverse movement in the price of an individual securit+ o#ing to factors related to the individual issuer) The risk #eights to *e used in this calculation must *e consistent #ith those used for calculating the capital re. *oth for short (short position is not allo#ed in India e.
*anks ma+ adopt the standardised method) 3nder the standardised method there are t#o principal methods of measuring market risk. a Lmaturit+M method and a LdurationM method) s LdurationM method is a more accurate method of measuring interest rate risk.uired to measure the general market risk charge *+ calculating the price sensitivit+ (modified duration) of each position separatel+) 3nder this method. and (iv) a net charge for positions in options. the mechanics are as follo#s: (i) first calculate the price sensitivit+ (modified duration) of each instrumentH (ii) ne. to start #ith. *anks are re. it has *een decided that. #here appropriate) E)0)8 The Basle Committee has suggested t#o *road methodologies for computation of capital charge for market risks) :ne is the standardised method and the other is the *anks@ internal risk management models method) s *anks in India are still in a nascent stage of developing internal risk management models.cept in derivatives) or long position in the #hole trading *ookH (ii) a small proportion of the matched positions in each time/ *and (the Lvertical disallo#anceM)H (iii) a larger proportion of the matched positions across different time/*ands (the Lhori2ontal disallo#anceM). it has *een decided to adopt standardised duration method to arrive at the capital charge) ccordingl+.t appl+ the assumed change in +ield to the modified duration of each instrument *et#een ')& and 4)' percentage points depending on the maturit+ of the instrument (see Ta*le/4 *elo#)H (iii) slot the resulting capital charge measures into a maturit+ .90 rates) The capital charge is the sum of four components: (i) the net short (short position is not allo#ed in India e.
9( ladder #ith the fifteen time *ands as set out in Ta*le/4H (iv) su*Bect long and short positions (short position is not allo#ed in India e.cept in derivatives) in each time *and to a 9 per cent vertical disallo#ance designed to capture *asis riskH and (v) carr+ for#ard the net positions in each time/*and for hori2ontal offsetting su*Bect to the disallo#ances set out in Ta*le/%) Tab"e 1 Dura(io me(ho% E (ime ba %' a % a''ume% $ha 9e' i yie"% Time Ba %' +''ume% Cha 9e i 5ie"% 4)'' 4)'' 4)'' 4)'' ')=' ')E' ')89 ')89 ')8' ')&9 ')&' ')&' ')&' ')&' ')&' Fo e 1 4 month or less 4 to 0 months 0 to & months & to 4% months Fo e 2 4)' to 4)= +ears 4)= to %)E +ears %)E to 0)& +ears Fo e 3 0)& to ()0 +ears ()0 to 9)8 +ears 9)8 to 8)0 +ears 8)0 to =)0 +ears =)0 to 4')& +ears 4')& to 4% +ears 4% to %' +ears over %' +ears Tab"e 2 .
like "! s.99 8oriGo (a" Di'a""o.ee Go e' 1 a % 3 4 month or less Fo e 1 4 to 0 months 0 to & months & to 4% months 4)' to 4)= +ears Fo e 2 4)= to %)E +ears %)E to 0)& +ears 0)& to ()0 +ears ()0 to 9)8 +ears 9)8 to 8)0 +ears 8)0 to =)0 +ears Fo e 3 =)0 +ears 4')& +ears 4% to %' +ears over %' +ears to 4% to 4')& 0'F ('F 4''F 0'F ('F ('F Capital charge for interest rate derivatives E)0)E The measurement of capital charge for market risks should include all interest rate derivatives and off/*alance sheet instruments in the trading *ook and derivatives entered into for hedging trading *ook e.ee a%=a$e ( Go e' Be(. interest rate positions etc) The details of measurement of capital charge for interest rate derivatives are furnished in nne.a $e' Fo e' Time ba % Hi(hi (he Go e' Be(. In the case of residual currencies the gross positions in each time/*and #ill *e su*Bect to the assumed change in +ield set out in Ta*le/4 #ith no further . () Aetails of computing capital charges for market risks in maBor currencies are detailed in ttachment I.posures #hich #ould react to changes in the interest rates.
uit+ position is.change and gold open position is =F at present) These open .uities are also treated as an+ other investments for the purpose of assigning credit risk) n additional risk #eight of %)9F is assigned on these positions to capture market risk) E)()% Minimum capital re.uit+ positions) #e$(io D E)9 3ea'ureme ( o! $a*i(a" $har9e !or !orei9 e?$ha 9e a % 9o"% o*e *o'i(io ' E)9)4 "oreign e.uirement to cover the risk of holding or taking positions in e. not allo#ed for *anks in India)) The general market risk charge #ill also *e =F on the gross e. and commitments to *u+ or sell e.uit+ positions (i)e) the sum of all long e.uit+ positions Y short e.ui(ie' t present e. capital charge for foreign e.uities in the trading *ook is set out *elo#) This is applied to all instruments that e.uit+ shares.uit+) #*e$i!i$ a % 9e era" mar&e( ri'& E)()0 Capital charge for specific risk (akin to credit risk) #ill *e =F and specific risk is computed on the *anks@ gross e. for e.uities.uit+ positions and of all short e.9& offsets) #e$(io C 8.hi*it market *ehaviour similar to e.change open positions and gold open positions are at present risk/#eighted at 4''F) Thus.uities *ut not to non/converti*le preference shares (#hich are covered *+ the interest rate risk re.uirements descri*ed earlier)) The instruments covered include e. ho#ever. converti*le securities that *ehave like e.4 E)()4 3ea'ureme ( o! $a*i(a" $har9e !or e.ample: units of mutual funds. #hether voting or non/voting.
ternal events) This definition includes legal risk. "imi(' or a$(ua" . penalties. *ut is not limited to. *ut e.cludes strategic and reputational risk) Degal risk includes.hi$he7er i' hi9her.uate or failed internal processes.plained earlier capital charges for specific risk and general market risk are to *e computed separatel+ *efore aggregation) "or computing the total capital charge for market risks.uirement) #e$(io 0 E)& E)&)4 +99re9a(io o! (he $a*i(a" $har9e !or mar&e( ri'&' s e. #ould continue to attract capital charge at =F) This is in line #ith the Basel Committee re. e. people and s+stems or from e.98 positions.(ere'( 1a(e :aAb< a) <eneral market risk i) Get position (parallel shift) ii) Cori2ontal disallo#ance (curvature) iii) Oertical disallo#ance (*asis) iv) :ptions *) Specific risk II) 0.posure to fines. the calculations ma+ *e plotted in the follo#ing ta*le: Pro!orma 1 (!s) in crore) 1i'& Ca(e9ory I) .ui(y :aAb< a) <eneral market risk *) Specific risk III) Forei9 0?$ha 9e @ )o"% IO)To(a" $a*i(a" $har9e !or mar&e( ri'&' (INIINIII) C Ca*i(a" Char9e !or O*era(io a" ri'& =)4 De!i i(io o! o*era(io a" ri'& :perational risk is defined as the risk of loss resulting from inade. or punitive damages Ca*i(a" $har9e .
to *egin #ith. supervisors #ill consider appropriate supervisor+ action under 1illar %) The charge ma+ *e e.uirement produced *+ the Basic Indicator credi*ilit+.9E resulting from supervisor+ actions.uac+ "rame#ork provides that pproachH and (iii) dvanced internationall+ active *anks and *anks #ith significant operational risk e. specialised processing *anks) are e. *anks in India shall compute the capital re. and in the event that credi*ilit+ is lacking.uirements for operational risk under the Basic Indicator pproach) !eserve Bank #ill revie# the capital pproach for general re. as #ell as private settlements) =)% The mea'ureme ( me(ho%o"o9ie' =)%)4 The Ge# Capital de.cluded from *oth the numerator and denominator #hen calculating the average) If negative gross income distorts a *ank@s 1illar 4 capital charge.uac+ "rame#ork outlines three methods for calculating operational risk capital charges in a continuum of increasing sophistication and risk sensitivit+: (i) the Basic Indicator pproachH (ii) the Standardised Measurement pproaches ( M )) =)%)% Banks are encouraged to move along the spectrum of availa*le approaches as the+ develop more sophisticated operational risk measurement s+stems and practices) =)%)0 The Ge# Capital de.pected to use an approach that is more sophisticated than the Basic Indicator pproach and that is appropriate for the risk profile of the institution) Co#ever.ed percentage (denoted alpha) of positive annual gross income) "igures for an+ +ear in #hich annual gross income is negative or 2ero should *e e.pressed as follo#s: IB-+ D J [ :)-1K ? \ ]<L/ .%i$a(or +**roa$h =)0)4 Banks using the Basic Indicator pproach must hold capital for operational risk e. appropriate supervisor+ action under 1illar % #ill *e considered) =)0 The Ba'i$ .ample.posures (for e.ual to the average over the previous three +ears of a fi.
9= 6here 7BI Q the capital charge under the Basic Indicator pproach <I Q annual gross income. loss on sale of H!" invest'ents. • . inco'e fro' insurance .1. 1.cluding +ears of negative or 2ero gross income <ross income Q Net profit . #hich is set *+ the BCBS . over the previous three +ears n Q num*er of the previous three +ears for #hich gross income is positive \ Q 49F. extraordinary ) irregular ite' of inco'e .traordinar+ or irregular items as #ell as income derived from insurance) =)0)0 Banks are advised to compute capital charge for operational risk under the Basic Indicator pproach as follo#s: • verage of S<ross Income P alphaT for each of the last three financial +ears. profit on sale of H!" invest'ents .clude realised profits-losses from the sale of securities in the *anking *ookH ealised profits)losses fro' securities classified as *#eld to 'aturity+$ w#ic# typically constitute ite's of t#e %an&ing %oo& $ are also excluded fro' t#e definition of gross inco'e and (iv) e. .uired capital to the industr+ #ide level of the indicator) =)0)% <ross income is defined as under : Get interest income plus net non/interest income) It is intended that this measure should: (i) *e gross of an+ provisions (e)g) for unpaid interest)H (ii) *e gross of operating e. e. Provisions / contingencies .+) operating expenses . including fees paid to outsourcing service providers. in contrast to fees paid for services t#at are outsourced$ fees received %y %an&s t#at provide outsourcing services s#all %e included in t#e definition of gross inco'e( (iii) e.-. #here positive.penses.-.clude e. relating the industr+ #ide level of re.Sc#edule 10.1.
uac+ of the institution) 4')% In principle. risk assessment processes. no specific criteria for use of the Basic Indicator pproach are set out in the Ge# Capital de.uirements) It is *elieved that providing disclosures that are *ased on a common frame#ork is an effective means of informing the market a*out a *ank@s e. non/compliance #ith the prescri*ed 4')0)4 Market discipline can contri*ute to a safe and sound *anking disclosure re. *anks@ disclosures should *e consistent #ith ho# senior management and the Board of directors assess and manage the risks of the *ank) 3nder 1illar 4.uac+ "rame#ork) Gevertheless.posures.methodologies for measuring the various risks the+ face and the resulting capital re. "e*ruar+ %''0) 10 3ar&e( Di'$i*"i e 4')4 The purpose of Market discipline (detailed in 1illar 0) in the Ge# "rame#ork is to complement the minimum capital re. capital.uirements #ould attract a penalt+. *anks using this approach are encouraged to compl+ #ith the Committee@s guidance on Sound Practices for t#e "anage'ent and Supervision of Operational isk. risk e.&' • lpha Q 49 per cent =)0)( s a point of entr+ for capital calculation.uirements #hich #ill allo# market participants to assess ke+ pieces of information on the scope of application. and hence the capital ade.uirements (detailed under 1illar 4) and the supervisor+ revie# process (detailed under 1illar %)) The aim is to encourage market discipline *+ developing a set of disclosure re.posure to those risks and provides a consistent and comprehensive disclosure frame#ork that enhances compara*ilit+) 4')0 +$hie7i 9 a**ro*ria(e %i'$"o'ure environment) Cence. including financial . *anks use specified approaches.
does not conflict #ith the *roader accounting re. *oth .uirements #ould *e a response to non/disclosure. #hich is aimed at disclosure of *ank capital ade. on their respective #e*sites) Banks in this categor+ that do not host a #e*site are encouraged to make the necessar+ arrangements to host a #e*site *+ March 04. the "rame#ork also anticipates a role for specific measures) 6here disclosure is a .ualif+ing criterion under 1illar 4 to o*tain lo#er risk #eightings and-or to appl+ specific methodologies. it is not intended that direct additional capital re. %''&) Kualitative disclosures that provide a general summar+ of a *ank@s risk management o*Bectives and policies.uantitative. should provide all 1illar 0 . including consolidated *anks. reporting s+stem and definitions ma+ *e pu*lished onl+ on an annual *asis) 4')()4 It is recognised that the 1illar 0 disclosure frame#ork does not 4')9)4 Banks. there #ould *e a direct sanction (not *eing allo#ed to appl+ the lo#er risk #eighting or the specific methodolog+)) 4')( .&4 penalt+) Co#ever.uirements under accounting standards. e.i(h a$$ou (i 9 %i'$"o'ure' conflict #ith re.uantitative aspects. as at end March each +ear along #ith the annual financial statements) Banks #ith capital funds of !s)4'' crore or more should make certain interim disclosures on . on a stand alone *asis. #hich are *roader in scope) The BCBS has taken considera*le efforts to see that the narro#er focus of 1illar 0.ualitative and .(era$(io .cept as indicated *elo#) 4')0)% In addition to the general intervention measures.ue $y o! %i'$"o'ure' disclosures.uac+.uirements) The !eserve Bank #ill consider future modifications to the Market Aiscipline disclosures as necessar+ in light of its ongoing monitoring of this area and industr+ developments) 4')9 #$o*e a % !re.
in light of the particular circumstances.uate validation) "or e.&% 4')9)% In recognition of the increased risk sensitivit+ of the "rame#ork and the general trend to#ards more fre. supplementar+ material (such as Management@s Aiscussion and nal+sis) that is pu*lished should su*Bected to sufficient scrutin+ (e)g) internal control assessments.ample. a user of financial information #ould consider the item to *e material (user test)) The !eserve Bank does not consider it necessar+ to set specific thresholds for disclosure as the .uarterl+ *asis) 4')& Ma"i%a(io The disclosures in this manner should *e su*Bected to ade. and their significant *ank su*sidiaries.uac+ ratios. on a . then management should ensure that appropriate verification of the information takes place.ualitative Budgement of #hether.uent reporting in capital markets. the additional material pu*lished #ith such statements must *e consistent #ith the audited statements) also *e In addition. etc)) to satisf+ the validation issue) If material is not pu*lished under a validation regime. unless specified) 4')8 3a(eria"i(y *ank should decide #hich disclosures are relevant for it *ased on the materialit+ concept) Information #ould *e regarded as material if its omission or misstatement could change or influence the assessment or decision of a user rel+ing on that information for the purpose of making economic decisions) This definition is consistent #ith International ccounting Standards and #ith the national accounting frame#ork) The !eserve Bank recognises the need for a . in accordance #ith the general disclosure principle set out *elo#) In the light of the a*ove. since information in the annual financial statements #ould generall+ *e audited.ternal auditor. total re.uired to *e audited *+ an e. total capital.uired capital and total capital ade. must disclose their Tier 4 capital. for instance in a stand alone report or as a section on a #e*site. 1illar 0 disclosures #ill not *e re. all *anks #ith capital funds of !s) 9'' crore or more.
uirements under 1illar 0) dditional definitions and e.uireme (' The follo#ing sections set out in ta*ular form the disclosure re.planations are provided in a series of footnotes) 4')4' )e era" %i'$"o'ure *ri $i*"e Banks should have a formal disclosure polic+ approved *+ the Board of directors that addresses the *ank@s approach for determining #hat disclosures it #ill make and the internal controls over the disclosure process) In addition. data etc) The !eserve Bank *elieves that the re. in that it is provided under the terms of a legal agreement or counterpart+ relationship) This has an impact on #hat *anks should reveal in terms of information a*out their customer *ase. #ith a vie# to facilitate smooth transition to greater disclosures as #ell as to promote greater compara*ilit+ among the *anks@ 1illar 0 disclosures. the materialit+ thresholds have *een prescri*ed for certain limited disclosures) Got#ithstanding the a*ove. as #ell as details on their internal arrangements.uirements set out *elo# strike an appropriate *alance *et#een the need for meaningful disclosure and the protection of proprietar+ and confidential information) 4')= The %i'$"o'ure re.ample on products or s+stems). parameter estimates. that if shared #ith competitors #ould render a *ank@s investment in these products-s+stems less valua*le. *anks should implement a . for instance methodologies used. *anks are encouraged to appl+ the user test to these specific disclosures and #here considered necessar+ make disclosures *elo# the specified thresholds also) 4')E Pro*rie(ary a % $o !i%e (ia" i !orma(io 1roprietar+ information encompasses information (for e.&0 user test is a useful *enchmark for achieving sufficient disclosure) Co#ever. and hence #ould undermine its competitive position) Information a*out customers is often confidential.
&( process for assessing the appropriateness of their disclosures.ception to this arises in the disclosure of #ithin the groups #ould not generall+ *e re. including validation and fre.uired to *e made *+ the individual *anks on a standalone *asis #hen the+ are not the top consolidated entit+ in the *anking group) 4')4% 0!!e$(i7e %a(e o! %i'$"o'ure' The first of the disclosures as per these guidelines shall *e made as on March 04. in order to recognise the need for these su*sidiaries to compl+ #ith the "rame#ork and other applica*le limitations on the transfer of funds or capital #ithin the group) 1illar 0 disclosures #ill *e re. %''8) .uired to *e made *+ the parent *ank) Total and Tier 4 Capital !atios *+ the top consolidated entit+ #here an anal+sis of significant *ank su*sidiaries #ithin the group is appropriate.uenc+) 4')44 #$o*e o! a**"i$a(io 1illar 0 applies at the top consolidated level of the *anking group to #hich the "rame#ork applies (as indicated a*ove under paragraph 0)4 Scope of pplication)) Aisclosures related to individual *anks n e.
ee paragraph 00 . #hich are risk/#eighted E as #ell as their name. " capital deficiency is the amount by #hich actual capital is less than the regulatory capital requirement. 21. significant minority equity investments in insurance.&9 Tab"e 1 #$o*e o! a**"i$a(io 4ua"i(a(i7e Di'$"o'ure' (a) The name of the top *ank in the group to #hich the "rame#ork applies) (*) n outline of differences in the *asis of consolidation for accounting and regulator+ purposes. insurance and other financial subsidiaries. -ollo#ing the listing of subsidiaries in consolidated accounting. the proportion of voting po#er in these entities) In addition. indicate the .uantitative impact on regulator+ capital of using this method versus using the deduction or alternate group/#ide method) ) *ntity + securities. e.g. 21. / . #ith a *rief description of the entities ( #ithin the group (i) that are full+ consolidatedH9 (ii) that are pro/rata consolidatedH& (iii) that are given a deduction treatmentH and (iv) that are neither consolidated nor deducted (e)g) #here the investment is risk/#eighted)) 4ua (i(a(i7e Di'$"o'ure' (c) The aggregate amount of capital deficiencies 8 in all su*sidiaries not included in the consolidation i)e) that are deducted and the name(s) of such su*sidiaries) (d) The aggregate amounts (e)g) current *ook value) of the *ank@s total interests in insurance entities. the proportion of o#nership interest and. if different.g. 5 ( -ollo#ing the listing of significant subsidiaries in consolidated accounting. e. their countr+ of incorporation or residence. "ny deficiencies #hich have been deducted on a group level in addition to the investment in such subsidiaries are not to be included in the aggregate capital deficiency. commercial subsidiaries. ". financial and commercial entities. ".
10 1anks are not allo#ed to raise 2ier 333 capital at present. #ith separate disclosure of: • paid/up share capitalH • reservesH • innovative instrumentsH = • other capital instrumentsH • other amounts deducted from Tier 4 capital. comple. including good#ill and investments) (c) The total amount of Tier % and Tier 04' capital (net of deductions from Tier % capital)) (d) Su*ordinated de*t • • • Total amount outstanding :f #hich amount raised during the current +ear mount eligi*le to *e reckoned as capital funds (e) :ther deductions from capital. especiall+ in the case of innovative. . at present. or h+*rid capital instruments) 4ua (i(a(i7e Di'$"o'ure' (*) The amount of Tier 4 capital.&& Tab"e 2 Ca*i(a" '(ru$(ure 4ua"i(a(i7e Di'$"o'ure' (a) Summar+ information on the terms and conditions of the main features of all capital instruments. if an+) (f) Total eligi*le capital) & 1anks are not allo#ed to recognise any innovative instruments as Capital funds.
uirements for market risk: • Standardised duration approachH (d) Capital re.uirements for operational risk: • Basic indicator approachH (e) Total and Tier 4 capital ratio: • "or the top consolidated groupH and • "or significant *ank su*sidiaries (stand alone or su*/consolidated depending on ho# the "rame#ork is applied)) .&8 Tab"e 3 Ca*i(a" +%e.ua$y 4ua"i(a(i7e %i'$"o'ure' (a) summar+ discussion of the *ank5s approach to assessing the ade.uirements for credit risk: • 1ortfolios su*Bect to standardised approach • Securitisation e.uac+ of its capital to support current and future activities) 4ua (i(a(i7e %i'$"o'ure' (*) Capital re.posures) (c) Capital re.
including: (i) (ii) (iii) (iv) strategies and processesH the structure and organisation of the relevant risk management functionH the scope and nature of risk reporting and-or measurement s+stemsH policies for hedging and-or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges-mitigants) Credit risk <eneral disclosures of credit risk provide market participants #ith a range of information a*out overall credit e. . the means of capital assessment and data to assess the relia*ilit+ of the information 11 4uidance on interest rate risk and equity risk in the banking book #ill be issued separately. market.uit+ risk in the *anking *ook44 and operational risk) lso included in this section are disclosures relating to credit risk mitigation and asset securitisation. separate disclosures are set out for *anks using different approaches to the assessment of regulator+ capital) 4')4( General qualitative disclosure requirement "or each separate risk area (e)g) credit.&E 4')40 1i'& e?*o'ure a % a''e''me ( The risks to #hich *anks are e. *anking *ook interest rate risk.posed and the techni.uit+) *anks must descri*e their risk management o*Bectives and policies. monitor and control those risks are important factors market participants consider in their assessment of an institution) In this section. market risk. e. *oth of #hich alter the risk profile of the institution) 6here applica*le.ues give information on the specific nature of the e. several ke+ *anking risks are considered: credit risk.posures.posure and need not necessaril+ *e *ased on information prepared for regulator+ purposes) Aisclosures on the capital assessment techni. operational.ues that *anks use to identif+. interest rate risk and e. measure.
1 returns at present. 1 15 2he industry6#ise break6up may be provided on the same lines as under 7.posures4%. fund *ased and non/fund *ased separatel+ (e) !esidual contractual maturit+ *reakdo#n of assets.&= disclosed) Tab"e 4 Cre%i( ri'& :i $"u%i 9 e. e. before application of CC-s 1) 2hat is. collateral and netting. 1( 1anks shall use the same maturity bands as used for reporting positions in the "8M returns. including: • Aefinitions of past due and impaired (for accounting purposes)H • Aiscussion of the *ank@s credit risk management polic+H 4ua (i(a(i7e Di'$"o'ure' (*) Total gross credit risk e.g. 4& (g) mount of G1 s (<ross) • • • • • Su*standard Aou*tful 4 Aou*tful % Aou*tful 0 Doss (h) Get G1 s 12 2hat is outstanding. "und *ased and Gon/fund *ased separatel+ • :verseas • Aomestic (d) Industr+49 t+pe distri*ution of e.posures. 1! "t actuals.ui(ie'<6 9e era" %i'$"o'ure' !or a"" ba &' 4ua"i(a(i7e Di'$"o'ure' (a) The general . 3f the exposure to any particular industry is more than 5' of the gross credit exposure as computed under $b% above it should be disclosed separately. . "und *ased and Gon/fund *ased40 separatel+) (c) <eographic distri*ution of e. on the same basis as adopted for .egment 5eporting adopted for compliance #ith ".posures4(.ualitative disclosure re. after accounting offsets in accordance #ith the applicable accounting regime and #ithout taking into account the effects of credit risk mitigation techniques.uirement (paragraph 4')4( ) #ith respect to credit risk.
cess provisions Closing *alance .#rite/*ack of e.#rite/*ack of e.cess provisions Closing *alance (l) mount of Gon/1erforming Investments (m) Movement of provisions for depreciation on investments • • • • :pening *alance 1rovisions made during the period 6rite/off .8' (i) G1 !atios • • <ross G1 s to gross advances Get G1 s to net advances • • • • • • • • :pening *alance dditions !eductions Closing *alance (B) Movement of G1 s (<ross) (k) Movement of provisions for G1 s :pening *alance 1rovisions made during the period 6rite/off .
84 Tab"e 5 Cre%i( ri'&6 %i'$"o'ure' !or *or(!o"io' 'ub=e$( (o (he '(a %ar%i'e% a**roa$h 4ua"i(a(i7e Di'$"o'ure' (a) "or portfolios under the standardised approach: • Games of credit rating agencies used. plus reasons for an+ changesH • T+pes of e.posure amounts after risk mitigation su*Bect to the standardised approach. amount of a *ank@s outstandings (rated and unrated) in each risk *ucket as #ell as those that are deductedH • Belo# 4'' F risk #eight • 4'' F risk #eight • More than 4'' F risk #eight .posure for #hich each agenc+ is usedH and • description of the process used to transfer pu*lic issue ratings onto compara*le assets in the *anking *ookH 4ua (i(a(i7e Di'$"o'ure' (*) "or e.
. the total e.ualitative disclosure re. as permitted under . #here applicable.8% Tab"e 6 Cre%i( ri'& mi(i9a(io 6 %i'$"o'ure' !or '(a %ar%i'e% a**roa$he' 4ua"i(a(i7e Di'$"o'ure'N (a) The general . the total exposure covered by collateral after haircuts should be reduced further to remove any positive ad:ustments that #ere applied to the exposure.art 2.uirement (paragraph 4')4( ) #ith respect to credit risk mitigation including: • policies and processes for collateral valuation and managementH • a description of the main t+pes of collateral taken *+ the *ankH • the main t+pes of guarantor counterpart+ and their cedit#orthinessH and • information a*out (market or credit) risk concentrations #ithin the mitigation taken 4ua (i(a(i7e Di'$"o'ure'N (*) "or disclosed credit risk portfolio under the standardised approach.posure that is covered *+: • eligi*le financial collateralH and • other eligi*le collateralH after the application of haircuts) 4E 1> 1 "t a minimum. 9here relevant. banks are encouraged to give further information about mitigants that have not been recognised for that purpose. banks must give the disclosures belo# in relation to credit risk mitigation that has been recognised for the purposes of reducing capital requirements under this -rame#ork. 1/ 3f the comprehensive approach is applied.
ualifies) Tab"e 10 0.(ere'( ra(e ri'& i (he ba &i 9 boo& :-11BB< .i"" be i''ue% 'e*ara(e"y .change riskH and Tab"e C O*era(io a" ri'& 4ua"i(a(i7e %i'$"o'ure' • In addition to the general .ualitative disclosure re.i"" be i''ue% 'e*ara(e"y Tab"e 11 .80 Tab"e > #e$uri(i'a(io 6 %i'$"o'ure !or '(a %ar%i'e% a**roa$he' JHi"" be !ur i'he% 'e*ara(e"yL Tab"e 8 3ar&e( ri'& i (ra%i 9 boo&6 %i'$"o'ure' !or ba &' u'i 9 (he '(a %ar%i'e% %ura(io a**roa$h 4ua"i(a(i7e %i'$"o'ure' (a) The general .uirements for: • interest rate riskH • e.ualitative disclosure re. the approach(es) for operational risk capital assessment for #hich the *ank .uirement (paragraph 4')4() for market risk including the portfolios covered *+ the standardised approach) 4ua (i(a(i7e %i'$"o'ure' (*) The capital re.uit+ position riskH • foreign e.ui(ie'6 %i'$"o'ure' !or ba &i 9 boo& *o'i(io ' .uirement (paragraph 4')4().
the+ should have a minimum tenure of si.uarter of the +ear i)e) from 4st $anuar+ to 04st March. 1u*ee #ubor%i a(e% Deb( Term' o! -''ue o! Bo % To *e eligi*le for inclusion in Tier / II Capital. the+ should *e su*Bected to progressive discount as the+ approach maturit+ at the rates sho#n *elo#: 1emai i 9 3a(uri(y o! .8( +NN0O 1 1ai'i 9 o! 'ubor%i a(e% %eb( by . 1. terms of issue of the *onds as su*ordinated de*t instruments should *e in conformit+ #ith the follo#ing: (i) mount The amount of su*ordinated de*t to *e raised ma+ *e decided *+ the Board of Airectors of the *anks) (ii) Maturit+ period (a) Su*ordinated de*t instruments #ith an initial maturit+ period of less than 9 +ears.'(rume (' Dess than one +ear More than :ne +ear and less than T#o +ears More than T#o +ears and less than Three +ears More than Three +ears and less than "our +ears More than "our +ears and less than "ive +ears 1a(e o! Di'$ou ( :.%ia ba &' (Oide paragraph ()E)4) :i< -.t+ three months) (iii) !ate of interest The interest rate should not *e more than %'' *asis points a*ove the +ield .< 4'' E' &' (' %' (*) The *onds should have a minimum maturit+ of 9 +ears) Co#ever if the *onds are issued in the last . or #ith a remaining maturit+ of one +ear should not *e included as part of Tier/II Capital) "urther.
change Aepartment) 2. unsecured.ual residual maturit+ at the time of issuing *onds) The instruments should *e 5vanila5 #ith no special features like options etc) (iv) • :ther conditions The instruments should *e full+ paid/up.ceed 4''F of Tier I capital) 3.uireme (' The total amount of Su*ordinated Ae*t raised *+ the *ank has to *e reckoned as lia*ilit+ for the calculation of net demand and time lia*ilities for the purpose of reserve re. should not e. through the Indian *ranch after o*taining specific approval from "oreign >. as such. . set *+ S>BI-other regulator+ authorities in regard to issue of the instruments) d) In the case of foreign *anks rupee su*ordinated de*t should *e issued *+ the Cead :ffice of the *ank.$"u'io i Tier -.uirements and.$a*i(a" Su*ordinated de*t instruments #ill *e limited to 9' per cent of Tier/I Capital of the *ank) These instruments.89 on <overnment of India securities of e. if an+. Com*"ia $e . together #ith other components of Tier II capital.uirements) . su*ordinated to the claims of other creditors. #ill attract C!!-SD! re. free of restrictive clauses and should not *e redeema*le at the initiative of the holder or #ithout the consent of the !eserve Bank of India) • Gecessar+ permission from "oreign >. )ra ( o! a%7a $e' a9ai '( bo %' Banks should not grant advances against the securit+ of their o#n *onds) 4.change Aepartment should *e o*tained for issuing the instruments to G!Is-:CBs-"IIs) • Banks should compl+ #ith the terms and conditions.i(h 1e'er7e 1e.
1e*or(i 9 1e.uireme (' The *anks should su*mit a report to !eserve Bank of India giving details of the capital raised. rate of interest together #ith a cop+ of the offer document soon after the issue is completed) . Trea(me ( o! . such as.8& 5. the *ank5s aggregate investment in Tier II *onds issued *+ other *anks and financial institutions shall *e #ithin the overall ceiling of 4' percent of the investing *ank5s total capital) The capital for this purpose #ill *e the same as that reckoned for the purpose of capital ade. maturit+ of the instrument.7e'(me ( i 'ubor%i a(e% %eb( Investments *+ *anks in su*ordinated de*t of other *anks #ill *e assigned 4''F risk #eight for capital ade.uac+) --. amount raised. #ubor%i a(e% Deb( i !orei9 $urre $y Banks ma+ take approval of !BI on a case/*+/case *asis) ---.uac+ purpose) lso.
imum ceiling of 9'F of the Tier I capital maintained in India.uirements and conditions for Cead :ffice *orro#ings in foreign currenc+ raised *+ foreign *anks operating in India for inclusion . each tranche #ill have to *e retained in India for a minimum period of five +ears) C: *orro#ings in the nature of perpetual su*ordinated de*t.%ia !or i $"u'io i Tier -. and the applica*le discount rate mentioned in para 9 *elo#) "urther as per e. the amount eligi*le for inclusion in Tier II capital as su*ordinated de*t #ill *e su*Bect to a ma.88 +NN0O 2 P12D0NT-+/ NO13# ON C+P-T+/ +D042+C5 1ai'i 9 o! 'ubor%i a(e% %eb( by !orei9 ba &' 1ai'i 9 o! 8ea% O!!i$e borro.i 9' i !orei9 $urre $y by !orei9 ba &' o*era(i 9 i .ceed 4''F of Tier I capital) 3a(uri(y *erio% 0) Cead :ffice *orro#ings should have a minimum initial maturit+ of 9 +ears) If the *orro#ing is in tranches.$a*i(a" (Oide paragraph ()E)%) Aetailed guidelines on the standard re. #ill not *e permitted) .tant instructions. as su*ordinated de*t in Tier II capital are as indicated *elo#:/ +mou ( o! borro. the total of Tier II capital should not e.i 9 %) The total amount of C: *orro#ing in foreign currenc+ #ill *e at the discretion of the foreign *ank) Co#ever. #here there ma+ *e no final maturit+ date.
i)e) the entire *orro#ing or each tranche of the *orro#ing should *e availa*le in full to the *ranch in India) It should *e unsecured. free of restrictive clauses and should not *e redeema*le at the instance of the C:) 1a(e o! %i'$ou ( 9) The C: *orro#ings #ill *e su*Bected to progressive discount as the+ approach maturit+ at the rates indicated *elo#: 1emai i 9 ma(uri(y o! borro. su*ordinated to the claims of other creditors of the foreign *ank in India.ceed the on/ going market rate) Interest should *e paid at half +earl+ rests) Hi(hho"%i 9 (a? 8) The interest pa+ments to the C: #ill *e su*Bect to applica*le .i 9 More than 9 +ears 1a(e o! %i'$ou ( Got pplica*le (the entire amount can *e included as su*ordinated de*t in Tier II capital su*Bect to the ceiling mentioned in para %) More than ( +ears and less than 9 %'F +ears More than 0 +ears and less than ( ('F +ears More than % +ears and less than 0 &'F +ears More than 4 +ear and less than % E'F +ears Dess than 4 +ear 4''F (Go amount can *e treated as su*ordinated de*t for Tier II capital) 1a(e o! i (ere'( &) The rate of interest on C: *orro#ings should not e.8E Fea(ure' () The C: *orro#ings should *e full+ paid up.
uire prior approval of !eserve Bank of India) Co#ever. #ould not re. #ill attract C!!-SD! re. and construed in accordance #ith the Indian la#) 1rior approval of the !BI should *e o*tained in case of an+ material changes in the original terms of issue) Di'$"o'ure 4') The total amount of C: *orro#ings ma+ *e disclosed in the *alance sheet under the head ^Su*ordinated loan in the nature of long term *orro#ings in foreign currenc+ from Cead :ffice@) 1e'er7e re.uireme (' 44) The total amount of C: *orro#ings is to *e reckoned as lia*ilit+ for the calculation of net demand and time lia*ilities for the purpose of reserve re.) 1e*ayme ( E) ll repa+ments of the principal amount #ill *e su*Bect to prior approval of !eserve Bank of India. as such. information regarding the total amount of *orro#ing raised from .8= #ithholding ta.uirements and.uirements) 8e%9i 9 4%) The entire amount of C: *orro#ing should remain full+ s#apped #ith *anks at all times) The s#ap should *e in Indian rupees) 1e*or(i 9 @ Cer(i!i$a(io 40) Such *orro#ings done in compliance #ith the guidelines set out a*ove. Aepartment of Banking :perations and Aevelopment) Do$ume (a(io =) The *ank should o*tain a letter from its C: agreeing to give the loan for supplementing the capital *ase for the Indian operations of the foreign *ank) The loan documentation should confirm that the loan given *+ Cead :ffice #ould *e su*ordinated to the claims of all other creditors of the foreign *ank in India) The loan agreement #ill *e governed *+.
Markets Aivision).ternal Investments I :perations and "oreign >.change Aepartment ("ore.E' Cead :ffice under this circular. !eserve Bank of India. Mum*ai) . along #ith a certification to the effect that the *orro#ing is as per the guidelines. Aepartment of >. should *e advised to the Chief <eneral Managers/in/Charge of the Aepartment of Banking :perations I Aevelopment (International Banking Section).
R '. (4 N ') Y 4'' .posure *ank has an e. R '.posure (>) Caircut app) to the e. S4'' Y =4TU Q Ma.posure and the collateral) The collateral received *+ the *ank .ualifies for recognition under the credit risk mitigation) The e. R '. (')=4)TU Ma. >P > Ce C CC C"Z Q Q Q Q Q Q e? 3 >. = U Q = The e. R '.posure Current value of the collateral received Caircut appropriate to the collateral Caircut appropriate for currenc+ mismatch *et#een the collateral and e.E4 + -""u'(ra(io o Cre%i( ri'& mi(i9a(io 0N D 3a? P0.posure value after risk mitigation #ill *e !s)=) . (4/ ')'4/ ')'E) T U Ma.posure (Ce) Current Oalue of the collateral (C) Caircut appropriate to the collateral _ 4 +ear Y Standard haircut T (CC Caircut app) for currenc+ mismatch *et#een collateral and e. S4'' Y 4'' . S4'' .posure (1ara 49%) (C"Z >P Q Q Q Q !s) 4''.posure to#ards a term loan facilit+ of !s) 4'') The tenor of the loan is 4 +ear) The *ank has received de*t securit+ as collateral #hich is rated N) There is no maturit+ mismatch *et#een the e.posure value after mitigation #ould *e as under: Current value of the e.posure Caircut appropriate to the e.8$-8!?< L Q 6here.posure value after risk mitigation Current value of the e. Q' Q !s) 4'' Q 4F (i)e)')'4) Q EF (i)e) ')'E) Ma. J0 ? :1 A 8e< E C ? :1.
*anks must use the effective notional amount) :a< Fu(ure' a % !or. other for#ard contracts. 6here a range of delivera*le instruments ma+ *e delivered . *ond futures.3. the amounts reported should *e the market value of the principal amount of the underl+ing or of the notional underl+ing) "or instruments #here the apparent notional amount differs from the effective notional amount.8< ) Interest rate derivatives The measurement s+stem should include all interest rate derivatives and off/*alance/sheet instruments in the trading *ook.change positions)) :ptions can *e treated in a variet+ of #a+s as descri*ed in B)4 *elo#) summar+ of the rules for dealing #ith interest rate derivatives is set out in the Ta*le at the end of this section) 1. interest rate and cross/currenc+ s#aps and for#ard foreign e. (e)g) for#ard rate agreements ("! s). Ca"$u"a(io o! *o'i(io ' The derivatives should *e converted into positions in the relevant underl+ing and *e su*Bected to specific and general market risk charges as descri*ed in the guidelines) In order to calculate the capital charge. plus / #here applica*le / the life of the underl+ing instrument) 2or exa'ple$ a long position in a 3une t#ree4'ont# interest rate future .E% + e? 4 3ea'ureme ( o! $a*i(a" $har9e !or mar&e( ri'&' i re'*e$( o! i (ere'( ra(e %eri7a(i7e' a % o*(io ' :Para 8.ta&en in April.ar% ra(e a9reeme (' These instruments are treated as a com*ination of a long and a short position in a notional government securit+) The maturit+ of a future or a "! #ill *e the period until deliver+ or e. is to %e reported as a long position in a govern'ent security wit# a 'aturity of five 'ont#s and a s#ort position in a govern'ent security wit# a 'aturity of two 'ont#s. i $"u%i 9 !or.ercise of the contract. #hich react to changes in interest rates.ar% $o (ra$('.
pir+ of the future should ho#ever *e reported) and thus e. e)g) a stock inde.change) :b< #. coupon.i*ilit+ to elect #hich delivera*le securit+ goes into the duration ladder *ut should take account of an+ conversion factor defined *+ the e.ab"e o!!'e((i 9 o! ma($he% *o'i(io ' Banks ma+ e.uit+ component *eing included in the e.actl+ the same issuer.clude the follo#ing from the interest rate maturit+ frame#ork altogether (for *oth specific and general market risk)H • Dong and short positions (*oth actual and notional) in identical instruments #ith e. #ith the e.ed or floating interest rate against some other reference price.cluded from the calculation) ..uit+ frame#ork) Separate legs of cross/currenc+ s#aps are to *e reported in the relevant maturit+ ladders for the currencies concerned) 2. the *ank has fle. the interest rate component should *e slotted into the appropriate repricing maturit+ categor+. currenc+ and maturit+) • matched position in a future or for#ard and its corresponding underl+ing ma+ also *e full+ offset.E0 to fulfill the contract. Ca"$u"a(io o! $a*i(a" $har9e' !or %eri7a(i7e' u %er (he '(a %ar%i'e% me(ho%o"o9y :a< +""o.a*' S#aps #ill *e treated as t#o notional positions in government securities #ith relevant maturities) 2or exa'ple$ an interest rate swap under w#ic# a %an& is receiving floating rate interest and paying fixed will %e treated as a long position in a floating rate instru'ent of 'aturity e5uivalent to t#e period until t#e next interest fixing and a s#ort position in a fixed4rate instru'ent of 'aturity e5uivalent to t#e residual life of t#e swap. "or s#aps that pa+ or receive a fi. (the leg representing the time to e.
the residual maturit+ must correspond #ithin the follo#ing limits: o less than one month hence: same da+H o *et#een one month and one +ear hence: #ithin seven da+sH . sometimes called the "cheapest/to/deliver".ualif+ for this treatment the positions must relate to the same underl+ing instruments. "! s and for#ards: the ne. and the price of the future or for#ard contract should in such cases move in close alignment) Go offsetting #ill *e allo#ed *et#een positions in different currenciesH the separate legs of cross/currenc+ s#aps or for#ard foreign e.t interest fi.change deals are to *e treated as notional positions in the relevant instruments and included in the appropriate calculation for each currenc+) In addition.ing date or. for fi. opposite positions in the same categor+ of instruments can in certain circumstances *e regarded as matched and allo#ed to offset full+) To .ed coupon positions or for#ards. offsetting of positions in the future or for#ard contract and its underl+ing is onl+ permissi*le in cases #here there is a readil+ identifia*le underl+ing securit+ #hich is most profita*le for the trader #ith a short position to deliver) The price of this securit+.E( 6hen the future or the for#ard comprises a range of delivera*le instruments. *e of the same nominal value and *e denominated in the same currenc+) In addition: • for futures: offsetting positions in the notional or underl+ing instruments to #hich the futures contract relates must *e for identical products and mature #ithin seven da+s of each otherH • for s#aps and "! s: the reference rate (for floating rate positions) must *e identical and the coupon closel+ matched (i)e) #ithin 49 *asis points)H and • for s#aps.
as t#o t#o t#o / Inde.change/traded future / <overnment de*t securit+ / Corporate de*t securit+ .emption for full+ or ver+ closel+ matched positions in identical instruments as defined in paragraphs a*ove) The various categories of instruments should *e slotted into the maturit+ ladder and treated according to the rules identified earlier) Ta*le / Summar+ of treatment of interest rate derivatives .change contracts and interest rate futures #ill not *e su*Bect to a specific risk charge) This e. representing a *asket of de*t securities. su*Bect onl+ to an e.es.'(rume ( #*e$i!i$ ri'& $har9e Go . as positions .emption also applies to futures on an interest rate inde. or an inde.es )e era" 3ar&e( ri'& $har9e >. for#ard foreign e.E9 o over one +ear hence: #ithin thirt+ da+s) Banks #ith large s#ap *ooks ma+ use alternative formulae for these s#aps to calculate the positions to *e included in the duration ladder) The method #ould *e to calculate the sensitivit+ of the net present value implied *+ the change in +ield used in the duration method and allocate these sensitivities into the time/*ands set out in Ta*le 4 in Section B) :b< #*e$i!i$ ri'& Interest rate and currenc+ s#aps. as positions . (e)g) DIB:!)) Co#ever. "! s. in the case of futures contracts #here the underl+ing is a de*t securit+. on interest rates (e)g) Go MIB:!) .es.es. a specific risk charge #ill appl+ according to the credit risk of the issuer as set out in paragraphs a*ove) :$< )e era" mar&e( ri'& <eneral market risk applies to positions in all derivative products in the same manner as for cash positions.
cash or for#ard. the positions for the options and the associated underl+ing. on interest rates (e)g) Go MIB:!) .E& positions :TC for#ard / <overnment de*t securit+ / Corporate de*t securit+ Go .es. as positions t#o t#o t#o t#o / Inde. alternative approaches are permissi*le as under: • those *anks #hich solel+ use purchased options 4= #ill *e free to use the simplified approach descri*ed in Section I *elo#H • those *anks #hich also #rite options #ill *e e.uired .es Go Go .change :ptions / <overnment de*t securit+ / Corporate de*t securit+ Go .es. as positions .es.es.es . in #hich case no capital charge for market risk is re. S#aps B. Trea(me ( o! O*(io ' 4) In recognition of the #ide diversit+ of *anks@ activities in options and the difficulties of measuring price risk for options. are not su*Bect to the standardised methodolog+ *ut rather are "carved/out" and su*Bect to separatel+ calculated capital charges that incorporate *oth general market 4= 3nless all their #ritten option positions are hedged *+ perfectl+ matched long positions in e.actl+ the same options.es. as positions . as positions "! s. S#aps "or#ard "oreign >. as one position in each currenc+ / Inde. on interest rates (e)g) Go MIB:!) Go / "! s.pected to use one of the intermediate approaches as set out in Section II *elo#) %) In the simplified approach.
the capital charge #ould *e: !s)4. for particular s an e.uivalent of each option *+ the specific risk #eights set out in Section B and Section C) -. e. if a holder of 4'' shares currentl+ valued at !s)4' each holds an e.uivalent amount su*Bect to the applica*le general market risk charges) Separate capital charges are then applied to the gamma and vega risks of the option positions) The scenario approach uses simulation techni.ample of ho# the calculation #ould #ork. and foreign e.uirements) 3nder this method.E8 risk and specific risk) The risk num*ers thus generated are then added to the capital charges for the relevant categor+.uivalent position of each option *ecomes part of the standardised methodolog+ set out in Section B to A #ith the delta/e. 4'' Q !s)4''.change as descri*ed in Sections B to A) The delta4plus 'et#od uses the sensitivit+ parameters or "<reek letters" associated #ith options to measure their market risk and capital re. i)e) interest rate related instruments.ues to calculate changes in the value of an options portfolio for changes in the level and volatilit+ of its associated underl+ings) 3nder this approach. the general market risk charge is determined *+ the scenario "grid" (i)e) the specified com*ination of underl+ing and volatilit+ changes) that produces the largest loss) "or the delta/plus method and the scenario approach the specific risk capital charges are determined separatel+ *+ multipl+ing the delta/e. #im*"i!ie% a**roa$h 0) Banks #hich handle a limited range of purchased options onl+ #ill *e free to use the simplified approach set out in Ta*le trades) *elo#. i)e) the capital charge #ould *e !s)E') similar methodolog+ applies for options #hose underl+ing is a foreign currenc+ or an interest rate related instrument) . 4EF (i)e) =F specific plus =F general market risk) Q !s)4E'. less the amount the option is in the mone+ (!s)44 Y !s)4') .''' .uivalent put option #ith a strike price of !s)44. the delta/e.uities.
price) the/mone+" amount to *e 2ero) 2! 9here the position does not fall #ithin the trading book $i. *ut specific risk #ill *e present in the case of options on certain interest rate/ related instruments (e)g) options on a corporate de*t securit+ or corporate *ond inde.uities and stock indices (see Section C)) The charge under this measure for currenc+ options #ill *e =F) %% "or options #ith a residual maturit+ of more than si. the strike price should *e *ank una*le to do this must take the "in/ compared #ith the for#ard.change.e. it ma+ *e unclear #hich side is the "underl+ing securit+"H this should *e taken to *e the asset #hich #ould *e received if the option #ere e.H see Section B for the relevant capital charges) and for options on e. options on certain foreign exchange or commodities positions not belonging to the . e)g) caps and floors. months.EE Ta*le Simplified approach: capital char es Po'i(io Dong cash and Dong put :r Short cash and Dong call Trea(me ( The capital charge #ill *e the market value of the underl+ing securit+ %' multiplied *+ the sum of specific and general market risk charges%4 for the underl+ing less the amount the option is in the mone+ (if an+) *ounded at 2ero%% Dong call or Dong put The capital charge #ill *e the lesser of: (i) the market value of the underl+ing securit+ multiplied *+ the sum of specific and general market risk charges0 for the underl+ing (ii) the market value of the option%0 %' In some cases such as foreign e.ercised) In addition the nominal value should *e used for items #here the market value of the underl+ing instrument could *e 2ero. s#aptions etc) %4 Some options (e)g) #here the underl+ing is an interest rate or a currenc+) *ear no specific risk. not current.
to *e a long position #ith a maturit+ of five trading book%. %( !eserve Bank of India ma+ #ish to re. re. .uiring one entr+ at the time the underl+ing contract takes effect and a second at the time the underl+ing contract matures) "or instance. as set out in Ta*le 4 of Section B. *oth of #hich can accommodate more detailed revaluation approaches) . under the follo#ing procedure) t#o/legged approach should *e used as for other derivatives. a *ought call option on a $une three/month interest/rate future #ill in pril *e considered.(erme%ia(e a**roa$he' :a< De"(a-*"u' me(ho% () Banks #hich #rite options #ill *e allo#ed to include delta/#eighted options positions #ithin the standardised methodolog+ set out in Section B / A) Such options should *e reported as a position e.otic options (e)g) *arriers.ual to the market value of the underl+ing multiplied *+ the delta) Co#ever. since delta does not sufficientl+ cover the risks associated #ith options positions. *anks #ill also *e re.uired to measure gamma (#hich measures the rate of change of delta) and vega (#hich measures the sensitivit+ of the value of an option #ith respect to a change in volatilit+) sensitivities in order to calculate the total capital charge) These sensitivities #ill *e calculated according to an approved e.uivalent value. it may be acceptable to use the book value instead.change model or to the *ank@s proprietar+ options pricing model su*Bect to oversight *+ the !eserve Bank of India%() 9) Aelta/#eighted positions #ith de%t securities or interest rates as t#e underlying #ill *e slotted into the interest rate time/*ands. on the *asis of its delta/e. digitals) or in options "at/the/mone+" that are close to e.pir+ to use either the scenario approach or the internal models alternative.E= Po'i(io Trea(me ( --.uire *anks doing *usiness in certain classes of e.
monthsH and (ii) a series of five #ritten call options on a "! #ith a reference rate of 49F. #ould *e considered in pril as *eing long the *ond and short a five/months deposit.uivalent of the foreign currenc+ and gold options #ill *e incorporated into the measurement of the e. .=' months and a short position #ith a maturit+ of t#o months %9) The #ritten option #ill *e similarl+ slotted as a long position #ith a maturit+ of t#o months and a short position #ith a maturit+ of five months) "loating rate instruments #ith caps or floors #ill *e treated as a com*ination of floating rate securities and a series of >uropean/st+le options) "or e. *oth positions *eing delta/#eighted) 2( 2he rules applying to closely6matched positions set out in paragraph 2 $a% of this "nnex #ill also apply in this respect.uired to calculate the gamma and vega for each option position (including hedge positions) separatel+) The capital %9 t#o/months call option on a *ond future. there #ill *e further capital charges for ga''a and for vega ris&. each #ith a negative sign at the time the underl+ing "! takes effect and a positive sign at the time the underl+ing "! matures%&) &) The capital charge for options wit# e5uities as t#e underlying #ill also *e *ased on the delta/#eighted positions #hich #ill *e incorporated in the measure of market risk descri*ed in Section C) "or purposes of this calculation each national market is to *e treated as a separate underl+ing) The capital charge for options on foreign exc#ange and gold positions #ill *e *ased on the method set out in Section A) "or delta risk. the net delta/ *ased e. the holder of a three/+ear floating rate *ond inde. #here deliver+ of the *ond takes place in Septem*er.ed to si. month DIB:! #ith a cap of 49F #ill treat it as: (i) a de*t securit+ that reprices in si.ample. Banks using the delta/plus method #ill *e re.posure for the respective currenc+ (or gold) position) 8) In addition to the a*ove capital charges arising from delta risk.
the market value of the underl+ing should *e multiplied *+ =F%8H • for foreign e.%E each time/*and as set out in Ta*le 4 of Section BH%= %8 The *asic rules set out here for interest rate and e.change and gold options: the market value of the underl+ing should *e multiplied *+ =FH (iii) "or the purpose of this calculation the follo#ing positions should *e treated as the same underl!in9: • for interest rates.uit+ options do not attempt to capture specific risk #hen calculating gamma capital charges) Co#ever.pansion as: <amma impact Q ` . the price sensitivit+ should *e #orked out as e.uire specific *anks to do so) %E 1ositions have to *e slotted into separate maturit+ ladders *+ currenc+) 2& 1anks using the duration method should use the time6bands as set out in . O3a #here O3 Q Oariation of the underl+ing of the option) (ii) O3 #ill *e calculated as follo#s: • for interest rate options if the underl+ing is a *ond. !eserve Bank ma+ re.uivalent calculation should *e carried out #here the underl+ing is an interest rate) • for options on e.plained) n e.=4 charges should *e calculated in the follo#ing #a+: (i) for each individual option a "gamma impact" should *e calculated according to a Ta+lor series e. <amma .uit+ indicesH #hich are not permitted at present.uities and e.
ection 1 . *+ a proportional shift in volatilit+ of b]%9F) (vii) The total capital char e for vega risk #ill *e the sum of the a*solute value of the individual capital charges that have *een calculated for vega risk) :b< #$e ario a**roa$h E) More sophisticated *anks #ill also have the right to *ase the market risk capital charge for options portfolios and associated hedging positions on scenario 'atrix analysis) This #ill *e accomplished *+ specif+ing a fi.uired to calculate the capital charges *+ multipl+ing the sum of the vegas for all options on the same underl+ing.uities and stock indices. at the discretion of each national authorit+.ed range of changes in the option portfolio@s risk factors and calculating changes in the value of the option portfolio at various points along this "grid") "or the purpose of calculating the capital charge. each national marketH for foreign currencies and gold. not more than three of the time/ 2able 1 of . #ill *e set up for each individual underl+ing as defined in paragraph 8 a*ove) s an alternative.=% • • for e. sets of time/*ands) 6hen using this method. *anks #hich are significant traders in options for interest rate options #ill *e permitted to *ase the calculation on a minimum of si. as defined a*ove. the *ank #ill revalue the option portfolio using matrices for simultaneous changes in the option@s underl+ing rate or price and in the volatilit+ of that rate or price) different matri. each currenc+ pair and goldH (iv) >ach option on the same underl+ing #ill have a gamma impact that is either positive or negative) These individual gamma impacts #ill *e summed. resulting in a net gamma impact for each underl+ing that is either positive or negative) :nl+ those net gamma impacts that are negative #ill *e included in the capital calculation) (v) The total gamma capital charge #ill *e the sum of the a*solute value of the net negative gamma impacts as calculated a*ove) (vi) "or volatilit! risk" *anks #ill *e re.
the highest assumed change in yield of these three bands #ould be 0. ) to 5 years and 5 to years are combined.ual to a shift in volatilit+ of N %9F and / %9F is e.uire that a different change in volatilit+ *e used and .=0 *ands as defined in Section B should *e com*ined into an+ one set) =) The options and related hedging positions #ill *e evaluated over a specified range a*ove and *elo# the current value of the underl+ing) The range for interest rates is consistent #ith the assumed changes in +ield in Ta*le 4 of Section B) Those *anks using the alternative method for interest rate options set out in paragraph E a*ove should use. the time6bands ! to ) years.) 4%) In dra#ing up these intermediate approaches it has *een sought to cover the maBor risks associated #ith options) In doing so.. regime) :n the other hand. at least seven o*servations (including the current o*servation) should *e used to divide the range into e.uities and b= F for foreign e.uall+ spaced intervals) 4') The second dimension of the matri. for example. onl+ the delta/related elements are capturedH to capture other risks #ould necessitate a much more comple. . entails a change in the volatilit+ of the underl+ing rate or price) single change in the volatilit+ of the s circumstances #arrant. each cell contains the net profit or loss of the option and the underl+ing hedge instrument) The capital charge for each underl+ing #ill then *e calculated as the largest loss contained in the matri. it is conscious that so far as specific risk is concerned.pected to *e sufficient in most cases) ho#ever. 5. the highest of the assumed changes in +ield applica*le to the group to #hich the time/*ands *elong)0' The other ranges are b= F for e. in other areas the simplif+ing assumptions used have resulted in a relativel+ conservative treatment of certain options positions) !0 3f. the !eserve Bank ma+ choose to re.or that intermediate points on the grid *e calculated) 44) fter calculating the matri. underl+ing rate or price e.change and gold) "or all risk categories. for each set of time/*ands.
if the+ #ish to do so) .pects *anks undertaking significant options *usiness at the ver+ least to monitor such risks closel+) dditionall+. it e. the !BI is conscious of the other risks also associated #ith options.=( 40) Besides the options risks mentioned a*ove. e)g) rho (rate of change of the value of the option #ith respect to the interest rate) and theta (rate of change of the value of the option #ith respect to time)) 6hile not proposing a measurement s+stem for those risks at present. *anks #ill *e permitted to incorporate rho into their capital calculations for interest rate risk.
=9 +((a$hme ( De(ai"' o! $om*u(i 9 $a*i(a" $har9e' !or *o'i(io ' i o(her $urre $ie' Capital charges should *e calculated for each currenc+ separatel+ and then summed #ith no offsetting *et#een positions of opposite sign) In the case of those currencies in #hich *usiness is insignificant (#here the turnover in the respective currenc+ is less than 9 per cent of overall foreign e. instead. the net long or short position for each currenc+) Co#ever.change turnover). to produce a gross position figure) . these individual net positions are to *e summed #ithin each time/*and. irrespective of #hether the+ are long or short positions. separate calculations for each currenc+ are not re. slot #ithin each appropriate time/ *and.uired) The *ank ma+.
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