FRTB SSA

This document is only for limited distribution among FGD participants Nov-2021
The opinions or analyses presented in this document are those of the presenter, not necessarily representative of OJK. Presenter: Djono Subagjo (Djono.subagjo@fisglobal.com),
1 Introduction

2 Interest rate risk

3 Commodity risk and equity risk

4 FX risk

5 Options risk

6 Conclusion

2
 Objective of the Focus Group Discussion (FGD)

1. To get in-depth understanding of the simplified standardized approach of the

upcoming market risk capital framework

2. To identify relevance, issues and implications of the new framework for the
banking sector

3. To obtain inputs for the finalization of the new framework

3
 Scope of market risk under Simplified Standardized approach

Market risk

Interest rate Foreign

Equities Commodities
risk exchange

Trading book All positions

SUMMARY OF MARKET RWA (Example of reporting, draft)

3. Simplified SA (MR)
Specific Risk General Market Risk Additional Capital Requirement Multiplier Total Capital Requirement
for Options
(a) Total capital requirement under SSA(MR) 0 0 0 0
(i) Interest Rate Risk 0 0 0 1.3 0
(ii) Equity Risk 0 0 0 3.5 0
(iii) Foreign Exchange Risk 0 0 1.2 0
(iv) Commodity Risk 0 0 1.9 0

(b) Market risk capital requirement using the SSA(MR) 0 MAR.40.2

Pillar 1 RWA surcharge MAR.21.15

Credit valuation adjustment (RWA)

Total Market RWA 0

4
 BIS FRTB Resources

Boundary trading and banking book (RBC25)

Market risk teIDRinology (MAR10)

Definitions and application of market risk (MAR11)

Definitions of trading desk (MAR12)

SA: General provisions and structure (MAR20)

SA: Sensitivity based approach (MAR21)

SA: Default Risk Adjustment (MAR22)

SA: Residual Risk Add-on (MAR23)

Simplified SA (MAR40)

5
Interest rate risk [MAR 40.3 – 40.40]

i.e. the risk of holding or taking positions in debt securities and other interest rate related instruments in the trading book,
including all fixed-rate and floating-rate debt securities and instruments that behave like them, including non-convertible
preference shares and convertible bonds

6
 Coverage of interest rate risk in trading book

• Measures the risk due to adverse movements in benchmark interest rates

General risk • Based on the product of the modified durations or maturity and interest rate shocks
set for each maturity

• Measures the risk of a decline in the liquidity or credit risk quality of the
portfolio over the holding period
Specific risk • Specific risk capital charge for each position is the product of the absolute IDR
values of the long (short) positions and the specific risk weights

7
 Specific interest rate risk
Scope and weighting

Key notes (see MAR40.5 - )

• The capital requirement for specific risk is designed to protect against an adverse
movement in the price of an individual security owing to factors related to the
individual issuer.
• In measuring the risk, offsetting will be restricted to matched positions in the
identical issue (including positions in derivatives)
• When the government paper is denominated in the domestic currency and
funded by the bank in the same currency, at national discretion a lower specific
risk capital requirement may be applied
• The qualifying category includes securities issued by public sector entities and
multilateral development banks, plus other securities that are investment grades
• In certain cases where the specific risk for debt instruments which have a high
yield to redemption relative to government debt securities are underestimated,
each national supervisor will have the discretion:
1) to apply a higher specific risk charge to such instruments; and/or
2) to disallow offsetting for the purposes of defining the extent of general
• Full allowance will be recognised for positions hedged by credit derivatives when
the values of two legs (ie long and short) always move in the opposite direction
and broadly to the same extent.

8
Specific interest rate risk weighting (comparison to existing)
NOMOR 38 /SEOJK.03/2016

Some comparison with existing

• In the SSA, investment
grade rating is BBB/Baa or
higher
• In the SSA, corporate
bonds is also considered as
Qualifying when
investment graded
• Favorable risk weights for
banks in the existing SA
compared to the SSA
• The SSA table is more
simple

9
 General interest rate

Overall
• The capital requirements for general market risk are designed to capture the risk of loss arising from changes in market interest
rates. A choice between two principal methods of measuring the risk is permitted – a maturity method and a duration method.
• Capital charge is calculated as the sum of four components:
1. the net short or long weighted position across the entire time bands;
2. the smaller proportion of the matched positions in each time band to capture basis risk (the ‘vertical disallowance’)
3. the larger proportion of the matched positions across different time bands to capture yield curve risk (the ‘horizontal
disallowance’); and
4. a net charge for positions in options, where appropriate

Maturity method
• Opposite positions of same amount in same issue may be omitted from framework
• Positions weighted by prescribed price sensitivity factors
• Partial offset (10% capital charge) for weighted longs and shorts in each time band
• Two rounds of horizontal partial offsetting between time bands pursuant to prescribed scale

Duration method
• Calculate price sensitivity on basis of prescribed interest rate change depending on maturity
• Slot resulting sensitivity measures into duration-based ladder within time bands
• Subject long and short positions to 5% vertical disallowance
• Carry forward net positions for horizontal offsetting

Notes
• Separate maturity ladders should be used for each currency and capital requirements should be calculated for each currency separately
and then summed with no offsetting between positions of the opposite sign
• A bank should inform its supervisory authority if it uses the duration method.

10
 Treatment of interest derivatives

Some explanatory notes:

• The measurement system should include all interest-rate
derivatives and off balance sheet instruments in the trading book
which react to changes in interest rates (eg FRAs, other forward
contracts, bond futures, interest rate and cross currency swaps
and forward foreign exchange positions). Options can be treated
in a variety of ways (see further below)
• General market risk charge is generally same as for cash positions
• Interest rate and currency swaps, FRAs, forward FX contracts
and interest rate futures will not be subject to a specific risk
charge.. Specific risk will be present in case of options on certain
instruments (e.g. options on corporate bonds), otherwise only
general risk is calculated
• Swaps: Slotted as two notional positions in government securities
with relevant repricing maturities. No offsetting will be allowed
between positions in different currencies; the separate legs of
cross-currency swaps or forward FX deals are to be treated as
notional positions in the relevant instruments and included in the
appropriate calculation for each currency
• Futures: Slotted as combination of long and short position in a
notional government security

11
 Example 1: Interest rate risk position slotting
Floating bond position
A long position in a floating rate bond with no
credit rating, coupon rate of 6.5 percent p.a,
issued by a US corporate (denominated in
USD). The face value is equivalent to IDR
50,000 billion. The next interest fixing period
is 9 months and the market value is equivalent
to IDR 45,000 billion.
Futures position
Long positions in 10 future contracts with total
market value of IDR 100,000. Each contract
will be delivered in 3 months. The underlying is
5yr SBN with a coupon rate of 6%.
FX forward position
A long position in forward FX position of USD
in the amount of USD 1 million, exchanged
with IDR in the amount of IDR 14 billion
remaining maturity of 3 months.
Examples of recording treatment of interest rate risk under maturity method:
Record the IDR market value of the long position into two separate categories:
1). record in the specific risk table for non-rating corporate bonds (unqualified category)
with 8 percent capital charge, and
2). record a long position with the amount of IDR45,000 billion in the maturity ladder for
general market risk according to the remaining maturity of USD with over 3 percent in the
time-band of 6-12 months.
Record as two separate positions in the table for general market risks:
A short position in a zero-coupon instrument, remaining maturity of 3 months in the time-
band of 1 –3 months,
A long position in SBN with coupon rate over 3 percent, remaining maturity of 5.25 years
in the time-band of 5 –7 years
Record 2 positions (general market risk only) as follows:
A long position in a 3-month zero coupon instrument in the USD table, in the time-band of
1-3 months. Use market value.
A short position in a 3-month zero coupon instrument in IDR table, in the time-band of 1 -
3 months. Use market value.
12
 Example 2: Application of Maturity method

A bank holds the following market risk positions in the trading book:
a) a qualifying bond, IDR 13.33 million market value, remaining maturity 8 years, coupon 8%;

b) a government bond, IDR 75 million market value, remaining maturity 2 months, coupon 7%

c) an interest rate swap, IDR 150 million, in respect of which the Reporting Bank receives floating rate interest and pays fixed, next
interest fixing after 9 months, remaining life of swap is 8 years (assume the current interest rate is identical to the one on which the
swap is based); and

d) a long position in an interest rate future, IDR50 million, delivery date after 6 months, life of underlying government security is 3.5
years (assume the current interest rate is identical to the one on which the interest rate future is based

All coupons or interest rates are more than 3%

13
 Example 2’: Application of Maturity method

• The first step in the calculation is to weight the positions in each time band by a • In addition, banks are allowed to conduct two rounds of horizontal offsetting:
factor designed to reflect the price sensitivity of those positions to assumed (a) first between the net positions in each of three zones shown in Table 5 above
changes in interest rates. The weights for each time band are set out in Table 4. (b) subsequently between the net positions in the three different zones
Zero-coupon bonds and deep-discount bonds (defined as bonds with a coupon of
less than 3%) should be slotted according to the time bands set out in the second
column of Table 4. The weighted long and short positions in each of three zones may be offset, subject to
the matched portion attracting a disallowance factor. The residual net position in each
• The next step in the calculation is to offset the weighted longs and shorts in each zone may be carried over and offset against opposite positions in other zones, subject
time band, resulting in a single short or long position for each band. Since, to a second set of disallowance factors.
however, each band would include different instruments and different maturities, a
10% capital requirement to reflect basis risk and gap risk will be levied on the
smaller of the offsetting positions, be it long or short. The result of the above
calculations is to produce two sets of weighted positions, the net long or short
positions in each time band and the vertical disallowances, which have no sign.
14
 Example 2’’: Application of Maturity method
Maturity method

Copied from previous slide: Example of calculations - maturity method (IDR million)
Zone 1 Zone 2 Zone 3
A bank holds the following market risk Time Bands
Months Years
positions in the trading book: Total charge

a) a qualifying bond, IDR 13.33 million (Coupon 3% or more) Up to 1 >1 - 3 >3 - 6 >6 -12 >1 - 2 >2 - 3 >3 - 4 >4 - 5 >5 - 7 >7 - 10 >10 - 15 >15 - 20 Over 20
market value, remaining maturity 8 75 150 50 13.33
years, coupon 8%; Long Position
Govt Swap Futures Qualifying

b) a government bond, IDR 75 million

market value, remaining maturity 2 Short Position
50 150
months, coupon 7% Futures Swap

c) an interest rate swap, IDR 150 Assigned weights 0% 0.2% 0.4% 0.7% 1.25% 1.75% 2.25% 2.75% 3.25% 3.75% 4.5% 5.25% 6%
million, in respect of which the
+0.5
Reporting Bank receives floating rate Overall NOP +0.15 -0.2 +1.05 +1.125 3.00
-5.625
interest and pays fixed, next interest
fixing after 9 months, remaining life of 0.5 x 10%
swap is 8 years (assume the current Vertical disallowance
= 0.05
0.05
interest rate is identical to the one on
which the swap is based); and Horizontal
0.20 x 40% = 0.08 0.08
disallowance 1
d) a long position in an interest rate
future, IDR50 million, delivery date after Horizontal
1.125 x 40% = 0.45 0.45
6 months, life of underlying government disallowance 2
security is 3.5 years (assume the current
Horizontal
interest rate is identical to the one on disallowance 3
1.0 x 100% = 1.0 1.00
which the interest rate future is based
Total General Risk
All coupons or interest rates are more Charge
4.58
than 3%

[3.75%x13.33] –[ 3.75%x150)
The total amount matched zone 1 (200K) x the corresponding zone matching factor 40%
The matched amount of partial
offsetting of long and short positions
x band matching factor of 10%
Adjacent zone requirement
Non-adjacent zone requirement

15
 Application of duration method - Procedures
Duration method

Procedures

a) Calculate the price sensitivity of each instrument in terms of a change in interest rates of between 0.6 and 1.0
percentage points depending on the maturity of the instrument (see Table 6)

b) Slot the resulting sensitivity measures into a duration-based ladder with the 15 time bands set out in Table 6

c) Subject long and short positions in each time band to a 5% vertical disallowance designed to capture basis risk; and

d) Carry forward the net positions in each time band for horizontal offsetting subject to the disallowances set out in
Table 5

e) Calculate the total capital requirement as the sum of the three requirements.

16
 Example of reporting – Maturity method

Net Position General Risk Risk Weighted Position Disallowances Unmatched

(Notional Amount) Charge Vertical Horizontal Position
Within Zone Between Zone 1 & 2 and 2 & 3 Between Zone 1 & 3
Long Short Long Short Matched Band Require- Matched Zone Require- Matched Zone Require- Matched Zone Require-
MATURITY METHOD Weighted Matching ment Weighted Matching ment Weighted Matching ment Weighted Matching ment
Position Factor Position Factor Position Factor Position Factor
Zone 1 < 1 month 0.00% 0 0 - 10.00% 0
1 < 3 months 75 0.20% 0.15 0 - 10.00% 0
0.20 40.00% 0.08 1.00
3 - 6 months 50 0.40% 0 0.2 - 10.00% 0 - 40.00% 0
6 - 12 months 150 0.70% 1.05 0 - 10.00% 0
Zone 2 1.0 - 1.9 years 1.25% 0 0 - 10.00% 0
1.9 - 2.8 years 1.75% 0 0 - 10.00% 0 - 30.00% 0 1.13
2.8 - 3.6 years 50 2.25% 1.125 0 - 10.00% 0
Zone 3 3.6 - 4.3 years 2.75% 0 0 - 10.00% 0 1.00 100.00% 1
4.3 - 5.7 years 3.25% 0 0 - 10.00% 0
5.7 - 7.3 years 13.33 150 3.75% 0.499875 5.625 0.50 10.00% 0.0499875
1.125 40.00% 0.45
7.3 - 9.3 years 4.50% 0 0 - 10.00% 0
- 30.00% 0 (5.13)
9.3 - 10.6 years 5.25% 0 0 - 10.00% 0
10.6 - 12 years 6.00% 0 0 - 10.00% 0
12 to 20 years 8.00% 0 0 - 10.00% 0
Over 20 years 12.50% 0 0 - 10.00% 0

0.0499875 0.08 0.45 1 3.000

Total Vertical Disallowance 0.0499875

Total Horizontal Disallowance 1.53

Interest Rate Risk (General Market Risk) Capital Requirement - Maturity Method 4.5801125

17
 Example of reporting – Duration method

Net Position x Modified Assumed Risk Weighted Position Disallowances Unmatched

Duration Yield Change Vertical Horizontal Position
Within Zone Between Zone 1 & 2 and 2 & 3 Between Zone 1 & 3
Long Short Long Short Matched Band Require- Matched Zone Require- Matched Zone Require- Matched Zone Require-
DURATION METHOD Weighted Matching ment Weighted Matching ment Weighted Matching ment Weighted Matching ment
Position Factor Position Factor Position Factor Position Factor
Zone 1 < 1 month - - 1.00% 0 0 - 5.00% 0
1 < 3 month 12.00 - 1.00% 0.12 0 - 5.00% 0
0.20 40.00% 0.08 1.01
3 - 6 month - 18.00 1.00% 0 0.18 - 5.00% 0 - 40.00% 0
6 - 12 months 106.50 - 1.00% 1.065 0 - 5.00% 0
Zone 2 1.0 - 1.9 years - - 0.90% 0 0 - 5.00% 0
1.9 - 2.8 years - - 0.80% 0 0 - 5.00% 0 - 30.00% 0 1.15
2.8 - 3.6 years 153.50 - 0.75% 1.15125 0 - 5.00% 0
Zone 3 3.6 - 4.3 years - - 0.70% 0 0 - 5.00% 0 1.00 100.00% 1
4.3 - 5.7 years - - 0.65% 0 0 - 5.00% 0
5.7 - 7.3 years 83.98 945.00 0.60% 0.503874 5.67 0.50 5.00% 0.0251937
1.125 40.00% 0.45
7.3 - 9.3 years - - 0.60% 0 0 - 5.00% 0
- 30.00% 0 (5.17)
9.3 - 10.6 years - - 0.60% 0 0 - 5.00% 0
10.6 - 12 years - - 0.60% 0 0 - 5.00% 0
12 to 20 years - - 0.60% 0 0 - 5.00% 0
Over 20 years - - 0.60% 0 0 - 5.00% 0

0.0251937 0.08 0.45 1 3.010

Total Vertical Disallowance 0.0251937

Total Horizontal Disallowance 1.53

Interest Rate Risk (General Market Risk) Capital Requirement - Duration Method 4.5650697

18
 Interest rate risk
Comparison of Existing vs SSA vs SBA

➢ There are notable differences in specify risk weighting between Existing and the SSA
- In the SSA qualifying securities also include Corporate Bond
- National authorities will have discretion to include within the qualifying category debt securities issued
by securities firms that are subject to equivalent rules applicable to banks
➢ No differences found in comparison between Existing and SSA
➢ Duration method is more risk sensitive. It is relatively closer to the sensitivity-based approach under the
upcoming SA. This said, the SBA approach is clearly more risk sensitive with greater granularity in risk factors
considered and consideration of diversification/concentration of risks.

Notes of difference in treatment of credit derivative in Existing vs SSA

➢ Offsetting is recognized when a long cash position (or credit derivative) is hedged by a credit default swap (CDS)
or a credit-linked note (or vice versa) and there is an exact match in terms of the reference obligation, the
maturity of both the reference obligation and the credit derivative, and the currency of the underlying exposure
- Existing: 50%
- SSA: 80%

19
Equity risk and commodity risk

20
 Equity Risk
Two sources of risk

Definition and scope

The risk of holding or taking positions in equities in the trading book. It applies to long and short positions in all instruments that
exhibit market behaviour similar to equities.
The instruments covered include common stocks (whether voting or non-voting), convertible securities that behave like equities,
and commitments to buy or sell equity securities

Firm-specific, unsystematic element

The capital charge here is based on adding the long and short positions in any given stock and applying a 8% charge against the
gross position in the stock.

Market or systematic risk element

The capital charge here is based on applying a 8% charge against the net long or short position
Hence, the approach does consider the benefits of diversification

21
 Equity Risk
Specific and general market risk As with debt securities, the minimum capital standard for equities is
expressed in terms of two separately calculated capital requirements:

Capital charge for individual equity • Specific risk of holding a long or short position in an individual
equity, defined as the bank’s gross equity positions (ie the sum of
all long equity positions and of all short equity positions)

• General market risk of holding a long or short position in the

market as a whole, defined as the difference between the sum of
Specific risk General market risk the longs and the sum of the shorts (ie the overall net position in
an equity market).
8%
• The long or short position in the market must be calculated on a
market-by-market basis, ie a separate calculation has to be
Qualifying equity carried out for each national market in which the bank holds
Others
index equities.

2% 8%

Note on equity derivatives:

- Convert derivatives into positions in relevant underlying

- Matched positions may be fully offset
- Index risk: Further capital charge of 2% against net long or
short position in index contract comprising diversified
portfolio of equities to cover factors such as execution risk
- Arbitrage: Addition 2% capital charge in qualifying futures-
related arbitrage strategies may be applied to only one index
with opposite position exempt from capital charge

22
 Equity risk: Existing vs SSA vs SBA
Comparison of Existing vs SSA vs SBA

➢ The SSA covers the following, currently not covered in the Existing:
• In the SSA, besides general market risk, a further capital requirement of 2% will apply to the net long or short position in an
index contract comprising a diversified portfolio of equities (Qualifying index). This capital requirement is intended to cover
factors such as execution risk
• In the SSA, equity risk in physical-futures arbitrage portfolio is covered. When the arbitrage portfolio meets the conditions (see
Table below) then the minimum capital requirement will be 4% (ie 2% of the gross value of the positions on each side) to
reflect divergence and execution risks

Calculation example related to deliberate arbitrage strategy*

Proportions of
Proportions in
Components physical shares Slippage
the index
in the portfolio Does the basket of
Stock A 40% 38% 2% stocks represent
The trade must be deliberately enteterd into and separately controlled Any excess value of the
Stock B 20% 20% 0% 90% of the index, stocks comprising the basket over the value of the futures contract or excess value of the
i.e. Slippage % < futures contract over the value of the basket is to be treated as an open long or short position
Stock C 15% 18% 3%
Stock D 14% 15% 1% 10%
Stock E 10% 9% 1%
Stock F 1% 0% 1%
Total 8% Yes

➢ In the SBA (FRTB SA), compared to SSA (Existing), overall treatment of equity risk is more risk sensitive with greater
granular considerations of diversification benefit

23
 Equity Risk
Existing reporting

Weight for
qualifying
index will
be 2%, thus
a reporting
change is
required

24
 Commodity Risk
Type of commodity risks and characteristics

1. Directional risk: the risk arising from a change in the spot price of the commodity.

2. Forward gap risk: the risk that the forward price may change for reasons other than a change in interest rates such as
warehouse fee, transportation fee, such as warehouse fee, transportation fee, insurance fee, etc.

3. Basis risk: the risk arising from the case that financial institutions cannot achieve perfect hedging. That means the
hedging item is not the same as the hedged item. Therefore, the basis risk is the risk occurring rom the imperfect
correlation between the price between the price movements of the hedged items and that of the hedging items.

This imperfect correlation may be due to transportation fee, location and delivery transportation fee, location and
delivery time, or quality and grade of commodities etc.

4. Interest rate risk: the risk arising from changes in interest rates, which affect the cost of carry and in turn affect the
forward price.

25
 Commodities risk
Standardised measurement method
General
- Commodity is defined as physical product which is or can be traded on a secondary market; Less liquid for more complex and volatile
- Sub-types of risks include:
- Directional risk (the risk arising from a change in the spot price of the commodity)
- Basis risk (risk that relationship between prices of similar commodities varies over time);
- Interest rate risk (risk of cost of carry);
- Forward gap risk (risk that forward price may change other than due to interest rate changes)
- Approaches: maturity ladder, simplified

Maturity ladder (measurement system) approach

- Express commodity position in standard unit of measurement (barrel, kilos etc)
- Convert net position at current spot rates into national currency
- Assess capital charge against matched long and short positions in specified time bands and specified spread rates (1.5%)
- Residual net positions in nearer time bands may be carried forward to offset exposures in later time banks, subject to surcharge equal to
0.6% of net position carried forward
- 15% capital charge against resulting long or short position

Simplified approach
- Same capital charge for direction risk as under the maturity ladder approach
- Additional capital charge of 3% of gross positions in each commodity, long plus short, for basis risk, interest rate risk and forward gap risk
26
 Example 3: Capital requirement for commodity risk
Example data inputs

Positions
1) A short forward position in 15,000 tonne of CPO maturing in six months’ time.
2) Swap position on 10,000 tonne notional amount of CPO, the bank receives spot price and pays fixed price. The next payment date
occurs in 2 months’ time (quarterly settlement) with residual life of 11 months.

Convert the positions at current spot rates (assuming current spot rate is IDR2,500 per tonne).
(a) 15,000 tonne X IDR2,500 = IDR37.5 million
(b) 10,000 tonne X IDR2,500 = IDR25.0 million

Before calculation, slot first the position in IDR into the maturity ladder accordingly:
(a) Forward contract in “3-6 months” time-band as short position.
(b) Swap position in several time-bands reflecting series of positions equal to notional amount of the contract. Since the bank is paying
fixed and receiving spot, the position would be reported as a long position.
The payments occur (and is slotted accordingly in the respective time-bands) as follows:
First payment : month 2 (next payment date)
Second Payment : month 5
Third payment : month 8
Final payment : month 11 (end of life of the swap)

27
 Example 3: Capital requirement for commodity risk
Maturity Ladder and Simplified Approach
Capital requirement for commodity risk under Maturity Ladder approach
Time-band Position (IDR '000) Spread Capital calculation IDR '000
0 - 1 month 1.50%
25,000 carried forward to 3 - 6 months
Long 25,000
1 - 3 months 1.50% 1,500
Carry charge: 25,000 x 0.6% =
1,125
37,500 long + 37,500 short (matched)
Spread charge = 75,000 x 1.5% =
Long 25,000
3 - 6 monts 1.50%
Short 37,500
Net position = 12,500
1,875
Capital charge: 12,500 x 15% = Capital requirement for commodity risk under Simplified approach (IDR '000)

Long 25,000 Net positions 25,000 + 25,000 + 25,000 + 25,000 - 37,500 = 62,500
6 - 12 monts 1.50% Outright charge: 50,000 x 15% = 7500
Long 25,000 Aggregate positions [25,000 + 25,000 + 25,000 + 25,000] + 37,500 = 137,500
Total capital charge 12,000 Capital requirement 15% * 62,500 + 3% * 137,500 = 13,500

28
 Commodity Risk
Comparison of Existing vs SSA vs SBA

➢ No differences found in comparison between Existing and SSA

• Some changes or enhancements in reporting template are possible for the SSA implementation

➢ In the SBA (FRTB SA), compared to SSA (Existing), overall treatment of commodity risk is more risk sensitive with greater
granular considerations of diversification benefit

29
Foreign exchange (FX) risk

30
 Foreign exchange risk
Existing approach (tbc)

NOP formula (current approach)

NOP = (FX assets - FX liabilities) + (FX bought - FX

sold) = Net foreign assets + Net FX bought

Positive net exposure: net long a currency

Negative net exposure: net short a currency

Bank must calculate its net exposure in each

foreign currency and then convert this into IDR at
the current spot exchange rate.

31
 Foreign exchange risk
SSA: Shorthand method

Measuring FX risk
- Shorthand method treating all currencies equally – capital charge is 8% times overall net open position determined by converting
nominal amount (net present value) of net position in each currency into reporting currency
- The overall net open position is measured by aggregating:
(1) the sum of the net short positions or the sum of the net long positions, whichever is the greater; plus
(2) the net position (short or long) in gold, regardless of sign.

Net exposure, NOP (detailed)

The bank’s net open position in each currency should be calculated by summing:
• the net spot position (i.e. all asset items less all liability items, including accrued interest, denominated in the currency in
question);
• the net forward position (i.e. all amounts to be received less all amounts to be paid under forward foreign exchange transactions,
including currency futures and the principal on currency swaps not included in the spot position);
• guarantees (and similar instruments) that are certain to be called and are likely to be irrecoverable;
• net future income/expenses not yet accrued but already fully hedged (at the discretion of the reporting bank);
• any other item representing a profit or loss in foreign currencies;
• net delta-based equivalent of the total book of the fx options
32
 Example 4: Shorthand method for FX risk
Capital charge calculation

FX Capital Charge Formula

Capital charge = 8% * overall FX exposure

The overall FX exposure is measured by aggregating the sum of the net short positions or the sum of the net long positions;
whichever is the greater, regardless of sign.

JPY EUR USD SGD HKD Gold Notes

Measure the exposure in a single currency position
Step 1 50 100 150 -20 -180 -35
(FX NOP)

Measure the risks inherent in Bank's mix of net long

Step 2 300 -200 -35
and short positions in different currencies

Capital charge is 8 per cent of the higher of either the

Capital requirement for net long currency positions or the net short currency
26.8
overall net open position positions (300) and of the net position in gold (35) =
335 x 8% = 26.8.

33
 Foreign exchange Risk
Comparison of Existing vs SSA vs SBA

➢ The SSA requires implementation of Shorthand method

• Some changes or enhancements in FX reporting template are possible for the SSA implementation

➢ In the SBA (FRTB SA), compared to SSA (Existing), overall treatment of FX risk is more risk sensitive with greater granular
considerations of diversification benefit

34
Option risks

35
 Options risk
Standardised measurement method
General
- Two approaches: simplified and intermediate comprising of delta-plus method and scenario approach
- Banks with bought options are only pemitted to use simplified approach.
Unless all their written option positions are hedged by perfectly matched long positions in exactly the same options, in which case no capital
requirement for market risk is required

Simplified approach

Delta-plus method (intermediate approach)

- Options reported as position equal to market value of underlying multiplied by delta
- Delta-weighted capital charge: Determination depending on whether option underlying is debt security or interest rate
instrument, equity, foreign exchange and gold or commodities
- Additional capital charges for gamma (measuring rate of change of delta) and vega (measuring sensitivity of value of option to
change in volatility)
Scenario approach (intermediate approach)
- Capital charge determined by calculating changes in option value at various points along “grid” of ranges of changes in option
portfolio’s risk factors
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 Example 5: Simplified approach for option risks
Application to stock portfolio

Simplified approach

A bank holds 100 shares currently valued at IDR1000 each and an equivalent put option with a strike price of IDR1100;

The market risk capital requirement = IDR6000

IDR100,000 x16% (i.e. 8% specific risk + 8% general market risk) = IDR16,000, less the amount the option is in the money
(IDR1100 – IDR1000) x 100 = IDR10,000.

See also page 42, SEOJK, No 38/03/2016

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 Example 6: Intermediate approach for option risks
Delta-plus method (case commodity)

Example based on the following inputs related to European short call option on a commodity

Exercise price : 490 Delta : -0.721

(the price of the option changes by -0.721 if the price of the
Market value : 500
underlying moves by 1)
Expiry : 12 months
Gamma : -0.0034
Risk free rate : 8% pa (the delta changes by -0.0034, from -0.721 to -0.7244, if the price
of the underlying moves by 1)
Volatility : 20%
Vega : 168
Option value : 65.48
(1% increase in volatility increase the value of the option by 1.68)

Delta-weighted position: |500 x -0.721| = 360.5

Capital requirement for delta: 360.5 x 15% = 54.075

Capital requirement for Gamma: 1/2 x -0.0034 x (500 x 0.15)² = |9.5625|

Vega capital charge is calculated on the basis of a 25% relative increase in the current volatility (20%), thus, an increase of a 5 % point.

Capital requirement for Vega: |5 * -1.68| = 8.4

Market risk for this option on commodity: 54.075 + 9.5625 + 8.4 = 72.04

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 Example 7: Intermediate approach for option risks
Delta-plus method (case FX) Step 3
Capital requirement for vega
Volatility shift
Assumed Change in Net Vega
Option Currency pair Vega (percentage
Given information on FX options positions volatility (%) value (IDR) impact (IDR)
points)
Market value of
Assumed 1 IDR/USD 5 1.84 1.25 2.30
Option Currency pair underlying (IDR Delta Gamma Vega
volatility (%)
billion) 2 IDR/USD 20 -3.87 5.00 (19.35)
(6.18)
1 IDR/USD 100 -0.803 0.0018 1.84 5 3 IDR/USD 20 -0.31 5.00 (1.55)
2 IDR/USD 600 -0.519 -0.0045 -3.87 20
4 IDR/USD 10 4.97 2.50 12.43
3 IDR/USD 200 0.182 -0.0049 -0.31 20
5 EUR/JPY 10 5.21 2.50 13.03
4 IDR/USD 300 0.375 0.0061 4.97 10 9.68
6 EUR/JPY 7 -4.16 1.75 (7.28)
5 EUR/JPY 100 -0.425 0.0065 5.21 10
7 EUR/JPY 5 3.15 1.25 3.94
6 EUR/JPY 50 0.639 -0.0016 -4.16 7
7 EUR/JPY 75 0.912 0.0068 3.15 5

Step 1 Net impact for vega on each currency pair

Calculate delta weighed option position
Delta * Market IDR/USD (6.18)
Option Currency pair Value of EUR USD JPY
Underlying EUR/JPY 9.68
57.9 (242.8) (57.9)
1 IDR/USD (80.3) 57.9 (300.7) Cap. Req 15.86
2 IDR/USD (311.4)
Note: Vega impact of the same underlying instrument is
3 IDR/USD 36.4 Net open delta-weighted position 300.7 allowed to be combined, however, vega impact of different
4 IDR/USD 112.5 underlying instrument is not allowed to be offset.
5 EUR/JPY (42.5) CR for delta risk (FX): 24.1
6 EUR/JPY 32.0
7 EUR/JPY 68.4

Step 2
Calculate CR for Gamma risk
Gamma impact:
½ x Gamma (IDR) Net Gamma
Option Currency pair
x (market value impact Last step
of underlying) x
1 IDR/USD 0.0576
2 IDR/USD (5.1840) Total capital 24.1 + 4 + 15.86
(4.00)
3
4
IDR/USD
IDR/USD
(0.6272)
1.7568 requirement fx [Delta + Gamma + Vega] 43.9
5 EUR/JPY 0.2080
6 EUR/JPY (0.0128) 0.32 options
7 EUR/JPY 0.1224
Assuming that the bank holds no other foreign currency positions,

Capital requirement
4.00
for Gamma
Only negative gamma shall be included in calculation of Capital 39
requirement
 Example 8: Scenario approach for option risks
Scenario analysis or contingent loss approach (case stock portfolio)

A bank holds portfolio of 2 shares and 2 related options with key details as follows:
Number of Current price Number of Maturity Exercise
Shares Options Type Volatility (%)
shares (IDR) options (year) price
Long AAA 100 19.09 Long AAA 50 Call 0.45 20 0.15
Short BBB 50 1.79 Short BBB 20 Put 0.36 2.25 0.42

Step 1: calculate the change in value (IDR) of the stock portfolio by applying the price change under +/- 8% (e.g divided into 7 banks) as follows:

Assumed price change

-8% -5.33% -2.67% 0 2.67% 5.33% 8%
AAA -152.72 -101.75 -50.97 0.00 50.97 101.75 152.72
BBB 7.16 4.77 2.39 0.00 -2.39 -4.77 -7.16

Step 2: calculate the price change in AAA call options and BBB put options by using matrix of price and volatility according to an appropriate price model, e.g.
Change in value of AAA call options from a price model: Change in value of BBB put options from a price model:
Assumed volatility Assumed price change Assumed volatility Assumed price change
change -8% -5.33% -2.67% 0 2.67% 5.33% 8% change -8% -5.33% -2.67% 0 2.67% 5.33% 8%
25% -8.26 -4.38 0.98 8.02 16.93 27.78 40.58 25% -2.81 -2.97 -1.36 -0.68 -0.02 0.62 1.22
0 -12.10 -9.63 -5.73 0.00 7.88 18.13 30.81 0 -2.32 -1.52 -0.75 0.00 0.72 1.41 2.08
-25% -14.30 -13.27 -11.12 -7.20 -0.83 8.52 21.08 -25% -1.88 -0.96 -0.04 0.80 1.81 2.73 3.65

Step 3: Sum the price change in stock and option portfolio from Step 1 & 2, resulting in the contingent loss matrix (use Min function):

Assumed volatility Assumed price change

change -8% -5.33% -2.67% 0 2.67% 5.33% 8%
25% -156.63 -104.33 -48.96 7.34 65.49 125.38 187.36
0 -159.98 -108.13 -55.06 0.00 57.18 116.52 178.45
-25% -161.74 -111.21 -59.74 -6.40 49.56 108.23 170.29
Total capital requirement for the portfolio: -161.74 40
 Options Risk
Comparison of Existing vs SSA vs SBA

➢ There is no difference at the high level between Existing and the SSA, however
• Scenario analysis approach is not covered in Existing
• Some changes or enhancements in FX reporting template may be required for the SSA implementation

➢ In the SBA (FRTB SA), compared to SSA (Existing), overall treatment of Options risk is more risk sensitive with greater
granular considerations of diversification benefit

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Terima Kasih