INSTRUCTIONS FOR ACCOMPLISHING THE REPORT ON COMPUTATION OF THE ADJUSTED RISK-BASED CAPITAL ADEQUACY RATIO COVERING COMBINED CREDIT RISK AND MARKET RISK
(For Universal Banks and Commercial Banks Without Expanded Derivatives Authority)
(Appendix to Sec. 125 on Market risk capital requirement)
1. All universal banks and commercial banks are required to complete this Report both on a solo basis (i.e., head office plus branches) and on a consolidated basis (i.e., parent bank plus subsidiary financial allied undertakings, but excluding insurance companies).
2. The Report should be submitted as follows:
(a) Solo report – within fifteen (15) banking days after the end of each reference quarter; and
(b) Consolidated report – within thirty (30) banking days after the end of each reference quarter
3. Current market value should be used for reporting. For leveraged instruments where the apparent notional amount differs from the effective notional amount, the bank should use the effective notional amount in calculating the market value for reporting, e.g., a swap contract with a stated notional amount of PhP1.0 million, the terms of which call for a quarterly settlement of the difference between 5% and PHIBOR multiplied by 10 has an effective notional amount of PhP10.0 million.
4. Securities transactions are to be reported on a “trade date” basis.
Definitions and Clarifications
5. Market risk is defined as the risk of losses in on- and off-balance sheet positions arising from movements in market prices. The risks subject to this reporting requirement are:
(a) the risks pertaining to interest rate-related instruments and equities in the bank’s trading book; and
(b) foreign exchange risk throughout the bank.
6. For the purpose of the Report, the trading book of a bank shall consist of:
(a) its proprietary positions in financial instruments which are taken on with the intention of short-term resale or benefiting in the short term from actual or expected differences between the buying and selling prices or from other price or interest rate variations;
(b) positions which arise from the execution of trade orders from customers and market making; and
(c) positions taken in order to hedge other elements of the trading book.
7. The financial instruments referred to in the preceding paragraph include:
(a) (i) transferable securities;
(ii) units in collective investment undertakings;
(b) certificates of deposit and other similar capital market instruments;
(c) currency forwards with tenor of one (1) year or less; and
(d) currency swaps with tenor of one (1) year or less and which for this purpose refer to the simultaneous buying and selling of a currency in approximately equal amounts for different maturity dates with the same party.
8. Banks are expected to have an established policy for allocating transactions (including internal deals) to the trading or non-trading (i.e., banking) book, as well as procedures to ensure compliance with such policy. There must be a clear audit trail at the time each transaction is entered into and the Bangko Sentral will examine the adequacy of such policy and procedures and their consistent implementation when it is considered necessary. For this purpose, banks which engage in trading activities should submit to the Bangko Sentral a policy statement covering:
(a) the definition of trading activities;
(b) the financial instruments which can be traded or used for hedging the trading book portfolio; and
(c) the principles for transferring positions between the trading and the banking books.
9. In general, the Bangko Sentral will have regard to the bank’s intention in entering into a particular transaction when determining whether such transaction should fall into the trading book. Transactions will likely be considered to carry a trading intent on the part of the bank if:
(a) the positions arising from the transactions are marked to market on a daily basis as part of the internal risk management process;
(b) the positions are not (or not intended to be) held to maturity; and
(c) the positions satisfy other criteria the bank applies to its trading portfolio on a consistent basis.
10. Debt securities include both fixed-rate and floating-rate instruments, negotiable certificates of deposit, non-convertible preference shares, and also convertible bonds (i.e., debt issues or preference shares that are convertible, at a stated price, into common shares of the issuer) which trade like debt securities.
11. Detailed offsetting rules applicable to the reporting of positions are set out in the relevant parts of Specific Instructions. These offsetting rules can be applied on both the solo and consolidated basis, provided that in the latter case there are no obstacles to the quick repatriation of profits from a foreign subsidiary to the Philippines and the bank performs daily management of risks on a consolidated basis. For this purpose, offsetting means the exclusion of matched positions of a bank from reporting and hence exclusion of such positions from the calculation of the adjusted capital adequacy ratio.
12. For avoidance of doubt, items that are deductible from the qualifying capital of the bank in the calculation of the risk-based capital adequacy ratio pursuant to applicable and existing capital adequacy framework are excluded from market risk capital requirement.
13. In general, banks are only required to complete Parts I to III and V of the Report. Banks which have obtained the Bangko Sentral’s approval to adopt their internal value-at-risk (VaR) models to calculate their market risk capital charge (in all or individual risk categories) should complete Part IV (in lieu of Parts I to III). Where the internal model is used to calculate only selected risk categories, the capital charge for the risk categories measured under the internal models approach should be reported in Part IV while that for the other risk categories measured under the standardized approach should be reported in the relevant sections of Parts I to III. This combination of the standardized approach and the internal models approach is allowed on a transitional basis. Banks which adopt the internal models approach will not be permitted, save in exceptional circumstances, to revert to the standardized approach.
Part I Interest Rate Exposures
1. Debt securities – specific risk
14. Report in this part the long and short positions in debt securities in the trading book by category of the issuer. Offsetting will be allowed between long and short positions in identical issues with exactly the same issuer, coupon, currency and maturity. For items 1.4 to 1.7 of the Report, positions should be slotted into the appropriate time bands according to the residual maturities of the debt securities. (Refer to examples (1) and (2) in Annex A).
15. A security, which is the subject of a repurchase agreement, will be treated as if it were still owned by the seller of the security, i.e., to be reported by the seller. This principle applies also in Part 1.2 of the Report.
16. Foreign countries, foreign incorporated banks and Philippine incorporated banks/ QBs with the “highest credit quality”, as well as debt securities with the “highest credit quality” refer to ratees/debt securities given the minimum credit ratings as indicated below by any two of the following internationally accepted rating agencies:
|Rating Agency||Credit Rating|
|(a) Moody’s||“Aa3” and above|
|(b) Standard and Poor’s||“AA-“ and above|
|(c) Fitch IBCA||“AA-“ and above|
17. Multilateral development banks refer to the World Bank Group comprised of the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC), the Asian Development Bank (ADB), the African Development Bank (AfDB), the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IADB), the European Investment Bank (EIB); the Nordic Investment Bank (NIB); the Caribbean Development Bank (CDB), the Council of Europe Development Bank (CEDB) and such others as may be recognized by the Bangko Sentral.
18. Non-central government public sector entities of a foreign country refer to entities which are regarded as such by a recognized banking supervisory authority in the country in which they are incorporated.
2. Debt securities – general market risk
19. Report in this part the long and short trading book positions in debt securities and forward foreign exchange positions. A Maturity Method is adopted for the reporting of these positions as detailed below. Banks that possess the necessary capability to calculate the duration and price sensitivity of each position separately and wish to adopt such a duration approach for reporting in this part may seek approval from Bangko Sentral.
20. Positions should be reported separately for each currency, i.e., banks should use separate sheets (Part I.2 of the Report) to report positions of different currencies. The unadjusted market risk capital charge is then calculated for each currency according to procedures set out in paragraphs 28 to 31 with no offsetting between different currencies.
21. Under the Maturity Method, positions are slotted into the time bands of the maturity ladder (as shown in Part I.2 of the Report) by remaining maturity if fixed rate and by the period to the next repricing date if floating rate. (Refer to examples (1) and (2) in Annex A). For forward foreign exchange positions in the trading book, they should be treated as long and as short positions in a zero coupon government security of the 2 currencies with the same maturity as the forward contract. (Refer to example (3) in Annex A).
22. As with the reporting under Part I.1 of the Report, banks can offset long and short positions in identical instruments with exactly the same issuer, coupon, currency and maturity for general market risk purposes.
23. Opposite forward foreign exchange positions can in certain circumstances be regarded as matched and allowed to offset fully. The separate legs of different currency swaps may also be “matched” subject to the same conditions. To qualify for this treatment, the positions must relate to the same underlying currency and be of the same nominal value. In addition, the residual maturity must correspond within the following limits:
– if either of the instruments for offsetting has a residual maturity up to 1 month, the residual maturity must be the same for both instruments; and
– if either of the instruments for offsetting has a residual maturity greater than 1 month and up to 1 year, those residual maturities must be within 7 days of each other.
24. Banks with the necessary expertise and systems may use alternative formulae (the so called “pre-processing” techniques) to calculate the positions to be included in the maturity ladder. This applies to all interest rate sensitive positions, arising from physical instruments and currency forwards and swaps. One method is to first convert the payments required under each transaction into their present values. For that purpose, each cash flow should be discounted using zero-coupon yields. A single net figure of all of the cash flows within each time band may be reported. Banks wishing to adopt this or other methods for reporting should seek the Bangko Sentral’s prior approval. The “pre-processing” models would be subject to review by the Bangko Sentral.
Calculation of capital charges for interest rate exposures reported in Part I
25. The unadjusted minimum capital requirement is expressed in terms of two separately calculated charges, one applying to the “specific risk” of each trading book position in debt securities, whether it is a short or long position, and the other to the overall interest rate risk in the trading book portfolio (termed “general market risk”) where long and short positions in different securities and currency forwards and swaps can be offset subject to certain “disallowances”.
26. The unadjusted specific risk charge is graduated into five broad categories by types of issuer, as follows:
|Government and multilateral development banks1||0.00%|
|Qualifying2||0.25% (residual maturity of 6 months or less)|
|1.00% (residual maturity of over 6 months to 24 months)|
|1.60% (residual maturity of over 24 months)|
27. Currency swaps and forward foreign exchange contracts will not be subject to a specific risk charge.
General market risk
28. General market risk applies to positions in all debt securities and currency forwards and swaps subject only to an exemption for fully or very closely matched positions in identical instruments as described in paragraphs 22 to 23 above. The unadjusted capital charge is the sum of the following components:
(a) the net short or long weighted position in the whole trading book;
(b) a small proportion of the matched positions in each time band (the “vertical disallowance”); and
(c) a larger proportion of the matched positions across different time-bands (the “horizontal disallowance”).
29. In the maturity ladder, first calculate the weighted positions by multiplying the positions reported in each time band by a risk-factor according to the following table:
Maturity method: time bands and weights
|Coupon 3% or more||Coupon less than 3%||Risk Weight|
|1 month or less||1 month or less||0.00%|
|Over 1 month to 3 months||Over 1 month to 3 months||0.20%|
|Over 3 months to 6 months||Over 3 months to 6 months||0.40%|
|Over 6 months to 12 months||Over 6 months to 12 months||0.70%|
|Over 1 year to 2 years||Over 1 year to 1.9 years||1.25%|
|Over 2 years to 3 years||Over 1.9 years to 2.8 years||1.75%|
|Over 3 years to 4 years||Over 2.8 years to 3.6 years||2.25%|
|Over 4 years to 5 years||Over 3.6 years to 4.3 years||2.75%|
|Over 5 years to 7 years||Over 4.3 years to 5.7 years||3.25%|
|Over 7 years to 10 years||Over 5.7 years to 7.3 years||3.75%|
|Over 10 years to 15 years||Over 7.3 years to 9.3 years||4.50%|
|Over 15 years to 20 years||Over 9.3 years to 10.6 years||5.25%|
|Over 20 years||Over 10.6 years to 12 years||6.00%|
|Over 12 years to 20 years||8.00%|
|Over 20 years||12.50%|
30. The weighted longs and shorts in each time band will be offset resulting in a single short or long position for each band. A 10% capital charge (“vertical disallowance”) will be levied on the smaller of the offsetting positions, be it long or short. Thus, if the sum of the weighted longs in a time band is P100.0 million and the sum of the weighted shorts is PhP90.0 million, the vertical disallowance would be 10% of PhP90.0 million (i.e., PhP9.0 million).
31. Two rounds of “horizontal offsetting” will then be conducted, first between the net positions in each of 3 zones (zero to 1 year, over 1 year to 4 years and over 4 years), and subsequently between the net positions in the 3 different zones. The offsetting will be subject to a scale of disallowances expressed as a fraction of the matched positions, as set out in Table 2 below. The weighted long and short positions in each of 3 zones may be offset, subject to the matched portion attracting a disallowance factor that is part of the capital charge. The residual net position in each zone may be carried over and offset against opposite positions in other zones, subject to a second set of disallowance factors.
|Zones||Time-band||Within the zone||Between adjacent zones||Between zones 1 and 3|
|1 month or less||40%||40%||100%|
|Over 1 month to 3 months|
|Over 3 month to 6 months|
|Over 6 months to 12 months|
|Zone 2||Over 1 year to 2 years||30%|
|Over 2 years to 3 years|
|Over 3 years to 4 years|
|Zone 3||Over 4 years to 5 years||30%||40%|
|Over 5 years to 6 years|
|Over 6 years to 7 years|
|Over 7 years to 10 years|
|Over 10 years to 15 years|
|Over 15 years to 20 years|
|Over 20 years|
Part II Equity Exposures
32. Report in this part the long and short positions in equities in the trading book, including instruments that exhibit market behavior similar to equities. The instruments covered include common stock (whether voting or non-voting), and convertible bonds (i.e., debt issues or preference shares that are convertible, at a stated price, into common shares of the issuer) which trade like equities. For non- convertible preference shares and those convertible bonds which trade like debt securities, they should be reported under Part I. Long and short positions in the same issue may be reported on a net basis.
33. The positions are to be reported on a market-by-market basis, i.e., under separate columns to indicate the exchange where the reported equities are listed/traded. For foreign markets, banks should indicate the country where the market is located. (Refer to example (4) in Annex A) Equities with listing in more than one market should be reported as positions in the market of their primary listing.
34. Matched positions in each identical equity market may be fully offset, resulting in a single net short or long position.
35. As with interest rate exposures, the capital charge is levied to separately cover both the specific risk and the general market risk. Calculation is done on an individual market basis. The unadjusted capital charge for specific risk will be 8% on the gross (i.e., long plus short) positions. The unadjusted general market risk charge will be 8% on the net position. Net long and short positions in different markets cannot be offset for the purpose of calculating general market risk charge.
Part III Foreign Exchange Exposures
36. Report in this part the amount in US dollars (USD) of net long or net short position in each currency. In addition, structural positions taken deliberately to hedge against the effects of exchange rate movements on the capital adequacy of the reporting bank may be excluded. This should be cleared with the Bangko Sentral prior to reporting.
37. Net long/(short) position shall refer to FX assets (excluding FX items allowed under existing regulations to be excluded from FX assets in the computation of a bank’s net FX position limits) less FX liabilities (excluding FX items allowed under existing regulations to be excluded from FX liabilities in the computation of a bank’s net FX position limits), plus contingent FX assets less contingent FX liabilities.
38. Banks which base their normal management accounting of forward currency positions on net present values shall use the net present values of each position, discounted using current interest rates, for measuring their positions. Otherwise, forward currency positions shall be measured based on notional amount.
39. The total USD amount of net long or net short position in each currency should then be converted at spot rates into Philippine peso. The overall net open position is the greater of the absolute value of the sum of net long position or sum of net short position.
40. The unadjusted capital charge will be 8% of the overall net open position.
Part IV Internal Models Approach
41. Only those banks which have obtained the Bangko Sentral’s approval to adopt their internal value-at-risk (VaR) models to calculate their market risk capital charges in lieu of the standardized methodology are required to report in this part.
1. Value-at-risk results
42. Report in this part the value-at-risk (VaR) results as at the last trading day of the reference quarter in column (a) and the average VaR over the most recent 60 trading days of the reference quarter in column (b), both for each individual market risk category using internal models approach, i.e., items 1.1 to 1.3, and for the aggregate of these risk categories, i.e., item 1.4.
43. Provided that the Bangko Sentral is satisfied with the bank’s system for measuring correlations, recognition of empirical correlations across broad risk categories (e.g., interest rates, equity prices and exchange rates) may be allowed. The VaR for the aggregate of all risk categories will therefore not necessarily be equal to an arithmetic sum of the VaR for the individual risk category.
44. Report also in this part the number of backtesting exceptions for the past 250 trading days (from the reference quarter-end going backwards), based on:
– actual daily changes in portfolio value, in item 1.4. column (c), and
– hypothetical changes in portfolio value that would occur were end-of-day positions to remain unchanged during the 1 day holding period, in item 1.4 column (d), for the aggregate of the broad risk categories.
45. The multiplication factor to be reported in item 1.4 column (e) is the summation of the following 3 elements:
(a) the minimum multiplication factor of 3;
(b) the “plus” factor ranging from 0 to 1 based on the number of backtesting exceptions (i.e., the larger of item 1.4 column (c) or item 1.4 column (d)) for the past 250 trading days as set out in Table 3 below: and
(c) any additional “plus” factor as may be prescribed by the Bangko Sentral.
“Plus” factor based on the number of backtesting exceptions for the past 250 trading days
|Zone||Number of exceptions||“Plus”
|10 or more||1.00|
46. Capital charge for general market risk calculated by internal models reported in item 1.6 is larger of:
(a) Item 1.4 column (a), i.e., VaR for the aggregate of all risk categories, as at the last trading day of the reference quarter; or
(b) Item 1.5, i.e., the average VaR for the last 60 trading days of the reference quarter [(item 1.4 column (b)] times the multiplication factor [(item 1.4 column (e)] set out in paragraph 45 above.
2. Specific risk
47. Capital charge for the specific risk of debt securities and equities is to be reported using either of the following two methods:
(a) For banks which incorporate the specific risk into their models, report the capital charge for the total specific risk calculated by the models in item 1.7 of Part IV.1; or
(b) For banks which do not incorporate the specific risk into their models, report the specific risk of debt securities in Part I.1 according to the instructions in paragraphs 14-18 and 26-27. For equities, report the specific risk in Part II according to the instructions in paragraphs 32 to 35.
3. Largest daily losses over the quarter
48. Report in this part in descending order (i.e., the largest loss first) the 5 largest daily losses over the reference quarter and their respective VaRs for the risk exposures which are measured by the internal models approach. If the number of daily losses during the quarter is less than 5, report only all such daily losses.
Part V Adjusted Capital Adequacy Ratio
49. The market risk capital charges should be aggregated and converted to a market risk-weighted exposure. The total market risk capital charge is the sum of the capital charges for individual market risk categories computed using either (a) the standardized approach, or (b) the internal models approach. The total capital charges for individual market risk categories using the standardized approach should be multiplied by 125% (to be consistent with the higher capital charge for credit risk, i.e., 10% as opposed to the BIS recommended 8%.)
50. The total market risk-weighted exposure is computed by multiplying the total market risk capital charges by 10. (The multiplier 10 is the reciprocal of the Bangko Sentral required minimum capital ratio for credit risk of 10%.) The qualifying capital and total credit risk weighted exposures are extracted from Part V.A and Part V.B, respectively, of the Report on the Computation of Risk-Based Capital Adequacy Ratio covering credit risk.
51. For on-balance-sheet debt securities and equities in the trading book included in Parts I, II and IV of this Report, the credit risk-weighted exposures reported in Part II of the Report on the Computation of the Risk-Based Capital Adequacy Ratio covering credit risk should be excluded in calculating the adjusted ratio covering combined credit risk and market risk. The market risk capital charges for these positions calculated in this Report cover all the capital requirements for absorbing potential losses arising from carrying such positions.
Suppose as at 31 December, 200X, ABC Bank Corporation has the following trading book positions:
(1) Long position in US Treasury Bond (7.5% annual coupon) with face value equivalent to PHP507.000MM and residual maturity of 8 years.
Market value based on quoted price: PHP518.914MM equivalent
(2) Long position in an unrated floating rate note (6.25% current annual coupon) issued by a US corporate with face value equivalent of PHP260.000MM and next repricing 9 months after.
Market value based on quoted price: PHP264.758MM equivalent
(3) Forward foreign exchange position of EUR5.000MM (long) against PHP250.000MM equivalent maturing in 3 months.
(4) Long 1000 shares of a US listed company with current market price of PHP715.000MM equivalent.
(1) Report market value (PHP518.914MM) of the long position in Part I.1, item I.2 and Part I.2, USD ladder, 7 to 10 years time band.
(2) Report market value (PHP264.758MM) of the long position in Part I.1, item 1.9 and Part I.2, USD ladder, 6 to 12 months time band.
(3) Report a long 3 months zero coupon security in Part I.2, EUR ladder, 1 to 3 months time band and a short 3 months zero coupon security in the Peso ladder, 1 to 3 months time band.
Assume 3 months EUR cash rate at 3.25%, 3-month Peso zero-coupon yield at 5.63% and spot exchange rate is 46.
PV of the EUR leg (i.e. receive side)
EUR = EUR5.000MM/ (1 + 0.0325 x 0.25)
= P228.146MM equivalent
PV of the PHP leg (i.e. pay side)
PHP = P250.000MM/ (1+ 0.0563 x 0.25)
(For simplicity Part III of the report is not presented in this example.)
(4) Report market value in Part II, item 1 (US column).
- “Government and multilateral development banks” refers to the issuers as described under items 1.1 and 1.3 in Part I.1 of the Report.
- “Qualifying” refers to the issuers/issues as described under items 1.4 to 1.7 in Part I.1 of the Report.
- “LGU bonds” refers to bonds issued by local government units (LGUs), covered by Deed of Assignment of Internal Revenue Allotment of the LGU and guaranteed by LGU Guarantee Corporation.