Regulations on minimum capital requirements for market risk, etc. for credit institutions and investment firms
Date FOR 2000-06-22-632
Affairs Ministry
Published Dept. In 2000 1295
Commencement 06/22/2000
Edited
FOR-2009-12-21-1735 from 01/01/2010
Changes
FOR 1996-07-17-780
For
Norway
Legal
LOV-1956-12-07-1-§1, LAW-1956-12-07-1-§4, LAW-1961-05-24-2-L-21, LAW-1988-06-10- 40 §2-9, LOV-1988-06-10-40-§2-9a, LOV-2005-06-10-44-§6-3, LOV-2007-06-29-75-§9- 15, LOV-2007-06-29-75-§9-16, LOV-2007-06-29-75-§9-17 cf. LOV-2015-04-10-17-§23-2
Promulgated
Short Title
Regulations on capital adequacy for market risk
Chapter Overview:
Chapter 1 - Scope and definitions (§§ 1-1 - 1-2)
Chapter 2 - The trading portfolio, valuation, reporting etc.. (§§ 2-1 - 2-4)
Chapter 3 - Minimum capital requirements (§§ 3-1 - 3-2)
Chapter 4 - Position risk of equity and debt instruments (§§ 4-1 - 4-8)
Chapter 5 - Position risk for derivatives (§§ 5-1 - 5-5)
Chapter 6 - Internal models (§§ 6-1 - 6-8)
Chapter 7 - Position risk share issues (§7-1)
Chapter 8 - Settlement and counterparty risk (§§ 8-1 - 8-4)
Chapter 9 - Currency risk (§§ 9-1 - 9-4)
Chapter 10 - Product risk (§§ 10-1 - 10-5)
Chapter 11 - Capital adequacy on a consolidated basis (§11-1)
Chapter 12 - Commencement (§12-1)
Adopted by the Ministry of Finance 22 June 2000 pursuant to the Act of 10 June 1988 no. 40 on financing activity and financial institutions § 2-9 second and third paragraphs, § 2-9a and § 3-17, the Law of 24 . May 1961 no. 2 on Commercial banks § 21, Act of 24 May 1961 no. 1 savings bank § 25, law of 7 December 1956 no. 1 on the supervision of financial institutions, etc. (Financial Supervision Act) § 4 ref. § 1, second paragraph, the Act of 19 June 1997. 79 Securities § 8-10 second paragraph and § 8-12.
Added basis: Law of 10 June 2005 no. 44 on insurance companies, pension companies and their activities etc.. (Insurance Act) § 6-3. Act 29 June 2007 no. 75 on securities trading (Securities Trading Act) § 9-15, § 9-16 and § 9-17.
EEA information: EEA Agreement, Annex IX section. 30a (European Parliament and Council Directive. 1998/31 / EC, the European Parliament and Council Directive. 1998/33 / EC and Directive 2006/49 / EC), and no. 14 (Directive 2006/48 / EC).
Changes: Amended by regulations 28 September 2006 no. 1102, January 16, 2007 no. 27, June 29, 2007 no. 876, 18 Dec 2009 No.. 1726, 21 Dec 2009 No.. 1735.
Chapter 1 - Scope and definitions
§ 1-1. Scope This regulation applies to investment firms authorized under the Act 29 June 2007 no. 75 on securities trading (Securities Trading Act) § 9-1 and credit institutions using allowances pursuant to Regulations 14 December 2006 No.. 1506 on capital requirements for commercial banks, savings banks and financial institutions, holding companies in financial services, investment firms and fund management companies, etc. (Capital Adequacy Regulations) § 49-2 first paragraph to calculate the capital requirement for this regulation until 31 December 2007.
Credit institutions and investment firms designated institution of this regulation.
This regulation applies also as a basis for calculating the minimum requirement set out in the Capital Adequacy Regulations § 49-2 seventh and eleventh paragraphs.
§ 1-2. Definitions
1. Equity instruments: financial instruments covered by the Securities Trading Act § 2-2 second paragraph. 1 and 3 and the rights to such.
2. Debt Instrument: financial instrument covered by the Securities Trading Act § 2-2 first paragraph no. 3, second paragraph. 2 and forward rate agreements (FRA), and interest rate and currency swaps, and rights to such.
3. Product: physical good that is standardized and / or classified and that can be traded commercially in the spot and futures markets. Examples of items in this context agricultural products, metals, oil and power.
4. Long position: ownership position in a financial instrument or a commodity or a right or obligation to acquire a financial instrument or commodity. Acquired call option written put option and sold forward rate agreement (FRA) is included in the definition of long position.
5. Short position: right or obligation to surrender a financial instrument or commodity. Issued call option acquired put option and purchased FRA is included in the definition of short position.
6. Net position: the difference between long and short positions in a financial instrument or commodity. In net position also includes derivative associated with the instrument, calculated according to the principles in Chapter 5.
7. Total net position: the difference between long and short net positions in different instruments.
8. Total gross position: the sum of long and short net positions in different instruments.
9. Derivative: financial instrument covered by the Securities Trading Act § 2-2 first paragraph no. 4 ref. Subsection.
10. Future: financial instrument covered by the Securities Trading Act § 2-2 subsection. 1 and traded with the assistance of an approved clearing house.
11. Warrants: securities in its maturity or at maturity gives the holder the right to buy an underlying asset at a fixed price. It may be settled by delivery of the underlying asset itself or by cash payment.
12. Regulatory capital: as defined in Regulation 1 June 1990 no. 435 on the calculation of own funds of financial institutions and investment firms.
13. Capital adequacy regulations: Regulation on 22 October 1990 no. 875 on minimum capital requirements of financial institutions and investment firms.
14. Inventory Financing: positions where a physical inventory is sold forward and the capital cost is locked until terminated the day.
15. Standard Units: the unit of measurement used to quantify one standard unit of a commodity. Kilo, tons, barrels, megawatts are examples of standard measurement units.
16. Value-at-Risk (VaR): the maximum expected loss on a position or a portfolio within a given time horizon and based on a given confidence level.
17. Idiosyncratic risk: daily price changes in individual securities that can not be explained by general market movements.
18. Event risk: the risk that a special event gives sudden changes in market value of the individual securities. Event risk also includes the risk of default.
Chapter 2 - The trading portfolio, valuation, reporting etc..
§ 2-1. Trading portfolio The trading portfolio consists of positions in financial instruments, cf. Securities Trading Act § 2-1, as well as goods and commodity derivatives that institution at its own expense for resale or for the short term to take advantage of price or interest rate fluctuations and to secure such positions. Positions referred to in Regulations Chapter 8 attached to the instruments under the first sentence shall be included.
Institution shall have internal rules governing the financial instruments included in the trading portfolio. The internal rules should be sent to the Financial Supervisory Authority.
If the purpose of a position change, shall be reclassified into or out of the trading done in accordance with the principles of accounting treatment.
§ 2-2. Valuation Institution trading portfolio shall at least daily at market value. Foreign currency shall be translated at the spot rate. If the market value can not be determined, the institution shall make a discretionary valuation. FSA can issue guidelines for such valuations.
The requirements in subsection does not apply to institutions as referred to in § 3.2.
§ 2-3. Reporting capital ratio will be reported to the Financial Supervisory Authority. Investment firms that are not credit institutions must report monthly. Credit institutions shall report each quarter. FSA lays down detailed rules on reporting.
Institutions shall report capital adequacy on a consolidated basis once every six months, cf. § 1.11, regardless of the provisions of the first paragraph.
If an institution's counterparties in repurchase agreements or transactions with borrowing financial instruments, commodities or commodity derivatives defaults on its obligations, this should be immediately reported to the Financial Supervisory Authority.
§ 2-4. Controls FSA may order the institution to implement control procedures, accounting procedures and administrative procedures which are considered necessary at any time to verify that the rules laid down in these regulations are upheld. The institution must at all times be able to prove that the capital requirements of these regulations are met, including compute all positions and have control systems for measuring the interest rate risk for its overall operations.
Chapter 3 - Minimum capital requirements
§ 3-1. Capital adequacy requirement institution must to cover risks covered by these regulations at all times have a capital base that comprises at least 8 percent of the following calculation:
A)
calculation as required by this regulation rules for position risk and settlement and counterparty risk associated with the institution's trading portfolio, cf. Section 4, 5, 7 and 8, and
B)
calculation resulting from currency risk and commodity risk related to the institution's overall business, cf. Chapter 9 and chapter 10.
If the institution uses an internal model to calculate the capital requirement for position risk, commodity risk and / or currency risk, cf. Chapter 6, the capital requirement for these risks appear directly mentioned in § 6-8.
Investment firm shall irrespective of the size of the capital requirement under subsection and the requirements of capital adequacy regulations have own funds equivalent to at least a quarter of its fixed costs in the preceding year. FSA can customize this requirement if there is a significant change in the firm's activities in relation to the preceding year. If the entity has exercised its business in less than one year shall capital charge equal a fourth of the amount of fixed costs set out in the plan of operations, cf. Securities Trading Act § 9-3 second paragraph.
Capital under these regulations are in addition to capital requirements for capital adequacy regulation, so that the same regulatory capital can not simultaneously be used to meet the requirements for both regulations.
§ 3-2. Exemption from the requirement calculation of capital adequacy under the provisions of this regulation An institution may notwithstanding § 3-1 letter a) calculate the minimum capital requirements for trading book for capital adequacy regulations if:
A)
trading portfolio generally no greater than 5 percent and never greater than 6 percent of the sum of the institution's balance sheet and off balance sheet items, and
B)
overall gross position for trading portfolio constitutes a sum which usually does not exceed an amount in Norwegian kroner that corresponds to EUR 15 million and never exceeds an amount in Norwegian kroner, which corresponds to 20 million euros.
When calculating the trading portfolio shall off- balance sheet items are translated in accordance with the capital adequacy regulations § 6 without weighting undertaken. Total gross position is the basis for the calculation.
FSA must be notified immediately when an institution's trading portfolio exceeding the limits in the first paragraph.
Chapter 4 - Position risk of equity and debt instruments
§ 4-1. Calculation of position risk Institution overall calculation for position risk in equity and debt instruments calculated by summing calculation for specific risk and calculation of overall risk.
The capital requirement for position risk of debt instruments calculated for each currency separately. Capital requirements for position risk for equity instruments is calculated for each national market (country) separately.
Institution may instead of the standard rules referred to in Chapters 4 and 5, use internal models as described in Chapter 6 to calculate the capital requirement for position risk.
§ 4-2. Shares of mutual funds in the calculation of shares in mutual funds is determined by the provisions of the Capital Adequacy Regulations § 5A.
§ 4-3. Specific risk, equity securities in the calculation of specific risk in equity instruments is gross position weighted by 50 percent.
§ 4-4. General risk, equity securities in the calculation of general risk in equity instruments are overall net position weighted by 100 percent.
§ 4-5. Specific risk, debt instruments Absolute value of net positions in individual debt instruments under the below categories should be multiplied by the specified risk weights.
1.
0 percent debt instruments with risk weight 0 percent after the capital adequacy regulations.
2.
3.125 percent debt instruments with risk weight 10 percent or 20 percent for capital adequacy regulation, and whose residual maturity less than 6 months.
3.
12.5 percent for debt securities risk weight 10 percent or 20 percent for capital adequacy regulation, and whose repayment period from 6 months to 24 months.
4.
20 percent for debt securities risk weight 10 percent or 20 percent for capital adequacy regulation, and whose residual maturity longer than 24 months.
5.
Debt instruments listed on a regulated market, sufficiently liquid and, because of the issuer's solvency have a risk of default that is not greater than the risks of receivables with risk weight 10 percent or 20 percent for capital adequacy regulations, may depend on residual maturity weighted in accordance with paragraph. 2-4 above. There must be an assessment of recognized rating agency as a basis for weighting of debt instrument under this provision.
6.
100 percent of net positions in all other debt instruments other than those mentioned in no. 1 - 5.
The remaining term is understood in this paragraph the term to maturity.
FSA may require that a debt instrument with a particular credit or illiquidity which basically fall into one of the categories in paragraphs. 1-4, used 100 percent risk weight.
Calculation of specific risk is calculated by summing the weighted positions in the above categories.
§ 4-6. General risk of debt instruments in the calculation of general risk for debt instruments shall be in accordance with the provisions of § 4-7 or § 4-8. The institution shall continue FSA about which method is used. The institution can not change the method of calculation without prior approval of the Financial Supervisory Authority.
In § 4-7 and § 4-8 going with maturities understood term to the next interest rate adjustment.
§ 4-7. General risk, debt instruments - option 1 maturity method calculation of the basis of capital requirements for general risk of debt instruments carried in the following 5 steps:
Step 1:
All net positions allocated to Zone I, Zone II and Zone III. Within each zone, net positions are distributed at intervals, depending on the repayment period and nominal interest rates. Zones and intervals are as follows:
Zone Interval
Remaining terms
Weight (pct)
Rate> = 3 pct
rate <3 pct
I
1
> 0, 0, 1, 1, 3, 3, 6, 6, 1, 1, 2, 1.9, 3, 2.8, 4, 3.6, 5, 4.3, 7 , 5.7, 10, 7.3, 15, 9.3, 20 years
> 10.6, 12, 20 years
12.50
Stage 2 (matching within intervals)
All net positions in individual debt instruments shall be multiplied by the weight of the corresponding interval.
The difference between the sum of all long weighted net positions and the sum of all short weighted net positions gives the open position in an interval. The assembled position is the minimum amount of the sum of all long weighted net positions and the sum of all short weighted net positions. The sum of the assembled positions in all intervals are the first assembly.
Step 3 (matching within zones)
difference between the sum of all long open positions and the sum of all short open position providing the open position in a corner. The assembled position is the minimum amount of the sum of all long open positions and the sum of all short open positions. The assembled amount appears becomes too zones I, II and III called respectively second, third and fourth assembly.
Step 4 (comparison between the zones)
The minimum amount of the open long (short) position in zone I and the open short (long) position in zone II constitute the assembled position between zone I and II. The minimum amount of the remaining open long (short) position in zone II and the open short (long) position in zone III constitutes the assembled position between zone II and III. The sum of the assembled position between zone I and II and the assembled position between zone II and III comprise the fifth assembly.
The minimum amount of the remaining open long (short) position in zone I and the remaining open short (long) position in zone III constitutes the sixth assembly.
Step 5:
sum of remaining open positions for assembly between the zones constitute residual position.
The institution shall apply the following risk weights on positions:
First assembly
125 percent
Second assembly
500 percent
Third assembly
375 percent
Fourth assembly
375 percent
Fifth assembly
500 percent
Sixth assembly
1875
percent
Residual position
1250
percent
Calculation of general risk for debt instruments is the sum of the weighted positions from the calculation above.
§ 4-8. General risk, debt instruments - option 2 durasjonsmetoden (duration method) Calculation of the basis of capital requirements for general risk of debt instruments carried in the following six steps: Step 1
:
Effective rate is calculated on the basis of an instrument market.
Step 2:
Gjeldsinstrumentets modified duration is calculated based on the effective interest rate calculated in step 1.
Step 3:
Debt instruments are distributed in zones depending on the modified duration. The zones are as follows:
Zone Modified duration in years
Assuming interest rate change in pct points
1
0 to 1.0
1.00
2
1.0 to 3.6
0.85
3
> 3.6
0.70
Step 4 (assembly within zones)
The durasjonsvektede net position of each debt instrument is calculated by multiplying the market value of the modified duration and the corresponding assumed change in interest rates.
The difference between the sum of durasjonsvektede long net positions and the sum of durasjonsvektede short net positions is the open position in each zone. The assembled position is the minimum amount of the sum of all long durasjonsvektede net positions and the sum of all short durasjonsvektede net positions. The sum of the assembled positions in all zones constitute the first assembly.
Step 5 (assembly between the zones):
The minimum amount of the open long (short) position in zone I and the open short (long) position in zone II constitute the assembled position between zone I and II. The minimum amount of the remaining open long (short) position in zone II and the open short (long) position in zone III constitutes the assembled position between zone II and III. The sum of the assembled position between zone I and II and the assembled position between zone II and III form the second assembly.
The minimum amount of the remaining open long (short) position in zone I and the remaining open short (long) position in zone III constitutes the third assembly.
Step 6:
sum of remaining open positions for assembly between the zones constitute residual position.
Institution will utilize the following risk weights on positions:
First assembly
25 percent
Second assembly
500 percent
Third assembly
1875
percent
Residual position
1250
percent
Calculation of general risk for debt instruments is the sum of the weighted positions from the calculation above.
Chapter 5 - Position risk for derivatives
§ 5-1. Calculation of derivatives positions in derivatives are treated as positions in the respective underlying instrument. Derivatives whose market value is directly linked to interest rates with maturities up to the redemption date, shall also be included as a short or long position in debt instruments with such repayment period or duration in accordance with § 4-6. Derivatives are treated in accordance with § 10-2.
§ 5-2. Futures A futures on a bond index can be divided into positions in each of the bonds making up the index, or it can be treated as a separate instrument with weighted average residual maturity or duration of all bonds in the index. Listed rate futures given a risk weight 0 percent when calculating capital requirements for specific risk under § 4-5.
A stock index futures can be divided into positions in each of the stocks making up the index, or it can be treated as a separate instrument. The requirements for coverage of specific risk under § 4-3 shall not publicly traded stock index futures which are treated as a separate instrument and that of the FSA approved as very diversified.
§ 5-3. Options Options treated as positions in the underlying instruments in accordance with § 5.1 so that each position is multiplied by the option's delta. Delta derives from trading prices on the relevant stock exchange for options that are listed. For unlisted options is calculated participate by methods approved by the FSA. The institution must have systems and procedures that captures otherwise risk when trading options, such as deltaverdiens sensitivity to changes in the price of the underlying instrument (gamma), option price's sensitivity to changes in time for redemption (theta), option price's sensitivity to changes in volatility ( vega) as well as option price's sensitivity to changes in the risk-free rate (rho). The institution must ensure that it has the capital base that covers such risks.
Rights as mentioned in the Securities Trading Act § 2-2 second paragraph. 3 treated the same way as options.
§ 5-4. Interest rate swaps An interest rate swap in which the institution receives variable rate and pays a fixed rate, is treated as a long position in a debt instrument with a variable interest rate with a maturity equal to the period until the next interest fixing and a short position in a debt instrument with fixed interest rate with the same maturity as the swap agreement.
An interest rate swap in which the institution receives fixed rate and pays a variable interest rate, is treated as a short position in a debt instrument with a variable interest rate with a maturity equal to the period until the next interest rate and a long position in a debt instrument with fixed interest rate with the same maturity as the swap agreement .
§ 5-5. Offsetting positions in derivatives which are debt instruments Offsetting positions in derivatives that have debt instruments as underlying may be excluded from calculation of general risk under § 4-6 if the instruments at least meet the following conditions:
-
They have the same nominal value and are denominated in the same currency,
-
Reference rates (for positions with variable interest rate) or nominal interest rate (for positions with fixed rate) are close to each other,
-
When the next interest rate adjustment date or shortest remaining term is less than one month ahead, be mentioned adjustment or maturity will be the same day for the two positions,
-
When the next interest rate adjustment date or shortest remaining maturity is more than a month but less than one year can not be the difference in timing of the aforementioned adjustment or maturity of the two positions will be more than seven days,
-
When the next interest rate adjustment date or shortest remaining maturity is more than one year can not be the difference in timing of the aforementioned adjustment or maturity of the two positions will be more than thirty days.
FSA must be notified if this freedom to reduce calculation used. It must be able to demonstrate to the FSA that the positions held outside the calculation satisfy the above conditions.
Chapter 6 - Internal models
§ 6-1. The use of internal models Following approval from the Financial Supervisory Authority, the institution may, instead of or in combination with standard rules laid down in Chapters 4, 5, 9 and 10 use internal risk models ( "Value-at-Risk" models) to calculate capital requirements for position risk, currency risk and commodity risk. Same calculation method must be used within one risk category. FSA may permit that negligible risks or new products not included in the model. As far as possible, risks that are not covered by the model are covered under standard policies.
For the Finance Authority to approve the use of such models, the institution must meet the requirements specified in §§ 6-2 to 6-7. An institution that has received the Financial Supervisory Authority acceptance to apply internal models, but later want to revert to the default rules, must have the consent of the Financial Supervisory Authority.
If the requirements of this chapter are not met, the FSA withdraw approval of the model.
§ 6-2. Qualitative requirements Approval of the model assumes that the institution has adequate procedures for the use of risk management system and in particular the following quality requirements are met:
A)
The internal risk calculation should be closely integrated in the institution's daily risk management and form the basis for reporting risk exposures to the institution's management.
B)
institution must have a device for risk control should be independent of the trading unit and reporting directly to the top management. The unit will be responsible for designing and implementing the institution's risk management system. It shall daily prepare and analyze reports and propose appropriate measures for compliance with internal risk limits for trading unit.
C)
institution's board and top management must actively participate in the risk control process and risk control unit daily reports shall be considered by leaders with sufficient authority to reduce both individual positions and the institution's overall risk exposure.
D)
institution must have a sufficient number of employees in the areas of trade, risk control, settlement (back-office), accounting and auditing that are qualified to understand advanced models.
E)
institution must have prepared a written documentation shall include a complete description of the model. The institution shall have established procedures for monitoring that written internal policies and controls in connection with the combined use of risk calculation observed.
F)
institution must be able to document that the model provides risk estimates with a reasonable degree of accuracy. Prior to approval, the institution must be able to demonstrate at least 250 days after testing ( "back-testing").
G)
It should be regularly undertaken independently controlling risk calculation system. The inspection should include both trading entity and risk control electronics firms. At least once a year, an inspection of the risk management system as a whole. In control should be assessed by:
-
About documentation concerning risk control are adequate and appropriate,
-
Organization of risk control,
-
Integration of market risk in daily risk management and the reliability of management information system
-
Procedure institution employs for approving the risk calculation models and systems for valuing used by employees on the trading unit and settlement and accounting unit ( "back-office")
-
Extent of risks and products captured by the model,
-
Validation of any significant changes in risk calculation process,
-
Whether position data is accurate and complete,
-
About the assumptions of the model, such as volatility and correlation assumptions, are well-founded and appropriate,
-
About valuations and calculations of risk sensitivity is accurate,
-
The control procedure that administers to assess whether the sources of information used for the internal model is consistent, relevant and reliable, and whether the sources are independent,
-
The procedure institution uses to evaluate after testing ( "back-testing") performed to assess the model's accuracy.
§ 6-3. Stress testing institution must as a complement to the VaR model, have a comprehensive system for stress testing. Stress testing should provide an indication of how much the institution can expect to lose if it happens great or special market changes. The institution shall use the results of stress testing to evaluate the capacity to absorb such losses, whether it should be set aside capital than is required when using the VaR model or any measures that can be taken to reduce risk. The results of stress testing should be regularly submitted to the institution's senior management and reflected in the guidelines and framework management sets.
§ 6-4. Specification of risk factors for general market risk model must capture a sufficient number of risk factors. The following minimum requirements must be complied with:
A)
Interest
The model will contain a set of risk factors corresponding to the interest rates in each currency in which the institution has interest rate sensitive positions. The institution shall estimate the yield curve using a commonly known method. For positions exposed to significant interest rate risk in the major currencies and markets, the yield curve is divided into at least six maturity categories to capture changes in volatility along the yield curve. For such positions, the model also capture movements between different yield curves that are not completely correlated.
B)
Currency
The model must contain risk factors which take account of price movements between the Norwegian krone and the currencies (including gold) as the institution's positions are denominated.
C)
Equity securities
Model must contain at least one risk factor for each of the markets in which the institution has significant positions.
D)
Goods
The model must contain one risk factor for each commodity that institution has significant positions. The model must also capture the risk associated with movements that are not fully correlated between similar but not identical goods, as well as exposure to changes in forward prices as a result of failure correlation between maturities. It should also be taken into account characteristics of the market, particularly delivery times and opportunities to close positions.
§ 6-5. Quantitative requirements The following quantitative requirements must be satisfied that the model may be used in calculating capital requirement:
1.
Calculating VaR shall take place at least daily.
2.
It will be used a unilateral confidence interval of 99%.
3.
The time horizon for the positions shall be assumed to be 10 days.
4.
The historical time series shall be based on an observation period of at least one year, unless a shorter time series can be justified by a significant increase in price volatility in recent months. FSA may order the use of a shorter observation period. About data series does not exist for a whole year, it may issue an institution authorized to use the constructed time series.
5.
The historical time series shall be updated at least once every three months or whenever there are any major changes in market conditions.
6.
Institution may take account of empirical correlations within and among the various risk categories on the condition that the institution has adequate systems and procedures to measure this correlation.
7.
For positions in options or instruments with option-like characteristics also apply to the following requirements:
A)
model must also cover non-linear changes in option prices (gamma)
B)
model must contain risk factors for the volatility of the interest rates, foreign exchange, commodity and / or share prices that option based on (vega risk).
The institution must ensure that it has sufficient own funds to cover the remaining risks of options, cf. Also § 5.3.
§ 6-6. Specific risk capital requirement for specific risk associated with equity instruments and debt instruments shall be calculated using standard methods in § 4-3 and § 4-5 unless the institution's model covers specific risks and to meet the requirements of this section in addition to those mentioned previously in Chapter 6 .
Specific risk divided into idiosyncratic risk and event risk.
When it comes to idiosyncratic risk model must be able to:
I)
explain the portfolio's historical price
Ii)
reflect concentration risk
Iii)
be robust to adverse market conditions
Iv)
checked afterwards in order to assess whether the specific risk is captured accurately.
When it comes to event risk, the institution must demonstrate that it has methods in a satisfactory manner covering this type of risk.
Institutions that meet the criteria for modeling idiosyncratic risk, but do not have methods to cover the event risks, shall calculate the capital requirement for specific risk based on calculations from the internal model plus an additional requirement mentioned in § 6-8.
§ 6-7. After Testing ( "back-testing") The institution shall monitor the model's accuracy and results by performing after testing ( "back-testing"). After testing means that for each working day made a comparison between the daily VaR calculated using the institution's model on the basis of the positions at the day's end, and the daily change in the portfolio value at the end of the subsequent business day. The institution should be able to perform after tests based on both actual and hypothetical changes in the portfolio value. FSA may require that institution to take appropriate action to improve procedures for testing if these are considered insufficient.
Institution must have the capacity to carry out after testing both the entire portfolio as a whole and for individual portfolios that significantly contribute to the risk.
Institution multiplier, ref. § 8.6 b), determined on the basis of the results after testing at the aggregate level. The multiplier is increased continuously with an additional factor of between 0 and 1 in accordance with the table below, depending on the number of exceedances that institution after testing has revealed for the last 250 business days. The institution shall calculate overruns on the basis of hypothetical changes in the portfolio value.
No.
overruns Additional Factor
Under 5
0.00
5
0.40
6
0.50
7
0.65
8
0.75
9
0.85
10 or more
1.00
FSA may in individual cases and in exceptional circumstances grant exemption from the requirement to increase the multiplier plus factor in accordance with the above table, if the institution has proven relationship with Finanstilsynet that such an increase is unjustified and that the model is basic correct.
If the number of exceedances indicate that the model is not sufficiently accurate Finanstilsynet may withdraw the approval of the model back or order the institution appropriate measures to ensure that the model is improved promptly. FSA may in individual cases order that the multiplier is increased by more than the number of exceedances would suggest.
Institution shall immediately and not later than five working days, inform the FSA about overruns that have been revealed by the end of testing, and that in accordance with the above table will involve an increase of the addition factor.
§ 6-8. Calculating the capital requirement institution must meet a capital requirement corresponding to the higher of the following values:
A)
the previous day's VaR amount
B)
an average of the daily calculated VaR amount for each of the preceding 60 working days multiplied by a factor of between 3 and 4, depending on how well institutions meet the qualitative requirements specified in § 6- 2 and adjusted for additional factor as described in § 6-7.
If the institution are modeling specific risk under § 6-6, but so that the model does not capture event risk, capital requirement calculated in accordance with section. B) above will be increased by either
I)
the part of the calculated VaR amounts which can be distinguished as specific risk according to the principles laid down in internal guidelines.
Ii) Estimated VaR of the portfolios of positions that contain specific risk.
Institutions using option ii), shall first explain the composition of its portfolio under and not change it without the Financial Supervisory Authority's consent.
Chapter 7 - Position risk for new issues
§ 7-1. Calculation of participation in share issues Institution who has guaranteed to underwrite the issue should compute its position in the emitted instrument by subtracting the position as a third party has subscribed for and then do the following deductions:
- Day no. 0:
100 percent
- 1st Day:
90 percent
- 2nd to 3rd Day:
75 percent
- 4 business days:
50 percent
- 5th Day:
25 percent
- After 5th Day:
0 percent
Business Day no. 0 is the business day the institution is obliged under warranty.
Calculation of position risk at source position as mentioned shall be calculated by the procedure in Chapter 4.
Chapter 8 - Settlement and counterparty risk
§ 8-1. Settlement risk for transactions in which neither money nor financial instruments, commodities or commodity derivatives are transferred to a new owner settlement risk for transactions that have not been settled, shall be calculated as follows:
-
The purchase transaction the positive difference between the agreed price and the market price multiplied by the relevant risk weight in the table below.
-
When purchasing transaction should the positive difference between the market price and the agreed price multiplied by the relevant risk weight in the table below.
The number of working days after the agreed settlement date
Risk weight
5-15
100 percent
16-30
625 percent
31-45
937.5 percent
> 45
1250
percent
Calculation of settlement risk is the sum of the risk-weighted differences from the above calculation.
This section shall not apply to repurchase agreements and loans of securities.
§ 8-2. Counterparty risk (uncompleted transactions) An institution shall have capital for counterparty risk if it paid for financial instruments, commodities or commodity derivatives until it has received them or have released financial instruments before they are paid. On cross-border transactions is the requirement in the first sentence apply a day after the institution undertook relevant payment or delivery.
Calculation of counterparty risk (uncompleted transactions) is the institution receivable risk weighted under the provisions of the capital adequacy regulations.
§ 8-3. Counterparty risk (derivatives) calculation of repurchase agreements and loans of financial instruments, commodities or commodity derivatives is the sum of the institution's net receivable amount risk weight under the provisions of the capital adequacy regulations.
For repurchase agreements, net receivable amount the positive difference between the financial instruments' or goods / commodity derivatives market and agreed repurchase price. For reverse repurchase agreements, net receivable amount the positive difference between the agreed sale price back and the instruments or goods / commodity derivatives market.
For loans of financial instruments, commodities and commodity derivatives, net receivable amount the positive difference between the lending instruments' market value and the market value of collateral the counterparty has pledged. For borrow financial instruments, commodities and commodity derivatives, net receivable amount the positive difference between the market value of the security institution has issued and the market value of the borrowed instruments, commodity or commodity derivatives.
Calculation of other derivatives are calculated according to the provisions of the Capital Adequacy Regulations §§ 5, 6 and 6a.
§ 8-4. Other risks in terms of settlement and counterparty risk in the calculation of credit balances in the form of brokerage, commission, interest, dividends and paid margin for derivatives that are not covered by this regulation capital requirements for settlement and counterparty risk or position risk, and that is directly related to items in the trading portfolio, calculated under the provisions of the capital adequacy regulations.
Chapter 9 - Currency risk
§ 9-1. General rule shall be calculated capital requirements for currency risk of the institution's overall business. Positions in gold are treated as foreign currency positions. The institution may, instead of the standard rules referred to in this chapter, use internal models as described in Chapter 6 for the calculation of currency risk.
§ 9-2. Calculation The calculation of currency risk is the sum of the net foreign exchange and gold position. Until 31 December 2004, however, the institution's calculation limited to that part of the sum of net foreign exchange position and the net gold position exceeds 2 per cent of its aggregate capital.
§ 9-3. Position Calculation Determination of the basis for calculation of capital requirements for currency risk occurs in two stages.
Step 1: The open net position
Institution open net position is calculated in each currency and in gold (except Norwegian kroner). The open net position consists of the following long or short positions:
-
Net spot position, ie all asset items less all liabilities.
-
Net forward position, ie all amounts that the institution will receive, minus any amounts it must pay under existing currency and gold futures and the currency swaps underlying principal that are not included in the spot position.
-
Sunk guarantees and similar instruments that are certain to be exercised.
-
Net delta value of the total amount of foreign currency and gold options.
-
Fair value of other derivatives in the currencies or gold.
Future income and expenses of the relevant currencies can be included in the calculation of the open net position with the consent of the Financial Supervisory Authority. Institutions that currency ensures capital adequacy may consent of FSA keep such structural currency positions outside position calculation. FSA may issue further rules on the use of net present value when calculating the open net position in each currency and in gold.
Step 2: The overall net foreign exchange position
Short and long net positions in each currency and in gold are translated into Norwegian kroner at the spot rate. Then summed short and long positions separately, so it appears a total amount of short positions and a total amount of long positions. The higher of the two sums is the institution's overall net foreign exchange position.
Net positions in a composite value may be divided at positions in each of the currencies it consists of. The division shall take place by the weight the individual currencies are included in the composite currency with.
§ 9-4. Position Limits An institution open net positions in individual currencies can not exceed 15 percent of the institution's capital. The overall net foreign exchange position (including positions in Norwegian kroner) can not exceed 30 percent of the institution's capital.
Institutions with regulatory capital that is substantially higher than the statutory minimum capital requirement, the permission of the Financial Supervisory Authority have higher position limits than those stated above.
Chapter 10 - Trade Risk
§ 10-1. General rule shall be calculated capital requirements for its overall business in terms of risk for positions in commodities and derivatives based on commodities. The institution may, instead of the standard rules referred to in this chapter, use internal models as described in Chapter 6 for the calculation of commodity risk.
Positions in gold or gold derivatives shall be considered as foreign currency positions and treated in accordance with Chapter 9 when calculating market risk.
Positions that have stock financing that sole purpose, can be omitted when calculating the trade risk.
§ 10-2. Derivatives Forward commitments for the purchase or sale of goods shall be included in the calculations as nominal amounts expressed in the relevant standard measuring unit and given a term based on the due date.
Swaps where a fixed price constitute one part of the transaction and the current market price the other, shall be included in the calculations under § 10-4 as a number of positions corresponding Agreement nominal amounts, where each position corresponds to a payment under the contract . The positions would be long if the institutions pay a fixed price and receive a floating price and short if the institution gets a fixed price and pays a floating price. For swaps where parts of the transaction relates to different items are placed the parts in the relevant intervals maturity method.
Options based on goods or commodity derivatives shall be treated as if they were positions equal in value as the underlying instruments option is based, multiplied by the option's delta. The positions that then emerges, can be offset by any corresponding position in the underlying commodity or commodity derivatives. Delta derives from trading prices on the relevant stock exchange for options that are listed. For unlisted options is calculated participate by methods approved by the FSA. The institution must ensure to have own funds that cover different risks than attend risk associated with commodity options, cf. Also § 5-3 second paragraph. Warrants relating to goods handled in the same way as options.
If goods or guaranteed rights to acquire goods transferred through a repurchase agreement, the transferor take the goods concerned in the calculation according to this chapter. The same applies to the lender of goods in a loan deal.
The purchase or sale of goods on installment and the purchase or sale of options on commodities, should interest rate risk on the other side of the contract included in the calculation of general interest rate risk under § 4-6. It should also be taken into account any currency risk, cf. § 9-1.
When a short position falls due before the long position, the institution shall also hedge against the risk of liquidity shortage that may occur in some markets.
§ 10-3. Calculation calculation of commodity risk shall be in accordance with the provisions of § 4.10 or § 10-5. The institution shall notify the FSA about the method used. The institution can not change the calculation without approval from the FSA.
All positions in commodities or commodity derivatives shall be expressed in standard units of measurement multiplied by the spot price (measured in Norwegian kroner) for each item.
The following positions can be regarded as positions in the same commodity:
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Positions in different sub-categories of commodities in cases where the sub-categories can be provided at each other.
-
Positions similar items if they are approximate substitutes, and if it can be clearly ascertained an association (correlation) between the price movements of at least 0.9 for a period of at least one year.
Capital requirements for commodity risk shall be calculated for each item separately.
§ 10-4. Product Risk, Option 1 - maturity method Step 1:
All positions in a commodity and all positions considered as positions in the same commodity, be placed in the relevant interval, depending on the time remaining to maturity. Physical store will placed in Interval 1. The intervals are as follows:
Interval Due
Risk weight percent.
1
> 0 ≤ 1 month
37.5
2
> 1 ≤ 3 months
37.5
3
> 3 ≤ 6 months
37.5
4
> 6 ≤ 12 months
37.5
5> 1 ≤ 2 years
37.5
6
> 2 ≤ 3 years
37.5
7
> 3 years
37.5
Positions in the same commodity or positions according to § 10-3 regarded as positions in the same commodity may be offset and placed in the appropriate intervals on a net basis for:
-
Positions in contracts that expire on the same date.
-
Positions in contracts that expire after the other within a period of ten days if the contracts are traded on markets with daily delivery.
Step 2:
Long positions and short positions in each interval are summed. The sum of long positions which are matched by the sum of the short positions in a given interval is the assembled position within an interval. The difference between the sum of the long positions and the sum of short position is the open position for an interval.
Step 3:
The long (short) open position in an interval which is matched by an open short (long) position in a later interval, is the assembled position between two intervals. The difference between the long (short) open position in an interval and the short (long) position in a later interval, is the open position.
Step 4:
calculation of each item is the sum of
I)
the assembled position within each interval multiplied by the appropriate risk weight.
Ii)
the assembled position between two intervals multiplied by 7.5 percent and by how many increments the open position is moved.
Iii)
remaining open positions, multiplied by 187.5 percent.
Step 5:
The overall measurement of commodity risk is the sum of the bases for each item that appears in Step 4.
§ 10-5. Product risk - option 2, simplified method excess institution long (short) position in relation to its short (long) positions in the same commodity and identical commodity futures, options and warrants, the net position in each commodity.
Step 1:
calculation of each item will be the sum of:
I)
187.5 percent of net position (long or short)
Ii)
37.5 percent of the gross position (long plus short).
Step 2:
The overall calculation of commodity risk will be the sum of the bases for each item that appears in step 1.
Chapter 11 - Capital adequacy on a consolidated basis
§ 11-1. Group of companies covered by this Regulation shall calculate capital requirements under the provisions of § 3-1 on an individual and consolidated basis if the enterprise:
A)
owns or controls at least 20 percent of the capital or voting securities or financial institution, or
B)
owns or controls at least 20 percent of the capital or voting rights in companies that provide services associated with the institution's ordinary activities or enterprises whose main activity consists in acquiring capital interests.
Chapter 12 - Commencement
§ 12-1. Entry into force These regulations enter into force immediately. From the same date, the Regulations of 17 July 1996 no. 780 on minimum capital requirements for market risk, etc. for credit institutions and investment firms.
