Download strukture for the decree on minimum capital requirements for market

THIS TEKST IS UNOFFICIAL TRANSLATION AND MAY NOT BE USED AS A BASIS FOR SOLVING
ANY DISPUTE
(unofficial consolidated text)
• Official Gazette of the Republic of Slovenia, No. 135/06 of 21 December 2006 – basic text (in force since 1
January 2007).
• Official Gazette of the Republic of Slovenia, No. 104/07 of 16 November 2007 – Amendments and
Additions (in force since 24 November 2007).
Pursuant to point 5 of Article 129 and Article 405 of the Banking Act (Official Gazette of the Republic
of Slovenia, No 131/06) and paragraph 1 of Article 31 of the Bank of Slovenia Act (Official Gazette
of the Republic of Slovenia No 72/06 - official consolidated text), the Governing Board of the Bank of
Slovenia issues the following
REGULATION
ON THE CALCULATION OF CAPITAL REQUIREMENTS FOR MARKET
RISKS FOR BANKS AND SAVINGS BANKS *
1.
GENERAL PROVISIONS
Article 1
(content of the regulation)
(1) This regulation defines in detail the rules relating to calculating the capital requirements for market
risks for banks and saving banks (hereinafter: banks).
(2) Market risk for the purposes of this regulation comprises:
(a) position risk (specific and general risk of price changes in financial instruments)
− associated with debt instruments
− associated with equity instruments
(b) settlement and counterparty credit risk
(c) foreign exchange risk
(d) commodity risk
(e) risk of exceeding the maximum allowable exposure from trading.
(3) When this regulation refers to provisions of other regulations, these provisions shall be applied
according to the text in force.
Article 2
(general terms)
(1) The terms used in this regulation are the same as those defined in Banking Act (Official Gazette of
the Republic of Slovenia, No. 131/06; hereinafter: ZBan-1), such as:
(b) local firm in the second paragraph of Article 14,
(d) probability of default (hereinafter: PD) in the first paragraph of Article 115,
(e) default in the second paragraph of Article 115,
(f) loss given default (hereinafter: LGD) in the fourth paragraph of Article 115,
(g) conversion figure (hereinafter: CF) in the fifth paragraph of Article 115,
(h) expected loss (hereinafter: EL) in the sixth paragraph of Article 115,
(i) a repurchase transaction in Article 117,
_____________________________________
The official language of the document translated herein is Slovene. In case of any doubt or misuderstanding the
Slovene version should therefore be considered final.
…………………..
* Sklep o izračunu kapitalske zahteve za tržna tveganja za banke in hranilnice (Uradni list 135/06 in
104/07).
THIS TEXT IS UNOFFICIAL TRANSLATION AND MAY NOT BE USED AS A BASIS FOR SOLVING ANY DISPUTE
(j) a securities or commodities lending or borrowing transaction in Article 118,
(k) cash assimilated instrument in Article 119,
(l) originator in the sixth paragraph of Article 120,
(m) sponsor in the seventh paragraph of Article 120,
(n) a financial instrument in the first paragraph of Article 121,
(o) a derivative instrument in the fifth paragraph of Article 121,
(p) a convertible security in the third paragraph of Article 121,
(q) a warrant in the fourth paragraph of Article 121,
(r) a regulated market referred to in Article 122.
(2) For the purpose of this regulation the following definitions shall apply:
(a) "over-the-counter (OTC) derivate instruments” are financial instruments defined in Annex I to
this regulation, other than those instruments to which an exposure value of zero is attributed in
accordance with Table 7 of Article 48 of this regulation;
(b) "stock financing" means positions where physical stock has been sold forward and the cost of
funding has been locked in until the date of the forward sale;
(c) "clearing member" means a member of the exchange or the clearing house which has a direct
contractual relationship with the central counterparty (market guarantor);
(d) "delta" means the expected change in an option price as a proportion of a small change in the
price of the instrument underlying the option;
(e) a "central counterparty" is an entity that legally interposes itself between counterparties to
transactions (contracts) traded on one or more financial markets, becoming the buyer to every
seller and the seller to every buyer;
(f) "counterparty credit risk" (hereinafter: CCR) is the risk that the counterparty to a transaction
could default before the final settlement of the transaction’s cash flows;
(g) "long settlement transactions" are transactions where a counterparty undertakes to deliver a
security, a commodity or a foreign currency against cash, other financial instruments, or
commodities, or vice versa, at a settlement or delivery date that is contractually specified as more
than the market standard for this particular transaction, or at least five business days after the date
on which the credit institution enters into the transaction;
(h) "margin lending transactions" mean transactions in which a credit institution extends credit in
connection with the purchase, sale, carrying or trading of securities. Margin lending transactions
do not include other loans that happen to be secured by securities collateral;
(i) an "eligible external credit assessment institution" (hereinafter: eligible ECAI) is an ECAI that
the Bank of Slovenia has placed on the list of eligible ECAIs for a particular category of exposure
pursuant to the Regulation on the Recognition of External Credit Assessment Institutions
(Official Gazette of the Republic of Slovenia, No. 135/06; hereinafter: the ECAI regulation);
(j) "credit quality step" is the step to which the Bank of Slovenia maps the individual credit
assessment of an eligible ECAI;
(k) "management body" is the management board in a two-tiered bank management system or the
executive directors of the management board in a one-tiered bank management system;
(l) "investment firm" is investment firm in the first paragraph of Article 14 in ZBan-1 for which
Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets
in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive
2000/12/EC of the European Parliament and of the Council and repealing Council Directive
93/22/EEC;
(m) "institutions" are credit institutions and investment firms;
(n) a "recognised exchange" is an exchange from Annex II of this regulation and which meets the
following conditions:
1. it functions regularly,
2. it has rules:
– issued or approved by the appropriate authorities of the home country of the exchange, and
– defining the conditions for the operation of the exchange, the conditions of access to the
exchange as well as the conditions that shall be satisfied by a contract before it can effectively be
dealt on the exchange; and
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3. it has a clearing mechanism whereby contracts listed are subject to daily margin requirements
which, in the opinion of the Bank of Slovenia, provide appropriate protection.
Article 3
(terms relating to netting sets, hedging sets and related expressions)
For the purposes of this regulation the following definitions of netting sets, hedging sets, and related
expressions shall apply:
(a) "netting set" means a group of transactions with a single counterparty that are subject to a
legally enforceable bilateral netting arrangement and for which netting is recognised under
Article 70 of this regulation and the Regulation on Credit Protection (Official Gazette of the
Republic of Slovenia, No 135/06; hereinafter: Regulation on Credit Protection). Each transaction
that is not subject to a legally enforceable bilateral netting arrangement, which is recognised
under Article 70 of this regulation, should be interpreted as its own netting set for the purpose of
this regulation;
(b) "risk position" means a risk number that is assigned to a transaction under the Standardised
Method set out in Articles 50 to 52 of this regulation following a predetermined algorithm;
(c) "hedging set" means a group of risk positions from the transactions within a single netting set
for which only their balance is relevant for determining the exposure value under the
Standardised Method set out in Articles 50 to 52 of this regulation;
(d) "margin agreement" means a contractual agreement or provisions of an agreement under
which one counterparty must supply collateral to a second counterparty when an exposure of that
second counterparty to the first counterparty exceeds a specified level. Collateral means financial
collateral, real estate collateral, other physical collateral, and monetary receivables;
(e) "margin threshold" means the largest amount of an exposure for a counterparty that remains
outstanding until one party has the right to call for collateral;
(f) "margin period of risk" means the time period from the last exchange of collateral covering a
netting set of transactions with a defaulting counterparty until that counterparty is closed out and
the resulting market risk is re-hedged;
(g) "effective maturity under the internal model method, for a netting set with maturity greater
than one year" (effective maturity) means the ratio of the sum of expected exposure over the life
of the transactions in the netting set discounted at the risk-free rate of return divided by the sum
of expected exposure over one year in a netting set discounted at the risk-free rate. This effective
maturity may be adjusted to reflect rollover risk by replacing expected exposure with effective
expected exposure for forecasting horizons under one year;
(h) "cross-product netting" means the inclusion of transactions of different product categories
within the same netting set pursuant to the Cross-Product Netting rules set out in Article 70 of this
regulation;
(i) "current market value" means the net market value of the portfolio of transactions within the
netting set with the counterparty. Both positive and negative market values are used to calculate
the current market value.
Article 4
(terms relating to distributions)
For the purposes of this regulation, the following definitions of distribution shall apply:
(a) "distribution of market values" means the forecast of the probability distribution of net market
values of transactions within a netting set for some future date (the forecasting horizon), given the
realised market value of those transactions up to the present time;
(b) "distribution of exposures" means the forecast of the probability distribution of market values
that is generated by setting forecast instances of negative net market values equal to zero;
(c) "risk-neutral distribution" means a distribution of market values or exposures at a future time
period where the distribution is calculated using market-implied values that express risks such as
market volatility;
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(d) "actual distribution" means a distribution of market values or exposures at a future time period
where the distribution is calculated using historic or realised values such as volatilities calculated
using past price or rate changes.
Article 5
(terms relating to exposure measures and adjustments)
For the purposes of this regulation, the following definitions of exposure measures and adjustments
shall apply:
(a) "current exposure" means the market value of a transaction or portfolio of transactions within
a netting set with a counterparty that would be lost upon the default of the counterparty, assuming
no recovery on the value of those transactions in bankruptcy. If the market value is negative, the
value is given as zero;
(b) "peak exposure" means a high percentile of the distribution of exposures at any particular
future date before the maturity date of the longest transaction in the netting set;
(c) "expected exposure" means the average of the distribution of exposures at any particular
future date before the longest maturity transaction in the netting set matures;
(d) "effective expected exposure (Effective EE)” at a specific date means the maximum expected
exposure that occurs at that date or any prior date. Alternatively, it may be defined for a specific
date as the greater of the expected exposure at that date, or the effective exposure at the previous
date;
(e) "expected positive exposure (EPE)" means the weighted average over time of expected
exposures where the weights are the proportion that an individual expected exposure represents of
the entire time interval. When calculating the minimum capital requirement, the average is taken
over the first year or, if all the contracts within the netting set mature within less than one year,
over the time period of the longest maturity contract in the netting set;
(f) "effective expected positive exposure (Effective EPE)" means the weighted average over time
of effective expected exposure over the first year, or, if all the contracts within the netting set
mature within less than one year, over the time period of the longest maturity contract in the
netting set, where the weights are the proportion that an individual expected exposure represents
of the entire time interval;
(g) "credit valuation adjustment" means an adjustment to the mid-market valuation of the
portfolio of transactions with a counterparty; this adjustment reflects the market value of the
credit risk due to any failure to perform on contractual agreements with a counterparty; this
adjustment may reflect the market value of the credit risk of the counterparty or the market value
of the credit risk of both the counterparty and the bank;
(h) "one-sided credit valuation adjustment" means a credit valuation adjustment that reflects the
market value of the credit risk of the counterparty to the bank, but does not reflect the market
value of the credit risk of the bank to the counterparty.
Article 6
(terms relating to CCR-related risk)
For the purposes of this regulation, the following definitions of CCR-related risks shall apply:
(a) "rollover risk" means the amount by which expected positive exposure is understated when
future transactions with a counterpart are expected to be conducted on an ongoing basis; the
additional exposure generated by those future transactions is not included in calculation of EPE;
(b) "general wrong-way risk" arises when the PD of counterparties is positively correlated with
general market risk factors;
(c) "specific wrong-way risk" arises when the exposure to a particular counterparty is positively
correlated with the PD of the counterparty due to the nature of the transactions with the
counterparty. A credit institution shall be considered to be exposed to Specific Wrong-Way Risk
if the future exposure to a specific counterparty is expected to be high when the counterparty's PD
is also high.
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2.
CAPITAL REQUIREMENT FOR MARKET RISK
Article 7
(calculation of capital requirement)
(1) The capital requirement for market risk is equal to the amount of:
(a) the capital requirements calculated for trading book business, i.e. for:
− position risk (in accordance with Articles 15 to 42 of this regulation);
− settlement and counterparty credit risk (in accordance with Articles 43 to 74 of this
regulation);
− risk of exceeding the maximum allowable exposure from trading (in accordance with Article
93 of this regulation);
(b) the capital requirements calculated for all business (non-trading and trading book items), i.e.
for:
− foreign exchange risk (in accordance with Articles 75 and 76 of this regulation);
− commodities risk (in accordance with Articles 77 to 80 of this regulation).
(2) Banks may also use internal models to calculate capital requirements for position risk, exchange
rate risk and/or commodities risk (in accordance with Articles 81 to 92 of this regulation), or use a
combination of internal models and the methods defined in Articles 15 to 42, 75, 76 and 77 to 80 of
this regulation, but only if authorised by the Bank of Slovenia or the competent authority of another
Member State to use internal models to calculate capital requirements for position risk, exchange rate
risk and/or commodities risk.
(3) Instead of calculating the capital requirements for their trading book items in accordance with
Articles 15 to 42 of this regulation, banks may calculate them in accordance with the Regulation on
the Calculation of Capital Requirements for Credit Risk using the Standardised Approach for Banks
and Savings Banks (Official Gazette of the Republic of Slovenia, No 135/06; hereinafter: Standardised
Approach Regulation) or the Regulation on the Calculation of Capital Requirements for Credit Risk
Using an Internal Ratings-Based Approach for Banks and Savings Banks (Official Gazette of the
Republic of Slovenia, No 135/06; hereinafter: the IRB Approach Regulation), if at the same time the
following conditions have been fulfilled:
(a) the trading book business of such institutions does not normally exceed 5% of their total
business;
(b) their total trading book positions do not normally exceed EUR 15 million; and
(c) the trading book business of such institutions never exceeds 6% of their total business and
their total trading book positions never exceed EUR 20 million.
(4) For the purpose of points (a) and (c) of the preceding paragraph, total business shall refer to onand off-balance-sheet business (from B.-1 to B.-4 on the balance sheet). When the size of on- and offbalance-sheet business is assessed, debt instruments shall be valued at their market prices or their
nominal value or amortised cost, equities at their market prices, and derivatives according to the
nominal or market values of the instruments underlying them. Long positions and short positions shall
be summed regardless of their signs.
(5) The spot rate shall be used to convert the value of trading business or the total position referred to
in the third paragraph of this article into euros.
(6) Irrespective of the third paragraph of this article, the Bank of Slovenia may issue a decision
requiring banks that meet the conditions set out in that paragraph to calculate the capital requirements
for trading book business in accordance with Articles 15 to 42, 43 to 74 and 93 of this regulation, if
the trading book business is significant in terms of overall bank business.
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Article 8
(calculating capital requirements when limits are exceeded)
(1) If a bank should, for a lengthier period, exceed either or both of the limits imposed in points (a)
and (b) of the third paragraph of Article 7 of this regulation, or if it exceeds either or both of the limits
imposed by point (c) of the third paragraph of Article 7 of this regulation, it must calculate capital
requirements in accordance with Articles 15 to 42, 43 to 74 and 93 of this regulation for trading book
business, and not in accordance with the Standardised Approach Regulation or the IRB Approach
Regulation. The bank must immediately notify the Bank of Slovenia of exceeding the stated limits.
(2) A bank shall be deemed to have exceeded either or both of this limits imposed in points (a) and (b)
of the third paragraph of Article 7 of this regulation, if it exceeds either or both of the stated limits
three times per month, within the period for which it is required to report to the Bank of Slovenia on
calculation of and compliance with capital requirements for market risk.
3.
DEFINITION OF TRADING BOOK
Article 9
(general)
(1) The trading book of an institution shall consist of all positions in financial instruments and
commodities held either with trading intent or in order to hedge other elements of the trading book and
which are either free of any restrictive covenants on their tradability or able to be hedged.
(2) Positions held with trading intent are those held intentionally for short-term resale and/or with the
intention of benefiting from actual or expected short-term price differences between buying and selling
prices or from other price or interest rate variations. These positions include proprietary positions and
positions arising from client servicing and market making.
(3) Trading intent shall be evidenced on the basis of strategies, polices, and procedures set up by the
bank in accordance with Article 10 of this regulation. The distinction between trading book and nontrading business is based on objective criteria that are used consistently and defined in advance in
internal documents.
(4) Banks must establish and maintain systems and controls for the management and valuation of their
trading book in accordance with Articles 12 and 13.
(5) In accordance with Article 14 of this regulation, banks may include internal hedges against risk for
non-trading items in the trading book.
Article 10
(evidence of trading intent)
For the purposes of managing positions/portfolios intended for trading, banks must produce and take
into consideration:
(a) a clearly documented trading strategy for positions/portfolios, approved by senior
management and including the expected holding horizon; the intent of acquiring a financial
instrument or commodity, or concluding a contract in relation to a financial instrument or
commodity must be known before the actual acquisition or conclusion of contract; evidence of
trading intent is given on the basis of the bank’s expectations or wishes in relation to trading
and/or generating earnings from changes in prices, interest rates, or historical patterns of bank
operations and methodologies used to evaluate risk;
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(b) clearly defined policies and procedures for the active management of the position, which shall
include the following:
− there must be a trading desk in which all trading positions are entered;
− the position limits are set and monitored for appropriateness;
− dealers have the autonomy to enter into/manage the position within agreed limits and
according to the approved strategy;
− senior management are notified of positions as part of the risk management process;
− positions are actively monitored with reference to market information sources and an
assessment made of the marketability or hedge-ability of the position or its component risks,
including the assessment of, the quality and availability of market inputs to the valuation process,
level of market turnover, sizes of positions traded in the market; and
(c) clearly defined policy and procedures to monitor positions against the institution's trading
strategy, including the monitoring of turnover and sale positions in the institution's trading book.
Article 11
(trading policies and procedures)
(1) Banks shall have clearly defined policies and procedures for determining which exposures to
include in the trading book for the purposes of calculating their capital requirements, consistent with
the criteria set out in Article 9 of this regulation, and taking into account the bank's risk management
capabilities and practices. Compliance with these policies and procedures shall be fully documented
and subject to periodic internal audit.
(2) Banks must have clearly defined policies and procedures for overall management of the trading
book. These policies and procedures shall address at least:
(a) the activities the institution considers to be trading and as constituting part of the trading book
for capital requirement purposes;
(b) the extent to which an item can be marked-to-market daily by reference to an active, liquid
two-way market;
(c) for positions that are marked-to-model, the extent to which the bank can:
− identify all material risks relating to these positions;
− hedge all material risks of these items with instruments for which an active, liquid two-way
market exists;
− derive reliable estimates for the key assumptions and parameters used in the internal model;
(d) the extent to which the bank can – and to which it is required to – generate valuations for the
exposures that may be subject to consistent external validation;
(e) the extent to which legal restrictions or other operational requirements would impede the
bank's ability to effect a liquidation or hedge of the position in the short term;
(f) the extent to which the bank can – and to which it is required to – actively manage risk;
(g) the extent to which the bank may transfer risk or positions between the non-trading and
trading books and the criteria for such transfers.
(3) Banks may only include positions that represent items set out in points (a), (b) and (c) of the
second paragraph of Article 22 of the Regulation on the Calculation of the Capital of Banks and
Savings Banks (Official Gazette of the Republic of Slovenia, No 135/06; hereinafter: the Capital
Regulation) as equity or debt instruments, as appropriate, in their trading book, if they demonstrate
they are an active market maker for these positions. In this case, the bank must have adequate systems
and controls to monitor trading of eligible own funds instruments.
For the purposes of this paragraph, a bank shall be deemed an active market maker, if it can
demonstrate that it maintains stable security buying and selling prices, and that it is, at any time,
prepared and capable of immediately purchasing and selling securities at publicly accessible listings.
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Furthermore, the bank must have performed these transactions regularly and frequently with unrelated
counterparties at market prices for at least one year.
(4) Banks may include trading-related repo-style transactions accounted for in its non-trading books in
the trading book for capital requirement purposes, but only if all such transactions are included. For
this purpose, trading-related repo-style transactions are defined as transactions that meet the
requirements in the second paragraph of Article 9 and Article 10 of this regulation, where both legs are
in the form of either cash or securities that can be included in the trading book. Regardless of where
they are booked, all repo-style transactions are subject to a non-trading book counterparty credit risk
(CCR) capital requirement calculation.
Article 12
(systems and controls for management and valuation of the trading book)
(1) Banks must establish and maintain systems and controls sufficient to provide prudent and reliable
valuation estimates for trading book positions. These rules require banks to ensure that the value
applied to each of its trading book positions appropriately reflects the current market value. This value
shall contain an appropriate degree of certainty with regard to the dynamic nature of trading book
positions, the demands of prudential soundness and the mode of operation and purpose of capital
requirements with regard to trading book positions.
(2) The systems and controls referred to in the first paragraph of this article must include the following
elements:
(a) documented policies and procedures for the process of valuation of trading book positions; this
includes clearly defined responsibilities of the various areas involved in the determination of the
valuation, market information and the review of its appropriateness, frequency of independent
valuation, timing of closing prices, procedures for adjusting valuations, and month-end and ad-hoc
verification procedures; and
(b) reporting lines for the department accountable for the valuation process that are clear and
independent of the front office; the reporting line shall ultimately be to the management board.
(3) Banks must revalue trading book positions according to current market prices (marking-to-market).
If that is not possible, they must mark-to-model their positions. Positions must be revalued at least
daily.
(4) Marking-to-market means revaluing positions at least on a daily basis at readily available close out
prices that are independently sourced, such as exchange prices, screen prices, or quotes from several
independent reputable brokers.
(5) When marking-to-market, the more prudent side of bid/offer shall be used, unless the bank is a
significant market maker in the particular type of financial instrument or commodity in question and
can close out at mid market (between the sale and purchase price).
(6) Marking-to-model is defined as any valuation which has to be benchmarked, extrapolated or
otherwise calculated from a market input.
(7) The following requirements must be complied with, if banks use marking-to-model to value
trading book positions:
(a) senior management must be aware of the trading book positions that are subject to marking-tomodel and must understand the materiality of the uncertainty this creates in the reporting of the
risk/performance of the business;
(b) market inputs must, where possible, be in line with market prices, and the appropriateness of
the market inputs for a particular position being valued and the parameters of the model must be
assessed on a frequent basis;
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(c) where available, valuation methodologies which are accepted market practice for particular
financial instruments or commodities shall be used;
(d) where the model is developed by the bank itself, it must be based on appropriate assumptions,
which have been assessed and tested by suitably qualified parties that did not participate in the
development process; the model must be developed and approved independently of the front
office and must be independently tested, including validation of the mathematical calculations,
assumptions and software;
(e) there shall be formal change control procedures in place and a secure copy of the model shall
be held and periodically used to check valuations;
(f) those responsible for risk management must be aware of the weaknesses of the model used and
how best to reflect them in the valuation output;
(g) the model shall be subject to periodic review to determine the accuracy of its performance
(e.g. assessing the continued appropriateness of assumptions, analysis of profit and loss versus
risk factors, comparison of actual close out values to model outputs).
(8) Independent price verification should be performed in addition to daily marking-to-market or
marking-to-model. This is the process by which market prices or model inputs are regularly verified
for accuracy and independence. While daily marking-to-market may be performed by dealers,
verification of market prices and model inputs should be performed by a unit independent of the
dealing room/front office, at least monthly (or, depending on the nature of the market/trading activity,
more frequently). Where independent pricing sources are not available or pricing sources are more
subjective, prudent measures such as valuation adjustments may be appropriate.
Article 13
(valuation adjustments to trading book positions)
(1) Notwithstanding the fact that banks must value trading book positions in accordance with
international accounting reporting standards, they must also have appropriate procedures for valuation
adjustments to trading book positions. These adjustments are only considered for the purposes of
calculating bank capital in accordance with the sixth paragraph of this article. Banks must review
valuation adjustments on an ongoing basis.
(2) Banks must produce valuation adjustments to trading book positions due to: unearned credit
spreads, close-out costs, operational risks, early termination, investing and funding costs, future
administrative costs and model risk.
(3) If possible, banks must also produce a valuation adjustment for less liquid trading book positions.
Less liquid positions could arise from both market events and situations in the banks (e.g. concentrated
positions and/or stale positions).
(4) Banks must consider the following factors when determining whether to make a valuation
adjustment: the amount of time it would take to hedge out the position/risks within the position, the
volatility and average of bid/offer spreads, the availability of market quotes (number and identity of
market makers), and the volatility and average of trading volumes, market concentrations, the aging of
positions, the extent to which valuation relies on marking-to-model, and the impact of other model
risks.
(5) If banks use third party valuations or marking-to-model for valuations of trading book positions,
they shall consider whether to apply a valuation adjustment for this reason.
(6) If the valuation adjustment from the first paragraph of this Article is material, in accordance with
point (c) of Article 12 of the Capital Regulation, the bank must deduct them from the bank’s original
own funds. If the valuation adjustment from the first paragraph of this Article is not material, in
accordance with Article 25 of the Capital Regulation, the bank must deduct them from the additional
own funds eligible to cover market risk.
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For the purpose of this paragraph of this article, an adjustment shall be considered material, if the bank
makes an adjustment in position value that exceeds 2% of the value of the portfolio to which the
position in question refers.
Article 14
(internal hedging against risk arising from non-trading items)
(1) An internal hedge is a position that materially or completely offsets the component risk element of
a non-trading book position or a set of positions. Positions arising from internal hedges are eligible for
trading book capital treatment, provided that they are held with trading intent and that the general
criteria on trading intent and prudent valuation specified in Articles 10 to 13 of this regulation are met.
Banks must respect the following requirements, in particular:
(a) internal hedges shall not be primarily intended to avoid or reduce capital requirements;
(b) internal hedges shall be properly documented and subject to specific internal approval and
audit procedures;
(c) internal hedge transactions must be dealt with according to market conditions;
(d) the bulk of the market risk that is generated by the internal hedge shall be dynamically
managed in the trading book within the authorised limits; and
(e) internal hedging transactions must be carefully monitored, and that monitoring guaranteed by
appropriate procedures.
(2) The treatment referred to in the first paragraph of this Article applies to the capital requirements
applicable to the non-trading book leg of the internal hedge.
(3) Notwithstanding the second paragraph of this Article, when a bank hedges a non-trading book
credit risk exposure using a credit derivative in its trading book, the non-trading book exposure is not
deemed to be hedged for the purposes of calculating capital requirements, unless the bank purchases a
credit derivative meeting the requirements set out in Article 40 of the Credit Protection Regulation
from an eligible third party protection provider for non-trading exposure. When a bank purchases such
third party protection, which is recognised as a hedge for a non-trading book exposure for the purposes
of calculating capital requirements, neither the internal nor external credit derivative hedge shall be
included in the trading book for the purposes of calculating capital requirements.
4.
CALCULATING CAPITAL REQUIREMENTS FOR POSITION RISK
4.1.
General Provisions
Article 15
(netting)
(1) The excess of an institution's long (short) positions over its short (long) positions in the same
equity, debt and convertible issues and identical financial futures (options, warrants and covered
warrants) shall be its net position in each of those different instruments. In calculating the net position,
positions in derivative instruments may be treated as positions in the underlying (or notional) security
or securities, in accordance with Articles 17 to 20 of this regulation. Banks’ holdings of their own debt
instruments shall be disregarded in calculating specific risk.
(2) No netting shall be possible between the position of a convertible security and the position of the
financial instrument underlying it.
(3) All net positions in financial instruments in foreign currency must be converted, irrespective of
their signs, into the reporting currency according to the valid spot exchange rate, before their
aggregation.
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Article 16
(general rules for breaking down the positions of particular instruments)
The positions of the particular instruments set out in Articles 17 to 20 of this regulation are broken
down into hypothetical positions in the following manner:
(a) if the underlying instrument is a debt instrument:
– into a debt instrument, where the particular instrument depends on the price (interest rate) of
the specifically defined underlying debt instrument it refers to; and/or
– into a hypothetical debt instrument that covers the interest rate risk arising from future
payments and received cash flows (including hypothetical payments and receipts); as they
generated to reflect a general position risk (and not a specific position risk), they are called
hypothetical risk-free debt instruments;
− into debt instruments and hypothetical debt instruments together;
(b) if the underlying instrument is an equity:
− into hypothetical positions in individual equities, baskets of equities, or equity indices;
(c) if the underlying instrument is a commodity:
− into hypothetical positions in the commodities to which they refer.
Article 17
(interest rate futures, forward rate agreements, and forward commitments to buy or sell debt
instruments)
(1) Interest rate futures, forward rate agreements (FRAs) and forward commitments to buy or sell debt
instruments shall be treated as combinations of hypothetical long and short positions in underlying
financial instruments, as defined in the second to fifth paragraphs of this article.
(2) For the purposes of this article, long position means a position in which a bank has set the interest
rate it will receive at some time in the future, and short position means a position in which it has set
the interest rate it will pay at some time in the future.
(3) A long interest rate futures position shall be treated as a combination of a short position in a riskfree zero coupon debt security maturing on the delivery date of the futures contract and a long position
in a risk-free zero-coupon debt security maturing on the delivery date of the futures contract, plus the
agreed contract period.
(4) A sold FRA shall be treated as a long position in a risk-free zero coupon debt security maturing on
the settlement date, plus the agreed or contracted period, and a short position in a risk-free zero coupon
debt security maturing on the settlement date.
(5) A forward commitment to buy a debt instrument shall be treated as a combination of a short
position in a risk-free zero coupon debt security maturing on the delivery date and a long (spot)
position in the bond to which the forward contract refers, with maturity the same as the bond’s
remaining maturity.
(6) Calculations of the capital requirements for a specific risk , positions in risk-free zero coupon debt
securities shall be included in the first category (weighting 0%) in Table 1 of Article 28 of this
regulation, and the position in the bond shall be included in the appropriate category in the same table.
(7) Banks may use, as the capital requirement for the contracts set out in the first paragraph of this
article, if they are traded on recognised exchanges listed in Annex II of this regulation, a sum that is
equal to the margin required for such contracts by the exchange in question.
(8) Banks may use, as the capital requirement for the contracts set out in the first paragraph of this
article, which are traded OTC, that are cleared by a recognised clearing house listed in Annex II of this
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regulation, a sum that is equal to the margin required for such contracts by the clearing house in
question.
Article 18
(options)
(1) Options on interest rates, debt instruments, equities, equity indices, financial futures, swaps and
foreign currencies shall be treated as if they were positions equal in value to the amount of the
underlying instrument to which the option refers, multiplied by its delta for the purposes of this
chapter. The latter positions may be netted off against any offsetting positions in the identical
instruments underlying the options. In calculating capital requirements in respect of position risk, the
positions in options shall be treated as a combination of hypothetical long and short positions; i.e. they
are broken down into the positions in the underlying instruments to which the options refer. The
capital requirement for a written OTC option must be calculated in relation to the underlying
instrument to which the options refer.
(2) The delta used shall be that of a recognised exchange listed in Annex II of this regulation where the
options are traded. For options for which there is no available delta from a recognised exchange, or for
OTC options, banks may calculate the delta themselves, if they demonstrate that their delta calculation
model is appropriate. The Bank of Slovenia may prescribe a delta calculation methodology.
(3) The delta-weighted positions for underlying instruments shall be taken into account for the
calculation of capital requirements in respect of position risks as follows:
(a) a purchased call option as a long position
(b) a written call option as a short position
(c) a purchased put option as a short position, and
(d) a written put option as a long position.
(4) It is essential that banks safeguard against other risks associated with options, apart from delta.
Banks therefore must calculate the additional capital requirement for other risks associated with
options, e.g. risks of changes to the delta (gamma risk), or volatility of the underlying instrument (vega
risk). Gamma and vega used shall be that of a recognised exchange listed in Annex II of this
regulation where the options are traded. For options for which there is no available gamma and vega
from a recognised exchange, or for OTC options, banks may calculate the gamma and vega
themselves, if they demonstrate that their models for calculation are appropriate. The Bank of Slovenia
may prescribe a calculation methodology for gamma and vega.
(5) Banks may use, as the capital requirement for the options set out in the first paragraph of this
article, if they are traded on recognised exchanges listed in Annex II of this regulation, a sum that is
equal to the margin required for such options by the exchange in question.
(6) Banks may use, as the capital requirement for the contracts set out in the first paragraph of this
article, which are traded OTC and are cleared by a recognised clearing house listed in Annex II of this
regulation, a sum that is equal to the margin required for such contracts by the clearing in question.
(7) Banks may use, as the capital requirement for the purchase options set out in the first paragraph of
this article, if they are traded on recognised exchanges or as OTC options, a sum that is equal to the
requirement required for the financial instruments to which the options refer. The capital requirement
defined in the manner shall not exceed the market value of the options referred to in the first paragraph
of this article.
Article 19
(warrants)
Warrants relating to debt instruments and equities shall be treated in the same way as options.
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Article 20
(swaps)
Banks must treat swaps (e.g. cross-currency swaps, interest rate swaps, equity swaps) for interest rate
risk on the same basis as on-balance sheet instruments. Thus, an interest rate swap for which banks
receive a floating rate interest and pay fixed rate interest shall be treated as equivalent to a
combination of a long position in a floating rate instrument of maturity equivalent to the period until
the next time the interest rate is set and a short position in a fixed rate instrument with the same
maturity as the swap itself.
Article 21
(treatment of the protection seller)
Unless otherwise stated, the nominal value of a credit derivative shall be used for the calculation of the
capital requirement against the position risk of the party assuming the credit risk ("protection seller").
When calculating the capital requirement for the specific risk of the party, except for total return
swaps, the maturity of the credit derivative contract is used instead of the maturity of the obligation.
The positions are therefore set as follows:
(a) a total return swap creates a long position in the general market risk of the reference obligation
and a short position in the general market risk of a government bond, which is assigned a 0% risk
weight using the standard approach for calculating the capital requirement for credit risk and
has a maturity equivalent to the period until the next interest rate fixing; It also creates a long
position in the specific risk of the reference obligation;
(b) a credit default swap does not create a position for the general market risk; for the purposes of
specific risk, banks must record a synthetic long position in an obligation of the reference entity,
unless the derivative has an external rating and meets the conditions for a qualifying debt item
(debt from a qualified issuer); in that case a long position in the derivative is recorded. If
premium or interest payments are due under the credit default swap, these cash flows must be
represented as notional positions in government bonds;
(c) a single name credit linked note (CLN) creates a long position in the general market risk of the
note itself, as an interest rate product. For the purpose of specific risk, a synthetic long position is
created in an obligation of the reference entity; an additional long position is created in the
obligation of the note issuer; where the credit linked note has an external rating and meets the
conditions for a qualifying debt item, a single long position with the specific risk of the note need
only be recorded;
(d) in addition to a long position in the specific risk of the issuer of the note, a multiple name
credit linked note providing proportional protection creates a position in the obligations of each
reference entity, with the total nominal amount of the credit linked note assigned across the
positions according to the proportion of the total nominal amount that each exposure to a
reference entity represents. Where more than one obligation of a reference entity can be selected,
the obligation with the highest risk weight determines the specific risk. Where a multiple name
credit linked note has an external rating and meets the conditions for a qualifying debt item, only
a single long position for the specific risk of the note need to be taken into account;
(e) a first-asset-to-default credit derivative creates a position for the nominal amount in an
obligation of each reference entity; if the size of the maximum credit event payment is lower than
the capital requirement calculated using the method in the preceding sentence, the maximum
credit event payment amount may be taken as the specific risk capital requirement (capital
charge);
a second-asset-to-default credit derivative creates a position for the nominal amount in an
obligation of each reference entity less one (the one with the lowest specific risk capital charge);
if the size of the maximum credit event payment is lower than the capital requirement calculated
using the method in the preceding sentence, the maximum credit event payment amount may be
taken as the specific risk capital charge;
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if a first- or second-asset-to-default derivative has as external rating and meets the conditions for
a qualifying debt item, then the protection seller only has to calculate one capital requirement for
the specific risk reflecting the rating of the credit derivative.
Article 22
(treatment of the protection buyer)
(1) For the party transferring credit risk (the "protection buyer"), the positions are determined as the
mirror image of the protection seller’s positions, with the exception of a credit-linked note (which does
not create any short position in the issuer). If at a given moment there is a call option in combination
with a step-up, this moment is treated as the maturity of the protection. In the case of nth to default
credit derivatives, protection buyers are allowed to offset specific risk for n-1 of the underlying
obligations (i.e., the n-1 assets with the lowest capital requirement for specific risk).
(2) Banks that mark-to-market and manage the interest rate risk on the derivative instruments referred
to in Articles 17 to 20 of this regulation on the basis of a discounted cash flow, may use sensitivity
models to calculate the positions in the derivative instruments. These models may also be used to
calculate positions in bonds that are amortised over their residual life, rather than via one final
repayment of principal. The positions determined in this manner shall be included in the calculation of
the capital requirement for general market risk of the debt instruments.
(3) Banks may only use the sensitivity models referred to in the second paragraph of this regulation, if
authorised by the Bank of Slovenia. The Bank of Slovenia shall issue this permission if the following
two conditions are met:
(a) the models generate positions that have the same sensitivity to interest rate changes as the
underlying instruments;
(b) this sensitivity must be assessed with reference to independent movements in sample rates
across the yield curve, with at least one sensitivity point in each of the maturity bands set out in
Table 2 of the fourth paragraph of Article 32.
(4) Banks shall prove that they meet the conditions specified in the third paragraph of this article by
submitting the following documentation as part of the request for the permission:
(a) documentation on the type of financial instruments for which they intend to use the sensitivity
model, and on the basic information on the models;
(b) documentation proving that the models generate positions that have the same sensitivity to
interest rate changes as the underlying instruments;
(c) documentation that demonstrates that the sensitivity is assessed with reference to independent
movements in sample rates across the yield curve, with at least one sensitivity point in each of the
maturity bands set out in Table 2 of the fourth paragraph of Article 32.
(5) Banks must meet the conditions referred to in the third paragraph of this article on an ongoing
basis from the moment the Bank of Slovenia issues its permissions onwards.
(6) More detailed instructions on the form for requesting a Bank of Slovenia permission to use
sensitivity models to calculate positions in derivatives or the form for requesting an amendment to this
permission are set out in Annex III of this regulation.
(7) The Bank of Slovenia shall withdraw the permission for use of sensitivity models, if:
(a) a bank acts in contradiction with the Bank of Slovenia order, or a Bank of Slovenia order with
additional measures for the correction of a violation in fulfilment of the conditions from the third
paragraph of this article;
(b) a bank seriously violates the fulfilment of the conditions from the third paragraph of this
article.
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Article 23
(treatment of a protection buyer without the use of sensitivity models)
Banks that do not use sensitivity models, may treat as fully matched those positions in a hypothetical
risk-free debt instruments that derived from derivative instruments referred to in Articles 17 to 20 of
this regulation and that meet at least the following conditions:
(a) the positions are of the same value and denominated in the same currency;
(b) the reference rate (for floating rate positions) or coupon (for fixed rate positions) for
derivative positions closely match the interest rate or coupon for the positions they are being
matched with (the widest possible gap between the two is 15 basis points);
(c) the positions mature:
− on the same day, if the residual maturity of the positions is less than one month,
− within seven days, if the residual maturity of the positions is between one month and one year,
− within 30 days, if the residual maturity of the positions is over one year.
Article 24
(treatment of securities in repurchase transactions and lending and borrowing transactions)
The transferor of securities or guaranteed rights relating to title to securities in repurchase agreements
and the lender of securities in a securities lending or borrowing shall include these securities in the
calculation of its capital requirement for position risk, provided that such securities meet the criteria
for inclusion in the trading book referred to in Article 9 of this article.
Article 25
(specific and general risks)
(1) The position risk on a debt instrument or equity (or debt or equity derivative) shall be divided into
two components in order to calculate the capital requirement against it, for specific and general risk.
(2) Specific risk is the risk of a price change in the relevant financial instrument due to factors related
to its issuer or in the case of a derivative financial instrument, the issuer of the underlying instrument.
(3) General risk is the risk of a price change in the relevant instrument due to a change in the level of
interest rates (in the case of a traded debt instrument or debt derivative) or due to price movement on
the capital market (in the case of an equity or equity derivative) that is unrelated to any specific
attributes of individual instruments.
Article 26
(calculation of capital requirement for position risk)
The capital requirement for position risk shall be calculated as the sum of capital requirements for the
position risk of debt instruments and equities.
4.2.
Debt Instruments
Article 27
(calculation of capital requirement for position risk of debt instruments)
(1) Banks must classify its net positions in debt instruments according to the currency in which they
are denominated. The capital requirement for general and specific risk must be calculated for the net
position in each currency separately.
(2) The capital requirement for position risk on debt instruments shall be calculated as the sum of the
capital requirement for specific and general risk on the debt instruments. Specific risk capital
requirement for debt instruments shall be calculated in accordance with Articles 28 to 30 of this
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regulation, and the capital requirement for general risk on debt instruments in accordance with Article
31 of this regulation.
Article 28
(specific risk)
(1) Banks must classify all net positions in debt instruments calculated in accordance with the first
paragraph of Article 15 of this regulation into the appropriate debt instrument category from Table 1 in
this paragraph, and on the basis of their issuer/obligor, external or internal credit assessment, and their
residual maturity. The classified net positions in debt instruments must then be multiplied by the
weightings prescribed in accordance with Table 1 in this paragraph for the individual category of debt
instrument to which they belong. Specific risk capital requirement for debt instruments shall be
calculated as the sum of its weighted positions (regardless of whether they are long or short).
Table 1: Categories of debt instruments and prescribed weightings for the calculation of specific risk
capital requirement (capital charge) for debt instruments
Weightings for specific
risk capital charge
Debt securities issued or guaranteed by central governments, issued by 0%
central banks, international organisations, multilateral development
banks or Member States' regional governments or local authorities,
and which would qualify for credit quality step 1 in accordance with
the Standardised Approach Regulation, or which would receive a 0%
risk weight under the described rules.
Debt securities issued or guaranteed by central governments, or issued 0.25%, if the residual term
by central banks, international organisations, multilateral development to final maturity is 6
banks or Member States' regional governments or local authorities, months or less
and which would qualify for credit quality step 2 or 3 in accordance
with the Standardised Approach Regulation.
1.00%, if the residual term
to final maturity is greater
Debt securities issued or guaranteed by institutions and which would than 6 and up to and
qualify for credit quality step 1 or 2 in accordance with the including 24 months
Standardised Approach Regulation.
1.60%, if the residual term
Debt securities issued or guaranteed by institutions and which would to final maturity exceeds
qualify for credit quality step 3 in accordance with Article 18 of the 24 months
Standardised Approach Regulation.
Categories of debt instruments
1
2
Debt securities issued or guaranteed by corporates and which would
qualify for credit quality step 1 or 2 in accordance with the
Standardised Approach Regulation.
3
Other qualifying items as defined in Article 30 of this regulation.
Debt securities issued or guaranteed by central governments, or issued 8.00%
by central banks, international organisations, multilateral development
banks or Member States' regional governments or local authorities or
institutions, and which would qualify for credit quality step 4 or 5 in
accordance with the Standardised Approach Regulation.
Debt securities issued or guaranteed by corporates and which would
qualify for credit quality step 3 or 4 in accordance with the
Standardised Approach Regulation.
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4
Exposures for which a credit assessment by a nominated ECAI is not
available.
Debt securities issued or guaranteed by central governments, or issued 12.00%
by central banks, international organisations, multilateral development
banks or Member States' regional governments or local authorities or
institutions, and which would qualify for credit quality step 6 in
accordance with the Standardised Approach Regulation.
Debt securities issued or guaranteed by corporates and which would
qualify for credit quality step 5 or 6 in accordance with the
Standardised Approach Regulation.
(2) Banks must use the maximum weighting shown in Table 1 in first paragraph of this article, which
is 12%, for debt instruments for which there is an increased risk due to the insufficient solvency of the
issuer or liquidity of the instrument.
Article 29
(special rules for calculating the capital requirement for specific risk)
(1) Banks that use the IRB approach to calculate the capital requirement for credit risk, shall determine
the credit quality for the purposes of the first paragraph of this article, on the basis of obligors’ PD
assessment according to the exposures in Table 1 of the first paragraph of Article 28 of this regulation.
The PD must be equal or lower than that, which in accordance with the rules for the risk weight of
exposures to corporates from the Standard Approach Regulation, which would qualify for the relevant
credit quality step.
(2) Instruments issued by unqualified issuers are attributed a weighting for specific risk of 8% or 12%
in accordance with Table 1 of the first paragraph of Article 28 of this regulation. The Bank of Slovenia
can require banks to use a higher specific risk capital requirement (capital charge) for such instruments
and/or to disallow offsetting for the purposes of defining the extent of general market risk between
such instruments and any other debt instruments.
(3) For securitisation exposures that are deducted in the calculation of the limits on individual capital
components in accordance with the first paragraph and point (g) of the second paragraph of Article 22
of the Capital Regulation, or which are risk weighted in accordance with the Rules on the Calculation
of Capital Requirements for Credit Risk in Securitisation (Official Gazette of the Republic of
Slovenia, No 135/06; hereinafter: Securitisation Regulation) with a weighting of 1250%, banks must
apply a capital requirement that is no lower than the results for the two possible treatments for
securitised exposures. For unrated liquidity facilities the bank must apply a capital requirement that is
no lower than that defined in accordance with Articles 18 to 20 and 30 to 33 of the Securitisation
Regulation.
(4) Banks may assign a 0%-weighting to debt securities issued or guaranteed by central governments,
or issued by central banks, international organisations, multilateral development banks or Member
States' regional governments or local authorities, instead of the weightings prescribed in Table 1 of the
first paragraph of Article 28 of this regulation, where these debt securities are denominated and funded
in domestic currency. The 0%-weighting may in that case be applied irrespective of the credit quality
of the debt securities in question.
(5) Irrespective of the weightings prescribed in Table 1 of the first paragraph of Article 28 of the
Regulation, for the purpose of covering the bonds defined in Item 10 of the second paragraph of
Article 2 and Article 45 of the Standard Approach Regulation, banks may use the same weightings as
for qualifying items with the same residual maturity as such bonds, reduced in the following manner:
(a) if a subordinated unsecured exposure to an issuer is assigned a risk weight of 20% for the
purposes of calculating the capital requirement, the appropriate debt instrument weighting from
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Table 1 in the first paragraph of Article 28 of this regulation (appropriate weighting for qualifying
items) shall be reduced by 50%;
(b) if a subordinated unsecured exposure to an issuer is assigned a risk weight of 50% for the
purposes of calculating the capital requirement, the appropriate debt instrument weighting from
Table 1 in the first paragraph of Article 28 of this regulation (appropriate weighting for qualifying
items) shall be reduced by 60%;
(c) if a subordinated unsecured exposure to an issuer is assigned a risk weight of 100% for the
purposes of calculating the capital requirement, the appropriate debt instrument weighting from
Table 1 in the first paragraph of Article 28 of this regulation (appropriate weighting for qualifying
items) shall be reduced by 50%;
(c) if a subordinated unsecured exposure to an issuer is assigned a risk weight of 150% for the
purposes of calculating the capital requirement, the appropriate debt instrument weighting from
Table 1 in the first paragraph of Article 28 of this regulation (appropriate weighting for qualifying
items) shall be reduced by 33.3%.
Article 30
(definition of other qualifying items)
The qualifying items from the second category of debt instruments in Table 1 of the first paragraph of
Article 28 of this regulation shall include:
(a) long and short positions in debt instruments, which would in accordance with the Standardised
Approach Regulation qualify for credit quality step that corresponds to investment grade;
For the purpose of this regulation, credit assessments with credit quality step from 1 to 3 shall be
deemed investment grade;
(b) long and short positions in debt instruments which, because of the solvency of the issuer, have
a PD that meets the investment grade referred to under point (a), if the bank uses the IRB
approach to calculate capital requirements for credit risk;
(c) long and short positions in debt instruments, which do not have an external credit assessment
from an nominated ECAI and that meet the following conditions:
− they are sufficiently liquid;
− their investment quality is at least equivalent to the investment quality of the positions
referred to under point (a) of this paragraph;
− the debt instrument to which these positions refer are listed on at least one regulated market in
a Member State or on a recognised exchange listed in Annex II of this regulation;
(d) long and short positions in debt instruments, issued by institutions that meet the following
conditions:
− they are sufficiently liquid;
− their investment quality is at least equivalent to the investment quality of the positions
referred to under point (a) of this paragraph;
(e) long and short positions in debt instruments issued by institutions, that are subject to
supervisory and regulatory arrangements comparable to those under this regulation, which meets
at least credit quality step 2, in accordance with the rules on the standardised approach to capital
requirement for credit risk.
If the Bank of Slovenia assesses that debt instruments that are treated as qualifying items are subject to
too high a degree of specific risk, it may require banks to cease treating them as qualifying items for in
the calculation of capital requirements.
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Article 31
(general risk)
Banks may use an approach to calculate the capital requirement for general risk based on maturity (in
accordance with Article 32 of this regulation), or based on duration (in accordance with Article 33 of
this regulation). The bank must apply the chosen approach on a consistent basis.
Article 32
(maturity-based approach)
(1) The procedure for calculating capital requirements against general risk involves two basic steps.
First, all positions shall be weighted according to maturity (as defined in the second paragraph of this
article), in order to compute the amount of capital required against them. Second, this requirement
shall be reduced, if a weighted position is held alongside an opposite (long/short) weighted position
within the same maturity band. A reduction in the requirement shall also be allowed when the opposite
weighted positions fall into different maturity bands, with the size of this reduction depending both on
whether the two positions fall into the same zone, or not, and on the particular maturity band group
they fall into. There are three groups of maturity bands or zones altogether.
(2) Banks shall assign their net positions to the appropriate maturity bands defined in column 2 or 3, as
appropriate, in Table 2 in the fourth paragraph of this article. It shall assign them on the basis of
residual maturity in the case of fixed rate debt instruments and on the basis of the period until the
interest rate is next set in the case of floating rate debt instruments. Banks must also distinguish
between debt instruments with a coupon of 3% or more and those with a coupon of less than 3% and
allocate them appropriately to column 2 or 3 in Table 2 in the fourth paragraph of this article. Each
position must then be multiplied by the appropriate weighting from column 4 of the mentioned Table.
(3) The banks shall then work out the sum of the weighted long positions and the sum of the weighted
short positions in each maturity band. The matched weighted position in an individual maturity band
shall be the lower of the sum of the weighted long and the short positions in that maturity band, while
the unmatched weighted position for an individual band shall be the difference between them. The
total of the matched weighted positions in all bands shall then be calculated.
(4) Banks must then compute the totals of the unmatched weighted long or unmatched weighted short
positions from all maturity bands within an individual zone. The matched weighted position of an
individual maturity group is the lower of the sum of unmatched weighted debts or the sum of
unmatched weighted short positions in that zone. The unmatched weighted position of an individual
zone is the difference between these two sums.
Table 2: Classifying net positions according to residual maturity
Zone
(1)
1
2
3
Maturity band
Interest rate of 3% Interest rate of less
or more
than 3%
(2)
0 ≤ 1 month
> 1 ≤ 3 months
> 3 ≤ 6 months
> 6 ≤ 12 months
> 1 ≤ 2 years
> 2 ≤ 3 years
> 3 ≤ 4 years
> 4 ≤ 5 years
> 5 ≤ 7 years
(3)
0 ≤ 1 month
> 1 ≤ 3 months
> 3 ≤ 6 months
> 6 ≤ 12 months
> 1.0 ≤ 1.9 years
> 1.9 ≤ 2.8 years
> 2.8 ≤ 3.6 years
> 3.6 ≤ 4.3 years
> 4.3 ≤ 5.7 years
19
Weighting (%)
Assumed interest
rate change (%)
(4)
(5)
0.00
0.20
0.40
0.70
1.25
1.75
2.25
2.75
3.25
1.00
1.00
1.00
0.90
0.80
0.75
0.75
0.65
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> 7 ≤ 10 years
> 10 ≤ 15 years
> 15 ≤ 20 years
> 20 years
> 5.7 ≤ 7.3 years
> 7.3 ≤ 9.3 years
> 9.3 ≤ 10.6 years
> 10.6 ≤ 12.0 years
> 12.0 ≤ 20.0 years
> 20.0 years
3.75
4.50
5.25
6.00
8.00
12.50
0.65
0.60
0.60
0.60
0.60
0.60
(5) Banks must then match the unmatched weighted positions of zones 1 and 2, to determine the
matched weighted position between zones 1 and 2. Then they must also match the remainder of the
unmatched weighted position of zone 2, and the unmatched weighted position of zone 3, in order to
calculate the matched weighted position between zones 2 and 3.
(6) Banks may change the order of matching referred to in the fifth paragraph of this article in order to
calculate the weighted position between zones 2 and 3 first, and then calculate the weighted position
between zones 1 and 2.
(7) Banks must then match the remaining unmatched weighted position for zone 1 and the remaining
unmatched weighted position of zone 3.
(8) Finally, banks must add the residual unmatched weighted positions, i.e. the positions not matched
in the calculations in accordance with the fifth to seventh paragraphs of this article.
(9) The capital requirement against general risk stemming from debt financial instruments shall be
calculated as the sum of:
(a) 10% of the sum of the matched weighted positions in all maturity bands;
(b) 40% of the matched weighted position in zone 1;
(c) 30% of the matched weighted position in zone 2;
(d) 30% of the matched weighted position in zone 3;
(e) 40% of the matched weighted position between zones 1 and 2 and between zones 2 and 3;
(f) 150% of the matched weighted position between zones 1 and 3; and
(g) 100% of the residual unmatched weighted positions.
Article 33
(duration-based approach)
(1) Under an approach based on duration, banks must take the market value of each fixed rate debt
instrument and calculate its yield to maturity, which is the implied discount rate for that instrument. In
the case of floating rate instruments, the institution shall take the market value of each instrument and
calculate its yield for a period equal to the time when the interest rate will next be set.
(2) The bank shall then calculate the modified duration of each debt instrument on the basis of the
following formula:
MD =
D
(1 + r )
Where:
MD = modified duration
D = duration
r = yield to maturity
Ct = cash payment in time t
m = total maturity
t = time
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m
D=
tCt
∑ (1 + r )
t =1
m
t
Ct
∑ (1 + r )
t =1
t
(3) Banks must then classify each debt instrument in the appropriate zone in Table 3 in this paragraph.
They must do this on the basis of the modified duration.
Table 3: Classifying debt instruments according to modified duration
Zone
Modified duration (in years)
(1)
1
2
3
(2)
> 0.0 ≤ 1.0
> 1.0 ≤ 3.6
> 3.6
Assumed interest rate change (in
%)
(3)
1.00
0.85
0.70
(4) Banks shall then calculate the duration-weighted position for each debt instrument by multiplying
its market price by its modified duration and by the relevant assumed interest rate change, as set out in
Table 3 in the third paragraph of this article.
(5) Banks must calculate the long and short duration-weighted positions within each zone and match
them within individual zones. The matched duration-weighted position for an individual zone is the
lower of the sum of the duration-weighted long positions and the sum of the duration-weighted short
positions. The unmatched duration-weighted position for an individual zone is the difference between
the two sums. Banks then continues the calculation of the matched and unmatched duration-weighted
positions in accordance with the fifth to eighth paragraphs of Article 32 of this regulation.
(6) The capital requirement against general risk stemming from debt financial instruments shall be
calculated as the sum of:
(a) 2% of the matched duration-weighted position for each zone;
(b) 40% of the matched duration-weighted positions between zones 1 and 2 and between zones 2
and 3;
(c) 150% of the matched duration-weighted position between zones 1 and 3; and
(d) 100% of the residual unmatched duration-weighted positions.
4.3.
Equities
Article 34
(calculation of capital requirement for the position risk of equities)
(1) The capital requirement for position risk for equities shall be calculated as the sum of the capital
requirement for specific and general risk for these instruments.
(2) Banks must separately sum all their net long positions and all their net short positions in equities,
calculated in accordance with the first paragraph of Article 15 of this regulation. The sum of absolute
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values of all net long and net short positions represents a bank’s overall gross position in equities. A
bank’s overall net position shall be the difference between them all net long and all net short positions.
Article 35
(specific risk)
(1) Banks shall calculate the capital requirement for specific risk for equities by multiplying their total
gross position in equities, as defined in the second paragraph of Article 34, by 4%.
(2) Irrespective of the first paragraph of this article, banks may calculate the capital requirement for
specific risk by multiplying their total gross position in equities by 2%, for equities that meet the
following conditions:
(a) the equities are not those of issuers which have only issued traded debt instruments that
currently attract an 8% or 12% weighting in Table 1 in the first paragraph of Article 28, or that
only attract a lower requirement because they are guaranteed or secured;
(b) the equities are adjudged highly liquid; they account for highly liquid if they are included in
one of the indexes from Annex IV of this regulation; and
(c) no individual position shall comprise more than 5% of the value of the bank's whole equity
portfolio; exceptionally an individual position may represent up to 10% of the value of an entire
equity portfolio, provided that the total of such positions does not exceed 50% of the entire
portfolio.
Article 36
(general risk)
Banks shall calculate the capital requirement for general risk for equities by multiplying their total net
position in equities, as defined in the second paragraph of Article 34, by 8%.
Article 37
(stock index futures)
(1) Stock index futures, the delta-weighted equivalents of options in stock index futures and stock
indices collectively referred to hereafter as "stock index futures", may be broken down into positions
in each of their constituent equities. Positions that are treated as positions in individual equities
included in the stock indices set out in Annex IV of this regulation, and may be netted against opposite
positions in equivalent equities.
(2) Banks that have netted off their positions in one or more of the equities constituting a stock index
future against one or more positions in the stock index future itself shall ensure that they have
adequate capital to cover the risk of loss caused by the future's values not moving fully in line with
that of its constituent equities. They must do the same when they hold opposite positions in stock
index futures which are not identical in respect of their maturity, their composition or both.
(3) Irrespective of the first and second paragraph of this article, stock index futures which are
exchange traded and relate to broadly diversified indices pursuant to Annex IV of this regulation shall
have a weighting of 8% when calculating the capital requirement for general risk, but no capital
requirement for specific risk. Banks must include these positions in the calculation of net positions
referred to in the second paragraph of Article 34 of this regulation, but exclude them from the
calculation of the overall gross position in the same paragraph.
(4) If a stock index future is not broken down into its underlying positions, banks must treat it as if it
were an individual equity. The capital requirement for the specific position risk shall not be calculated
for stock index futures that are exchange-traded and that represent a broadly diversified index pursuant
to Annex IV of this regulation.
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4.4.
Underwriting
Article 38
(calculation of capital requirement for underwriting positions)
(1) Banks may use the following procedure for the calculation of its capital requirements for position
risk, in the case of underwriting debt and equity instruments:
(a) calculating the net position, which is the difference between the bank's overall commitment
stemming from underwriting and the portion of the position already transferred to third parties
that have bought the securities or have made a commitment to sub-underwrite them.
(b) reducing the net positions in accordance with the reduction factors set out in Table 4;
Table 4: Reduction factors
working day 0:
100%
working day 1:
90%
working days 2 to 3:
75%
working day 4:
50%
working day 5:
25%
after working day 5:
0%
(c) calculating its capital requirement for the position risk using these reduced underwriting
positions.
(2) “Working day zero” shall be the working day on which the bank becomes unconditionally
committed to accepting a known quantity of securities at an agreed price.
(3) Banks must continually ensure that it holds sufficient capital against the risk of loss that exists
from the moment of initial commitment and working day 1.
4.5.
Treatment of Trading Book Positions Hedged by Credit Derivatives
Article 39
(calculation of capital requirement for specific risk of trading book positions hedged by credit
derivatives)
(1) The capital requirement for specific risk for trading book positions hedged by credit derivatives
may be reduced in accordance with the second to fifth paragraph of this article.
(2) When the values of two legs of a transaction always move in the opposite direction and
approximately to the same extent, a specific risk capital charge shall not be applied to either leg. This
treatment shall be permitted in the following cases:
(a) the two legs consist of completely identical instruments; or
(b) a long cash position is hedged by a total rate-of-return swap (or vice versa) and there is an
exact match between the reference obligation and the underlying exposure (i.e., the cash
position); the maturity of the swap itself may be different from that of the underlying exposure.
(3) Specific risk capital charge may also be reduced, if the values of both legs always move in the
opposite direction, and there is an exact match in terms of the reference obligation, the maturity of
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both the reference obligation and the credit derivative, and the currency of the underlying exposure. In
addition, key features of the credit derivative contract should not cause the price movement of the
credit derivative to materially deviate from the price movements of the cash position.
If a transaction meeting the criteria from the preceding subparagraph transfers risk, the capital
requirement for specific risk shall be reduced by 80% (specific risk offset) for the leg of the
transaction with the higher capital requirement, while the specific risk requirements for the other leg
shall be zero.
(4) The specific risk capital requirement may be partially reduced, when the values of two legs usually
move in opposite directions. This treatment shall be possible in the following cases:
(a) when the positions fall under point (b) of the second paragraph of this article, but there is an
asset mismatch between the reference obligations and the underlying exposure; however the
positions do meet the following conditions:
− in case of bankruptcy, the reference obligation ranks pari passu simultaneously with or is
junior to the underlying obligation,
− the obligor for the underlying and reference obligation is the same; both obligations have
legally enforceable cross-default or cross-acceleration clauses, or
(b) the position falls under point (a) of the second paragraph of this article or the third paragraph
of this article, but there is an exchange rate or maturity mismatch between the credit protection
and the underlying asset (exchange rate mismatches should be included in the normal reporting
foreign exchange risk in accordance with Articles 75 and 76 of this regulation); or
(c) the position falls under the third paragraph of this article, but there is an asset mismatch
between the cash position and the credit derivative. The underlying asset must be included in the
deliverable obligations in the credit derivative documentation.
In the cases set out in points (a), (b) and (c), rather than adding the specific risk capital requirements
for each side of the transaction, only the higher of the two capital requirements shall apply.
(5) In all situations not falling under the fourth paragraph of this article, a specific risk capital
requirement will be calculated against both legs of the positions.
4.6.
Treatment of Positions in CIUs in the Trading Book
Article 40
(calculation of capital requirement for positions in CIUs in the trading book)
(1) The capital requirement for positions in collective investment undertakings – investment funds
(hereinafter: CIUs) that are included in the trading book in accordance with Article 9 of this regulation
shall be calculated in accordance with the methods set out in the second to fourth paragraphs of this
article and in accordance with Articles 41 and 42 of this regulation.
(2) Without prejudice to the other provisions of this chapter, positions in CIUs shall be subject to a
capital requirement for position risk (specific and general) with a weighting of 32%. Without prejudice
to the provisions of point (a) of the second paragraph of Article 75 or point (b) of Article 86 of this
regulation, if the modified gold treatment of point (a) of the third sub-paragraph of the second
paragraph of Article 75 of this regulation is used in accordance with these provisions, then a weighting
of no more than 40% shall be used when calculating the capital requirement for position risk (specific
and general) and exchange rate risk for positions in CIUs.
(3) Banks may determine the capital requirement for positions in CIUs that meet the criteria set out in
the first paragraph of Article 41 of this regulation by the methods set out in the first to fourth
paragraphs of Article 42 of this regulation.
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(4) Unless stated otherwise, no netting is permitted between the underlying investments of a CIU and
other positions held by a bank.
Article 41
(criteria for CIUs)
(1) The methods set out in Article 42 of this regulation may be used to calculate capital requirements
for positions in CIUs supervised or with registered office within the European Union, if they meet the
following criteria:
(a) the CIU's prospectus or equivalent document must include:
− the categories of assets for which the CIU has authorisation;
− if investment limits apply, the relative limits and the methodologies to calculate them;
− if leverage is allowed, the maximum level of leverage;
− if investment in OTC financial derivatives or repo-style transactions are allowed, a policy to
limit counterparty risk arising from these transactions;
(b) the CIU must report on its business in half-yearly and annual reports to enable an assessment
to be made of the assets and liabilities, income and operations over the reporting period;
(c) the units/shares of the CIU are redeemable in cash, out of the undertaking's assets, on a daily
basis at the request of the unit holder;
(d) investments in the CIU shall be segregated from the assets of the CIU manager; and
(e) banks must perform an adequate risk assessment of the CIU.
(2) The methods set out in Article 42 of this regulation may also be used to calculate the capital
requirements for positions in CIUs from eligible third countries listed in Annex V of this regulation, if
they meet the requirements set out in point (a) to (e) of the first paragraph of this article, for positions
in CIUs from eligible third countries where this is permitted by the supervisory authorities of other
Member States.
Article 42
(capital requirement calculation method)
(1) If a bank monitors the underlying investments of CIUs on a daily basis, it may calculate the capital
requirement for position risk (general and specific) for positions in those underlying instruments,
instead of the positions in CIUs. This capital requirement shall be calculated in accordance with the
methods set out in this chapter (in Articles 15 to 42 of this regulation), or internal models, if authorised
by the Bank of Slovenia. Netting is permitted between positions in the underlying investments of the
CIU and other positions held by a bank, if a bank holds a sufficient quantity of CIU units to enable
redemption/creation in exchange for the underlying investments.
(2) Banks may calculate the capital requirement for position risk (general and specific) for positions in
CIUs in accordance with the methods set out in this chapter (in Articles 15 to 42 of this regulation), or
internal models, if authorised by the Bank of Slovenia. This capital requirement is calculated for
hypothetical positions in the instruments that comprise the external index or basket of instruments that
track movements in the CIU’s value if the following criteria are met:
(a) the purpose of the CIU's investment policy is to replicate the composition and performance of
an existing external index or fixed basket of equities or debt securities; and
(b) a minimum correlation of 0.9 between daily price movements of the CIU and the index or
basket of equities or debt securities it tracks can be clearly established over a minimum period of
six months; "Correlation" in this context means the correlation coefficient between daily returns
on the CIU and the index or basket of equities or debt securities it tracks.
(3) If a bank does not monitor the underlying investments of CIUs on a daily basis, it may calculate
the capital requirement for position risk (general and specific) subject to the following criteria:
(a) it will be assumed that the CIU first invests to the maximum extent allowed under its
investment policy in the asset classes attracting the highest capital requirement for position risk
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(general and specific), and then continues making investments in descending order until the
maximum total investment limit is reached. The position in the CIU will be treated as a direct
holding in the CIU assets mentioned;
(b) banks shall take account of the maximum indirect exposure that they could achieve by taking
leveraged positions through the CIU when calculating their capital requirement for position risk,
by proportionally increasing the position in the CIU up to the maximum exposure to the
underlying instruments in which the CIU invests, on the basis of its the investment policy; and
(c) the maximum capital requirement for position risk (general and specific) calculated in
accordance with this paragraph shall be no more than that set out in the second paragraph of
Article 40 of this regulation.
(4) The capital requirement for position risk (general and specific) relating to investments in CIUs
which is calculated in accordance with the first and third paragraphs of this article, may be calculated
and reported for banks by a third party, under condition that the calculation is correct and on time.
5.
CALCULATING CAPITAL REQUIREMENTS FOR SETTLEMENT AND
COUNTERPARTY CREDIT RISK
5.1.
Settlement/Delivery Risk
Article 43
(capital requirements for settlement/delivery risk)
For the purposes of calculating the capital requirement for settlement/delivery risk, banks must
calculate the price difference arising from transactions in which financial instruments (debt
instruments, equities, foreign currencies and commodities, except for repurchase and reverse
repurchase agreements or commodities or securities lending or borrowing) are not settled after their
due delivery date. The difference in the price referred to in the preceding sentence is the difference
between the agreed settlement price and the current market price of the instruments, foreign currencies
and commodities in question. Banks calculate the capital requirement for settlement/delivery risk by
multiplying this difference by the appropriate factor in column 2 of Table 5 of this paragraph.
Table 5: Capital requirement weightings for settlement/delivery risk
Number of working days after due settlement date Weighting (%)
(1)
(2)
5—15
8
16—30
50
31—45
75
46 or more
100
Article 44
(calculation of capital requirements for free deliveries)
(1) Banks must hold own funds, as set out in Table 6, if:
(a) it has paid for securities, foreign currencies or commodities before receiving them or it has
delivered securities, foreign currencies or commodities before receiving payment for them; and
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(b) in the case of cross-border transactions, one day or more has elapsed since it made that
payment or delivery.
Table 6: Capital treatment for free deliveries
(1)
(2)
(3)
Transaction type
Free delivery
(1)
(2)
Up to first contractual payment or No capital treatment
delivery leg
From first contractual payment or Treat as an exposure
delivery leg up to four days after
second contractual payment or
delivery leg
From 5 business days post second Deduct value transferred plus current
contractual payment or delivery leg positive exposure from own funds (if it
exists)
until extinction of the transaction
(2) Banks that use the IRB approach, can assign PDs to free delivery exposures as set out in line 2 of
Table 6 of the first paragraph of this article, based on the external ratings of the counterparties, if they
have no other non-trading exposure to these counterparties. Banks using their own estimates of loss
given defaults (LGDs) may apply an LGD of 45% to free delivery exposures treated according to line
2 of Table 6, provided that they apply it to all such exposures. Alternatively, banks using the IRB
approach for exposures treated according to line 2 of Table 6 of the first paragraph of this article, may
apply the risk weight defined in the Standard Approach Regulation, providing that they apply them to
all such exposures or that they apply a 100% risk weight to all such exposures.
(3) If the amount of positive exposure resulting from free delivery transactions is not material,
institutions may apply a risk weight of 100% to these exposures.
(4) In cases of system-wide failure of a settlement or clearing system, the Bank of Slovenia may
decide that banks do not need to meet the capital requirement set out in Article 43 of this regulation
and the first paragraph of this article. In such circumstances a transaction that is not settled by a
counterparty shall not be deemed as a default for the purposes of credit risk. When the situation is
rectified, the Bank of Slovenia shall decide on whether banks must re-fulfil the capital requirement in
question.
5.2.
Counterparty Credit Risk (CCR)
Article 45
(calculation of capital requirement for CCR)
(1) Banks must hold own funds against the CCR arising from exposures due to the following:
(b) OTC derivative instruments and credit derivatives;
(c) repurchase agreements, reverse repurchase agreements, securities or commodities lending or
borrowing transactions based on securities or commodities included in the trading book;
(d) margin lending transactions based on securities or commodities; and
(e) long settlement transactions.
(3) Exposure values and risk weighted exposure amounts for the exposures referred to in the first
paragraph of this article shall be calculated in accordance with the Standardised Approach Regulation
or in accordance with the IRB Approach Regulation. Banks must apply the rules set out in Article 46
of this regulation.
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(4) If a credit derivative included in a trading book forms part of an internal hedge and is recognised as
eligible collateral in accordance with the Credit Protection Regulation, it shall be deemed that there is
no counterparty risk for that credit derivative.
(5) The capital requirement for CCR shall be 8% of the total risk weighted exposure amounts.
Article 46
(exposure value and risk weighted exposure amounts for derivatives)
(1) The list of derivatives set out in Annex I of this regulation shall apply for the purposes of the third
paragraph of Article 45 of this regulation.
(2) For the purposes of the third paragraph of Article 45 of this regulation, the exposure value for
derivatives, repurchase transactions, securities or commodities lending or borrowing transactions,
margin lending transactions, and long settlement transactions shall be calculated in accordance with
Articles 47 to 74 of this regulation.
(3) For the purposes of the third paragraph of Article 45 of this regulation, banks shall not be
permitted to use the Financial Collateral Simple Method set out in the Credit Protection Regulation,
for calculating risk weighted exposure amounts.
(4) For the purposes of the third paragraph of Article 45 of this regulation, in the case of repurchase
transactions and securities or commodities lending or borrowing transactions booked in the trading
book, all financial instruments and commodities that are eligible to be included in the trading book
may be recognised as eligible collateral. For exposures due to OTC derivative instruments booked in
the trading book, commodities that are eligible to be included in the trading book may also be
recognised as eligible collateral. For the purposes of calculating volatility adjustments where financial
instruments or commodities that are not eligible under the Credit Protection Regulation are lent, sold
or provided, or borrowed, purchased or received as collateral or otherwise, and the bank is using the
Supervisory Volatility Adjustments Approach to calculate adjustments, such instruments and
commodities shall be treated in the same way as non-main index equities listed on a recognised
exchange.
If banks use their own estimate of volatility adjustments for financial instruments or commodities
which are not eligible as collateral under the regulation on credit protection, the volatility adjustments
must be calculated for each individual financial instrument and commodity. Where, in accordance with
the regulation on credit protection, a bank uses the Internal Models Approach, this may also be used
for trading book items.
(5) For the purposes of the third paragraph of Article 45 of this regulation, in relation to eligible
master netting agreements covering repurchase transactions and/or securities or commodities lending
or borrowing transactions and/or other capital market driven transactions, netting across positions in
the trading book and the non-trading book shall only be possible, when the netted transactions fulfil
the following conditions:
(a) all transactions are marked-to-market daily; and
(b) any items borrowed, purchased or received under the transactions may be recognised as
eligible financial collateral in accordance with the Credit Protection Regulation, without the
application of the fourth paragraph of this article.
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5.3.
Calculation of the Exposure Value for Derivatives, Repurchase Transactions, Securities
or Commodities Lending or Borrowing Transactions, Margin Lending Transactions,
and Long Settlement Transactions
5.3.1.
Method Selection
Article 47
(selection of the method for the calculation of the exposure value )
(1) Banks shall calculate the exposure value for the financial instruments listed in Annex I of this
regulation using the Mark-to-Market Method, the Original Exposure Method, the Standardised
Method (hereinafter: SM) or Internal Models Method (hereinafter: IMM). Banks that do not meet the
conditions set out in the third paragraph of Article 7 of this regulation shall not be permitted to use the
Original Exposure Method. Use of the Original Exposure Method is also not permitted for specifying
the exposure value for the derivatives listed in point 3 of Annex I of this regulation.
The combined use of the Mark-to-Market Method, Original Exposure Method, SM or IMM shall be
permitted within a group associated in a manner defined in Article 56 of the Companies Act (Official
Gazette of the Republic of Slovenia, Nos 42/06 and 60/06 – amended; hereinafter: ZGD-1), however,
not within a single legal person. The combined use of the Mark-to-Market Method and the SM within
one legal person shall be permitted, if one of these methods is used for cases specified in the third
paragraph of Article 52 of this regulation.
(2) If a bank has been authorised by the Bank of Slovenia or the competent authority of another
Member State, it may use the IMM from Articles 53 to 68 of this regulation to determine the exposure
value for:
(a) the financial instruments listed in Annex I of this regulation;
(b) repurchase transactions;
(c) securities or commodities lending or borrowing transactions;
(d) margin lending transactions, and
(e) long settlement transactions.
(3) If a bank purchases a credit derivative against a non-trading book exposure, or against a CCR
exposure, it may calculate its capital requirement for hedged asset in accordance with Articles 103 to
110 of the Credit Protection Regulation, or in accordance with the second paragraph of Article 51 and
the fifth paragraph of Article 52 or Articles 35 and 36 of the IRB Approach Regulation. In such cases
the exposure value for CCR for these credit derivatives is set to zero.
(4) The exposure value for CCR from sold credit default swaps in the non-trading book, where they
are treated as credit protection provided by the bank and subject to a capital requirement for credit risk
for the full nominal amount, is set to zero.
(5) Based on the Mark-to-Market Method, the Original Exposure Method, SM or IMM, the exposure
value for a given counterparty is equal to the sum of all exposure values calculated for each netting set
with the counterparty in question.
(6) An exposure value of zero for CCR can be attributed to derivatives, or repurchase transactions,
securities or commodities lending or borrowing transactions, long settlement transactions and margin
lending transactions outstanding with a central counterparty and that have not been rejected by the
central counterparty. Furthermore, an exposure value of zero can be attributed to credit risk exposures
to central counterparties that result from the derivatives, repurchase transactions, securities or
commodities lending or borrowing transactions, long settlement transactions and margin lending
transactions that the bank has outstanding with the central counterparty. The central counterparty CCR
exposures to all participants in its arrangements shall be fully collateralised on a daily basis.
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(7) Exposures arising from long settlement transactions can be calculated using the Mark-to-Market
Method, Original Exposure Method, SM or IMM, regardless of the methods chosen for treating OTC
derivatives and repurchase transactions, securities or commodities lending or borrowing transactions,
and margin lending transactions. Banks that use the IRB approach to calculate the capital requirement
for long settlement transactions shall permanently use the risk weights prescribed by the standard
approach, irrespective of the materiality of those positions.
(8) For the Mark-to-Market Method and the Original Exposure Method, banks must ensure that the
nominal (hypothetical) amount to be taken into account is an appropriate measure of the
instrument/contract’s risk. If, for example, a contract provides for a multiplication of cash flows, the
nominal or hypothetical amount must be adjusted for that purpose to take into account the effects of
multiplication on the risk structure of the contract/instrument.
5.3.2.
Mark-To-Market Method
Article 48
(calculation of exposure value with the mark-to-market method)
The exposure value for the financial instruments listed in Annex I of this regulation shall be calculated
in accordance with the Mark-to-Market Method as follows:
(a) calculating the replacement cost of all contracts with a positive value, by revaluating all
contracts using current prices based on current market value; for contracts with a negative value
the current exposure is set at zero;
(b) the potential future credit exposure is calculated for the residual maturity of the contract so
that the notional value or value of the underlying instruments are multiplied using the conversion
factors given in Table 7; the value of potential future credit exposure is not calculated for singlecurrency “floating/floating” interest rate swaps, for which only the current replacement cost is
calculated; contracts which do not fall within one of the five categories indicated in this table
shall be treated as contracts concerning commodities other than precious metals; for contracts
with multiple exchanges of principal, the percentages from Table 7 are multiplied by the number
of remaining payments still to be made according to the contract; for contracts that are structured
to settle outstanding exposure following specified payment dates and where the terms are reset
such that the market value of the contract is “zero” on these specified dates, the residual maturity
would be equal to the time until the next reset date. In the case of interest rate contracts that meet
these criteria and have a remaining maturity of over one year, the percentage shall be no lower
than 0.5%.
Table 7: Conversion factors for calculation of potential future credit exposure
Residual
maturity
Interest rate
contracts
Contracts
concerning
foreign
exchange rates
and gold
Contracts
concerning
equities
Contracts
concerning
precious
metals except
gold
Contracts
concerning
commodities
other than
precious metals
(1)
(2)
(3)
(4)
(5)
(6)
0%
1%
6%
7%
10%
One year or
less
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Over 1 year,
not
exceeding 5
years
0.5%
5%
8%
7%
12%
Over 5 years
1.5%
7.5%
10%
8%
15%
When calculating potential future credit exposure for total return swaps and credit swaps the notional
value of the instrument shall be multiplied by the following percentages:
− where the reference obligation is such that a direct exposure of the bank in that obligation
would be treated as a qualifying item referred to in Articles 28, 29 and 30 of this regulation: 5%;
− where the reference obligation is such that a direct exposure of the bank in that obligation
would not be treated as a qualifying item referred to in Articles 28, 29 and 30 of this regulation:
10%;
− in the case of a credit default swap, an bank whose exposure arising from the swap represents
a long position in the underlying instrument shall be permitted to use a figure of 0% for potential
future credit exposure, unless the credit default swap is subject to closeout on the insolvency of the
entity whose exposure arising from the swap represents a short position in the underlying
instrument, even though the underlying instrument has not defaulted.
Where the credit derivative provides protection in relation to "nth to default" among a number of
underlying obligations, the percentage figure of those prescribed in the first to third indent of the
preceding paragraph which is to be applied is determined by the obligation with the nth lowest credit
quality; this in turn is determined by whether it is one that if incurred by the bank would be a
qualifying item in accordance with Articles 28, 29 and 30 of this regulation.
(c) the exposure value is the sum of current replacement cost and potential future credit exposure.
5.3.3.
Original Exposure Method
Article 49
(calculation of exposure value with the original exposure method)
The exposure value for the financial instruments listed in Annex I of this regulation shall be calculated
in accordance with the Original Exposure Method as follows:
(a) the notional amount of each instrument is multiplied by the conversion factors in Table 8 of
this article; for interest rate contracts banks may select the residual maturity or the original
maturity for the purposes of Table 8 of this article;
Table 8: Conversion factors for calculation of original exposure
Original maturity
Interest rate
contracts
Contracts concerning foreign exchange
rates and gold
(1)
(2)
(3)
0.5%
2%
Over 1 year not exceeding 2 years
1%
5%
Additional conversion factor for each
additional year
1%
3%
One year or less
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(b) the original exposure thus obtained shall be the exposure value.
5.3.4.
SM (Standardised Method)
Article 50
(calculation of exposure value with the SM)
(1) The Standardised Method (SM) can be used only for OTC derivatives and long settlement
transactions. The exposure value shall be calculated separately for each netting set. The exposure
value shall be determined net of collateral, as follows:
⎛
exposure value = β * max⎜⎜ CMV − CMC ;
⎝
∑ ∑
j
i
⎞
RPTij − ∑ RPClj * CCRMj ⎟⎟ ,
l
⎠
where:
CMV = ∑ CMVi
i
CMC = ∑ CMCl
l
where:
β = 1.4;
CMV = current market value of the portfolio of transactions within the netting set with a counterparty
gross of collateral;
CMVi = the current market value of transaction i;
i = index designating transaction;
CMC = the current market value of the collateral assigned to the netting set;
CMCl = the current market value of collateral l;
l = index designating collateral;
j = index designating hedging set category. These hedging sets correspond to risk factors for which
risk positions of opposite sign can be offset to yield a net risk position on which the exposure measure
is then based;
RPTij = risk position from transaction i with respect to hedging set j;
RPClj = risk position from collateral l with respect to hedging set j;
CCRMj = CCR Multiplier set out in Table 10 in Article 52 of this regulation with respect to hedging
set j;
Collateral received from a counterparty has a positive sign and collateral posted to a counterparty has a
negative sign. The collateral recognised under the SM method is the collateral referred to in Article 13
of the Credit Protection Regulation and the fourth paragraph of Article 46 of this regulation.
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(2) When an OTC derivative transaction with a linear risk profile stipulates the exchange of a financial
instrument for payment, the payment part is referred to as the payment leg. Transactions that stipulate
the exchange of payment against payment consist of two payment legs. The payment legs consist of
the contractually agreed gross payments, including the notional amount of the transaction. Banks may
disregard the interest rate risk from payment legs with a remaining maturity of less than one year for
the purposes of calculating transactions with the SM method. Banks may treat transactions that consist
of two payment legs that are denominated in the same currency (e.g. interest rate swaps) as a single
aggregate transaction. The treatment for payment legs applies to the aggregate transaction.
(3) Transactions with a linear risk profile with equities (including equity indices), gold, other precious
metals or other commodities as the underlying financial instruments are mapped to a risk position in
the respective equity (or equity index) or commodity and an interest rate risk position for the payment
leg. If the payment leg is denominated in a foreign currency, it is additionally mapped to a risk
position in the respective currency.
(4) Transactions with a linear risk profile with a debt instrument as the underlying instrument are
mapped to an interest rate risk position for the debt instrument and another interest rate risk position
for the payment leg. Transactions with a linear risk profile that stipulate the exchange of payment
against payment, including foreign exchange forwards, are mapped to an interest rate risk position for
each of the payment legs. If the underlying debt instrument is denominated in a foreign currency, the
debt instrument is mapped to a risk position in this currency. If the payment leg is denominated in a
foreign currency, it is additionally mapped to a risk position in the respective currency. The exposure
value assigned to a foreign exchange basis swap transaction is zero.
(5) The size of a risk position from a transaction with linear risk profile is the effective notional value
(market price multiplied by quantity) of the underlying financial instruments (including commodities),
converted to the bank's domestic currency, except for debt instruments.
(6) For debt instruments and for payment legs, the size of the risk position is equal to the effective
notional value of the outstanding gross payments (including the notional amount) converted to the
credit institution's domestic currency and multiplied by the modified duration of the debt instrument,
or payment leg, respectively.
(7) The size of a risk position from a credit default swap is the notional value of the reference debt
instrument multiplied by the remaining maturity of the credit default swap.
(8) The size of a risk position from an OTC derivative with a non-linear risk profile, including options
and swaptions, is equal to the delta equivalent effective notional value of the financial instrument that
underlies the transaction, except in the case of an underlying debt instrument.
Article 51
(calculation of risk position with the SM)
(1) The size of a risk position from an OTC derivative with a non-linear risk profile, including options
and swaptions, of which the underlying is a debt instrument or a payment leg, is equal to the delta
equivalent effective notional value of the financial instrument or payment leg multiplied by the
modified duration of the debt instrument, or payment leg, respectively.
(2) For the determination of risk positions, collateral received from a counterparty is to be treated as a
claim on the counterparty under a derivative contract (long position) that is due on the current day,
while collateral posted is to be treated like an obligation to the counterparty (short position) that is due
on the current day.
(3) Credit institutions may use the following formulae to determine the size and sign of a risk position:
(a) for all instruments other than debt instruments:
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– effective notional value or delta equivalent of notional value = p ref
∂V
∂p
Where:
pref = price of the underlying instrument, expressed in the reference currency of the underlying
instrument;
V = value of the financial instrument (in the case of an option, this is the option price, and in the
case of a transaction with a linear risk profile, this is the value of the underlying instrument
itself);
p = price of the underlying instrument, expressed in the same currency as V;
(b) for debt instruments and the payment legs of all transactions:
– effective notional value multiplied by the modified duration, or
– delta equivalent in notional value multiplied by the modified duration =
∂V
∂r
Where:
V = value of the financial instrument (in the case of an option this is the option price and in the case of
a transaction with a linear risk profile this is the value of the underlying instrument itself or of the
payment leg, respectively);
r = interest rate.
If V is denominated in a currency other than the reference currency, the derivative must be converted
into the reference currency by multiplication with the relevant exchange rate.
(4) The risk positions are to be grouped into hedging sets. For each hedging set, the absolute value
amount of the sum of the resulting risk positions is computed. This sum is termed the “net risk
position” and is part of the formula set out in the first paragraph of Article 50 of this regulation:
net risk position =
∑ RPT − ∑ RPC
ij
i
lj
l
(5) For interest rate risk positions from money deposits received from a counterparty as collateral,
from payments leg and from the underlying debt instruments, to which a capital requirement (capital
charge) of more than 1.60% applies in accordance with Table 1 in Article 28 of this regulation, there
are six hedging sets for each currency stated in Table 9 of this paragraph. Hedging sets are defined by
a combination of the criteria “maturity” and “referenced interest rates”.
Table 9: Combinations of hedging sets
Government-referenced interest rates
(1)
Maturity
Maturity
Maturity
(2)
One year or less
Over 1 year, not exceeding 5 years
More than 5 years
Non-government-referenced
interest rates
(3)
One year or less
Over 1 year, not exceeding 5 years
More than 5 years
(6) For interest rate risk positions from underlying debt instruments or payment legs for which the
interest rate is linked to a reference interest rate that represents a general market interest level, the
remaining maturity is the length of the time interval up to the next re-adjustment of the interest rate. In
all other cases, it is the remaining life of the underlying debt instrument or in the case of a payment
leg, the remaining life of the transaction.
(7) There is one hedging set for each issuer of a reference debt instrument that underlies a credit
default swap.
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(8) For interest rate risk positions from money deposits that are posted with a counterparty as collateral
when that counterparty does not have debt obligations of low specific risk outstanding and from
underlying debt instruments, to which a capital requirement (capital charge) of more than 1,60%
applies in accordance with Table 1 in Article 28 of this regulation, there is one hedging set for each
issuer. When a payment leg emulates such a debt instrument, there is also one hedging set for each
issuer of the reference debt instrument. Banks may assign risk positions that arise from debt
instruments of a certain issuer, or from reference debt instruments of the same issuer that are emulated
by payment legs, or that underlie a credit swap, to the same hedging set.
Article 52
(different hedging sets for SM)
(1) Underlying financial instruments other than debt instruments shall only be assigned to the same
respective hedging sets, if they are identical or similar instruments. In all other cases they shall be
assigned to separate hedging sets. The similarity of instruments is established as follows:
(a) equities are similar if they have the same issuer; An equity index is treated as a separate
issuer;
(b) derivatives based on precious metals are similar if they relate to the same metal; A precious
metal index is treated as a separate precious metal;
(c) derivatives based on electric power are similar instruments if their delivery rights and
obligations refer to the same peak or off-peak load time interval within any 24-hour interval; and
(d) derivatives based on commodities are similar if they relate to the same commodity; A
commodity index is treated as a separate commodity.
(2) The CCR multipliers (CCRM) for the different hedging set categories are set out in Table 10 of
this paragraph.
Table 10: CCRM
Hedging set categories
CCRM
1. Interest rates
2. Interest rates for risk positions from a reference
debt instrument that underlies a credit default
swap and to which a capital charge of 1.60%, or
less, applies under Table 1 of Article 28 of this
regulation
3. Interest rates for risk positions from a debt
instrument or reference debt instrument to which a
capital charge of more than 1.60% applies under
Table 1 of Article 28 of this regulation
4. Exchange rates
5. Electric power
6. Gold
7. Equity
8. Precious Metals (except gold)
9. Other commodities (excluding precious metals
and electricity)
10. Underlying instruments of OTC derivatives
that are not in any of the above categories
0.2%
0.3%
0.6%
2.5%
4.0%
5.0%
7.0%
8.5%
10.0%
10.0%
The underlying instruments of OTC derivatives referred to in point 10 of Table 10 in this paragraph
shall be assigned to separate individual hedging sets for each category of underlying instrument.
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(3) For transactions with a non-linear risk profile or for payment legs and transactions with debt
instruments as underlying for which the credit institution cannot determine the delta or the modified
duration, respectively, with an instrument model for calculating capital requirements for market risk
for which the bank has acquired Bank of Slovenia permission, banks shall use the Mark-to-Market
Method. Netting shall not be recognised. This means that the exposure value shall be determined as if
there were a netting set that comprises just the individual transaction.
(4) Banks must have appropriate procedures in place to verify whether a transaction set to be included
in a netting set is covered by a legally enforceable netting contract that meets the requirements set out
in Article 70 of this regulation.
(5) Banks that make use of collateral to mitigate their CCR must have internal procedures in place to
verify that, prior to recognising the effect of collateral in its calculations, the collateral meets the
requirements of the Credit Protection Regulation.
5.3.5.
Internal Model Method (IMM)
5.3.5.1
Level of Use for IMM
Article 53
(general)
(1) Banks may only apply the IMM, if they have acquired Bank of Slovenia permission, and on the
basis of the decision set out in the third, fourth and sixth paragraphs of Article 291 of the ZBan-1.
(2) Banks may apply the IMM to calculate the exposure value for:
(a) derivatives listed in Annex I of this regulation and, optionally, also from long settlement
transactions; or
(b) repurchase transactions, securities or commodities lending or borrowing transactions, margin
lending transactions, and long settlement transactions; or
(c) derivatives listed in Annex I of this regulation, repurchase transactions, securities or
commodities lending or borrowing transactions, margin lending transactions, and, optionally,
long settlement transactions.
(3) Without prejudice to the first paragraph of Article 47 of this regulation, banks may permanently
exclude from the application of the IMM exposures that are not material in terms of size and risk.
Article 54
(Roll out of IMM)
(1) Banks may sequentially implement the IMM if they have acquired Bank of Slovenia permission,
and on the basis of the decision set out in the third, fourth and sixth paragraphs of Article 291 of the
ZBan-1.
(2) During the sequential implementation of the IMM, banks may use the Mark-to-Market Method or
SM to calculated the exposure value from transactions for which they do not yet use IMM, in
accordance with a Bank of Slovenia permission, or on the basis of the decision set out in the third,
fourth and sixth paragraphs of Article 291 of the ZBan-1. In such case, banks shall not be required to
use a specific type of model.
Article 55
(combined use)
If banks do not have a Bank of Slovenia permission to use IMM to calculate the exposure value from
transactions in OTC derivatives and long settlement transactions, they must use the Mark-to-Market
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Method or the SM. In such cases the combined use of the Mark-to-Market Method and SM shall be
permitted, however, only within a banking group that uses IMM on the basis of the decision set out in
the third, fourth and sixth paragraphs of Article 291 of the ZBan-1. It shall only be permitted within a
single bank, if that bank is required to use the Mark-to-Market Method for the purposes of the third
paragraph of Article 52 of this regulation.
5.3.5.2
Permission to use the IMM
Article 56
(conditions and documentation for granting permission)
(1) The Bank of Slovenia shall issue the permission for use of the IMM, if a bank meets the following
conditions:
(a) it meets the requirements for correct calculation of exposure value set out in Articles 59 and
60 of this regulation;
(b) it meets the requirements for the EPE model set out in Articles 62 to 67 of this regulation;
(c) it meets the validation requirements for EPE model set out in Article 68 of this regulation.
(2) Banks shall prove that they meet the conditions specified in the first paragraph of this article by
submitting the documentation set out in Annex VI as part of the request for permission:
(a) on the type of transactions for which it intends to use IMM (for transactions from point (a) or
(b) or (c) of the second paragraph of Article 53 of this regulation), on its plan for the sequential
implementation of IMM and basic information on the internal models;
(b) on meeting the requirements for correct calculation of exposure value set out in Articles 59
and 60 of this regulation;
(c) on meeting the requirements for the EPE model set out in Articles 62 to 67 of this regulation;
(d) on meeting the validation requirements for EPE model set out in Article 68 of this
regulation.
(3) Banks must meet the conditions referred to in the first paragraph of this article on an ongoing basis
from the moment the Bank of Slovenia issues its permission to use IMM. If a bank ceases to meet the
conditions set out in the first paragraph of this article, it must submit a timetable for re-achieving
compliance with the requirements of this regulation to the Bank of Slovenia or demonstrate that the
effect of not meeting said requirements is immaterial.
(4) In the operative part of the decision on granting permission for use of the IMM, the Bank of
Slovenia shall expressly state the type of transactions for which a bank is permitted to use the IMM
(for transactions under Items (a) or (b) or (c) of the second paragraph of Article 53 of this regulation)
and whether it is permitted to use its own estimate of α. If after being granted permission to use the
IMM, a bank intends to expand its use of the model to other transaction types or to decrease its use so
that certain transaction types are no longer covered by the IMM, or if it no longer intends to use its
own estimate of α, it must submit a request to amend the permission in question.
(5) In the operative part of the decision on granting permission to use the IMM, the Bank of Slovenia
shall expressly define the roll out plan for the implementation of IMM. In case of changes to this plan,
the bank must submit a request to amend the permission in question.
(6) More detailed instructions on the form for requesting a Bank of Slovenia permission to use IMM
or the form for requesting an amendment to this permission are set out in Annex VI of this regulation.
(7) The provisions of the first to sixth paragraphs of this article shall also apply mutatis mutandis
when an EU parent bank and its subsidiaries or banks and other institutions subordinate to an EU
parent financial holding company intend to use IMM in a bank group and jointly submit a request for
permission to use IMM on the basis of Article 291 of the ZBan-1.
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(8) The Bank of Slovenia shall issue an EU parent bank or a bank controlled by an EU parent financial
holding company a permission to use IMM to calculate exposure value on the basis of the decision set
out in the third and fourth paragraphs of Article 291 of the ZBan-1.
(9) The Bank of Slovenia shall issue a subsidiary bank with registered office in the Republic of
Slovenia that has submitted a request for issue of a permission together with an EU parent bank or a
bank controlled by an EU financial holding company with a permission to use IMM on the basis of the
decision set out in the third, fourth and sixth paragraphs of Article 291 of the ZBan-1.
Article 57
(withdrawal of permission)
(1) The Bank of Slovenia shall withdraw permission for use of IMM:
(a) if a bank acts in contradiction with the Bank of Slovenia order , or an order with additional
measures for the correction of a violation in fulfilment of the conditions set out in the first
paragraph of Article 56 of this regulation;
(b) if a bank seriously violates the conditions set out in the first paragraph of Article 56 of this
regulation;
(c) if a bank acts in contradiction with the Bank of Slovenia order, or an order with additional
measures for the correction of a violation relating to inaccuracy in the calculation of internal
models.
(2) The Bank of Slovenia shall also withdraw a bank’s permission to use the IMM in a banking group
on the basis of a decision on the withdrawal of a permission to use IMM in a banking group, which
shall follow mutatis mutandis the third, fourth and sixth paragraphs of Article 291 of the ZBan-1.
(3) A bank that has had its permission to use IMM withdrawn by the Bank of Slovenia, must start to
apply the Mark-to-Market Method or SM to calculate the exposure value of transactions in question
from the day the decision on withdrawal of the permission.
Article 58
(permission for transition from IMM to the Mark-to-Market Method or SM)
(1) Banks using IMM may replace that method with Mark-to-Market Method or SM only with the
permission from the Bank of Slovenia. When such permission is issued, the Bank of Slovenia
permission to use the IMM shall be deemed to have ceased validity.
(2) The Bank of Slovenia shall issue the permission referred to in the first paragraph of this article, if
the bank demonstrates good cause for changing the method.
(3) The instructions on the form for requesting the permission referred to in the first paragraph of this
article are set out in Annex VII of this regulation.
5.3.5.3
Exposure Value
Article 59
(defining exposure value)
(1) The exposure value shall be measured at the level of the netting set. The model must specify the
forecasting distribution for changes in the market value of the netting set attributable to changes in
market variables, such as interest rates, foreign exchange rates. The model must then compute the
exposure value for the netting set at each future date given the changes in the market variables. For
margined counterparties, the model may also capture future collateral movements.
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(2) Banks may include eligible financial collateral as defined in Article 13 of the Credit Protection
Regulation and the fourth paragraph of Article 46 of this regulation in their forecasting distributions
for changes in the market value of the netting set, if the quantitative, qualitative and data requirements
for the IMM are met for the collateral.
(3) The exposure value shall be calculated as the product of α times Effective EPE, as follows:
Exposure value = α × Effective EPE
Where:
α = 1.4; The Bank of Slovenia may require a higher α;
Effective EPE = estimated expected exposure (EE ) as the average exposure at future date t,
t
where the average is taken across possible future values of relevant market risk factors; The
internal model estimates EE at a series of future dates t , t , t etc.
1
2
3
(4) Effective EE shall be computed recursively as:
Effective EEtk = max (Effective EE
tk-1
; EE )
tk
where:
t = current date;
0
effective EE = current exposure.
t0
(5) Effective EPE is the average Effective EE during the first year of future exposure. If all contracts
in the netting set mature within less than one year, EPE is the average of EE until all contracts in the
netting set mature. Effective EPE is computed as a weighted average of Effective EE:
Effective EPE =
min(1 year maturity)
∑ Effective EEt
k =1
k
* Δt k ,
where:
the weights ∆t = t – t
k
k
k-1
allow for the case when future exposure is calculated at dates that are not
equally spaced over time.
(6) EE or peak exposure measures shall be calculated based on a distribution of exposures that
accounts for the possible non-normality of the distribution of exposures.
(7) Banks may use a measure for determining exposure value to each counterparty that is more
conservative than α multiplied by the Effective EPE defined in the third paragraph of this article.
Article 60
(use of own estimate of α)
(1) Notwithstanding the third paragraph of Article 59, banks may use their own estimates of α, with a
minimum value for α of 1.2, where α shall equal the ratio of internal capital from a full simulation of
CCR exposure across counterparties (numerator) and internal capital based on EPE (denominator). In
the denominator, EPE shall be used as if it were a fixed outstanding amount. Banks shall demonstrate
that their internal estimates of α capture in the numerator material sources of stochastic dependency of
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distribution of market values of transactions or of portfolios of transactions across counterparties.
Internal estimates of α must take account of the granularity of portfolios.
(2) Banks must ensure that the numerator and denominator of α are calculated in a consistent fashion
with respect to the modelling methodology, parameter specifications and portfolio composition. The
approach used to calculate α must be based on a bank's internal capital approach, be well documented
and subject to independent validation. In addition, banks must review their estimates on at least a
quarterly basis, and more frequently when the composition of the portfolio varies over time. Banks
must also assess the model risk.
(3) Where appropriate, volatilities and correlations of market risk factors used in the joint simulation
of market and credit risk should be conditioned on the credit risk factor to reflect potential increases in
volatility or correlation in an economic downturn.
(4) If the netting set is subject to a margin agreement, banks shall use one of the following EPE
measures:
(a)
Effective EPE without taking into account the margin agreement;
(b)
the threshold, if positive, under the margin agreement plus an add-on that reflects the
potential increase in exposure over the margin period of risk. The add-on is calculated as the
expected increase in the netting set's exposure beginning from a current exposure of zero over the
margin period of risk. A threshold of five business days for netting sets consisting only of repostyle transactions subject to daily remargining and daily mark-to-market, and a ten business days
threshold for all other netting sets is imposed on the margin period of risk used for this purpose;
(c)
if the internal model captures the effects of margining when estimating EE, the model's
EE measure may be used directly in the equation set out in the fourth paragraph of Article 59 of
this regulation.
5.3.5.4
Minimum Requirements for the EPE Model
Article 61
(requirements for EPE model)
Banks EPE models must meet the requirements set out in Articles 62 to 67 of this regulation.
Article 62
(CCR management)
(1) Banks must have a control unit that is responsible for the design and implementation of its CCR
management system, including the initial and on-going validation of the model. This unit must control
input data integrity and produce and analyse reports on the output model. The unit must evaluate the
relationship between measures of risk exposure and credit and trading limits.
This unit must be independent of trading units. It must be adequately staffed and must report directly
to the senior management of the bank. The work of this unit must be closely integrated into the bank's
day-to-day credit risk management process. Its output must, accordingly, be an integral part of the
process of planning, monitoring and controlling the credit institution's credit and overall risk profile.
(2) Banks must have CCR management policies, processes and systems that are sound and
implemented with integrity. A sound CCR management framework must include the identification,
measurement, management, approval and internal reporting of CCR.
(3) Banks’ risk management policies must take account of market, liquidity, and legal and operational
risks that can be associated with CCR. Banks must not undertake business with a counterparty without
assessing its creditworthiness in advance, and must take due account of settlement and pre-settlement
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credit risk. These risks shall be managed as comprehensively as practicable at the counterparty level
(aggregating CCR exposures with other credit exposures) and at the bank-wide level.
(4) The management board and senior management of banks must be actively involved in the CCR
control process and must regard this as an essential aspect of the business, to which significant
resources need to be devoted. Senior management must be aware of the limitations and assumptions of
the model used and the impact these can have on the reliability of the output. Senior management must
also consider the uncertainties of the market environment and operational issues and be aware of how
these are reflected in the model.
(5) The daily reports prepared on a bank's exposures to CCR shall be reviewed by a level of
management with sufficient seniority and authority to enforce both reductions of positions taken by
individual credit managers or traders and reductions in the bank's overall CCR exposure.
(6) A bank's CCR management system must include internal credit and trading limits. Credit and
trading limits must be related to the bank’s risk measurement model in a manner that is consistent over
time and that is well understood by credit managers, traders and senior management.
(7) A bank's measurement of CCR shall include measuring daily and intra-day usage of credit lines.
Banks must measure current exposure gross and net of collateral. At portfolio and counterparty level,
banks must calculate and monitor peak exposure or potential PFE at the confidence interval they
select. Banks must take account of any large or concentrated positions they hold, including by groups
of related counterparties, by industry, by market, etc.
(8) Banks must have a routine and rigorous stress-testing programme in place as a supplement to the
CCR analysis based on the day-to-day output of the model. The results of this stress testing shall be
reviewed periodically by senior management and shall be reflected in the CCR policies and limits set
by the management and the management board. Where stress tests reveal particular vulnerability to a
given set of circumstances, banks must take prompt action to manage those risks appropriately.
Article 63
(documentation and control of CCR)
(1) Banks must have a routine in place for ensuring compliance with a documented set of internal
policies, controls and procedures concerning the operation of the CCR management system. A bank’s
CCR management system must be well documented and must provide an explanation of the empirical
techniques used to measure CCR.
(2) Banks must conduct an independent review of their CCR management system regularly through
their own internal auditing process. This review shall include both the activities of the trading units
and of the independent CCR control unit. A review of the overall CCR management process must take
place at regular intervals and must specifically address, at least:
(a)
the adequacy of the documentation of the CCR management system and process;
(b)
the organisation of the CCR control unit;
(c)
the integration of CCR measures into daily risk management;
(d)
the approval process for risk pricing models and valuation systems used by front
(trading) and back-office personnel;
(e)
the validation of any significant change in the CCR measurement process;
(f)
the scope of CCR captured by the model;
(g)
the integrity of the management information system;
(h)
the accuracy and completeness of CCR data;
(i)
the verification of the consistency, timeliness and reliability of data sources used to run
models, including the independence of such data sources;
(j)
the accuracy and appropriateness of volatility and correlation assumptions;
(k)
the accuracy of valuation and risk transformation calculations; and
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(l) the verification of the model's accuracy through frequent back-testing.
Article 64
(use test)
(1) The distribution of exposures generated by the model used to calculate effective EPE shall be
closely integrated into the bank’s day-to-day CCR management process. The model's output shall
accordingly play an essential role in the credit approval, CCR management, internal capital allocation,
and corporate governance of the bank.
(2) Banks must keep records on the use of models that generate a distribution of exposures to CCR.
Thus, banks demonstrate that they have been using a model to calculate the distributions of exposures
upon which the EPE calculation is based that meets the minimum requirements for at least one year
prior to receiving the Bank of Slovenia permission to use the IMM.
(3) The model used to generate a distribution of exposures to CCR must be part of the CCR
management framework and must include the identification, measurement, management, approval and
internal reporting of CCR. This framework shall include the measurement of usage of credit lines
(aggregating CCR exposures with other credit exposures) and internal capital allocation. In addition to
EPE, banks must measure and manage current exposures. Where appropriate, banks measure current
exposure gross and net of collateral. The use test shall be satisfied if banks use other CCR measures,
such as peak exposure or PFE, based on the distribution of exposures generated by the same model, to
compute EPE.
(4) Banks must have the systems capability to estimate EE daily if necessary, unless they demonstrate
that their exposures to CCR warrant less frequent calculation. Banks must calculate EE along a time
profile of forecasting horizons that adequately reflects the time structure of future cash flows and
maturity of the contracts and in a manner that is consistent with the materiality and composition of the
exposures.
(5) Exposure shall be measured, monitored and controlled until the maturity of all contracts in the
netting set (not just to the one year horizon). Banks must have procedures in place to identify and
control the risks for counterparties where the exposure rises beyond the one-year horizon. The forecast
increase in exposure shall be an input to be taken into account by the bank’s internal capital model.
Article 65
(stress testing)
(1) Banks must have in place sound stress testing processes for use in the assessment of capital
requirements for CCR. Banks must compare these stress tests with the EPE measures and must treat
them within the internal capital adequacy assessment process (ICAAP). Stress testing shall also
involve identifying possible events or future changes in economic conditions that could have
unfavourable effects on their credit exposures and an assessment of their ability to withstand such
changes.
(2) Banks must stress test their CCR exposures, including jointly stressing market and credit risk
factors. Stress tests of CCR must take concentration risk into account (to a single counterparty or
groups of counterparties), correlation risk across market and credit risk, and the risk that liquidating
the counterparty's positions could move the market. Stress tests shall also consider the impact on a
bank's own positions of such market moves and integrate that impact in its assessment of CCR.
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Article 66
(taking wrong-way risk into account)
(1) Banks must give due consideration to exposures that give rise to a significant degree of General
Wrong-Way Risk.
(2) Banks must have procedures in place to identify, monitor and control cases of Specific WrongWay Risk, beginning at the inception of a transaction and continuing through the life of the
transaction.
Article 67
(integrity of the modelling process)
(1) The model shall reflect transaction terms and specifications in a timely, complete, and conservative
fashion. Such terms shall include at least contract notional amounts, maturity, reference assets,
margining arrangements, and netting arrangements. The terms and specifications shall be maintained
in a database that is subject to formal and periodic audit. The process for recognising netting
arrangements shall require signoff by legal staff to verify the legal enforceability of netting and be
input into the database by an independent unit. The transmission of transaction terms and
specifications data to the model must also be subject to internal audit. Formal reconciliation processes
must be in place between the model and source data systems to verify on an ongoing basis that
transaction terms and specifications are reflected correctly or at least conservatively in the EPE.
(2) The model shall employ current market data to calculate current exposures. When using historical
data to estimate volatility and correlations, at least three years of historical data shall be used and shall
be updated quarterly or more frequently if market conditions warrant. The data shall cover a full range
of economic conditions, such as a full business cycle. A unit independent from the business unit shall
validate the price supplied by the business unit. The data shall be acquired independently of the lines
of business, fed into the model in a timely and complete fashion, and maintained in a database subject
to formal and periodic audit. A credit institution shall also have a well-developed data integrity
process to clean the data of erroneous and/or anomalous observations. To the extent that the model
relies on proxy market data, including, for new products, where three years of historical data may not
be available, internal policies shall identify suitable proxies and the credit institution shall demonstrate
empirically that the proxy provides a conservative representation of the underlying risk under adverse
market conditions. If the model includes the effect of collateral on changes in the market value of the
netting set, the credit institution shall have adequate historical data to model the volatility of the
collateral.
(3) The model must be subject to a validation process. Banks must clearly articulate the process in
their policies and procedures. The validation process must include the kind of testing needed to ensure
model integrity and identify conditions under which assumptions are violated and may result in an
understatement of EPE. The validation process must include a review of the intelligibility of the
model.
(4) Banks must monitor the risks arising from market conditions and have processes in place to adjust
their estimation of EPE when those risks become significant. This includes the following:
(a)
banks must identify and manage its exposures to specific wrong-way risk;
(b)
for exposures with a rising risk profile after one year, banks must compare the estimate
for the EPE model over one year with the EPE model over the life of the exposure, on a regular
basis;
(c)
for exposures with a residual maturity below one year, banks must compare on a regular
basis the replacement cost (current exposure) and the realised exposure profile, and/or store data
that would allow such a comparison.
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(5) Banks must have appropriate procedures in place to verify whether a transaction set to be included
in a netting set is covered by a legally enforceable netting contract that meets the requirements set out
in Articles 69 to 73 of this regulation.
(6) Banks that make use of collateral to mitigate their CCR must have internal procedures in place to
verify that, prior to recognising the effect of collateral in its calculations, the collateral meets the
requirements of the Credit Protection Regulation.
5.3.5.5
Validation Requirements for EPE models
Article 68
(general)
The validation of a bank’s EPE model must meet with the following requirements:
(a) the model must be qualitatively validated in accordance with Articles 84 to 87 and 89 to 91 of
this regulation;
(b) interest rates, foreign exchange rates, equity prices, commodity prices, and other market risk
factors shall be forecast over long time horizons for the purpose of measuring CCR exposure. The
performance of the forecasting model for market risk factors shall be validated over a long time
horizon;
(c) the pricing models used to calculate CCR exposure for a given scenario of future shocks to
market risk factors must be tested as part of the model validation process. Pricing models for
options shall take into account the nonlinearity of option value with respect to market risk factors;
(d) the EPE model shall capture transaction-specific information in order to aggregate exposures
at the level of the netting set; banks must verify whether transactions are assigned to the
appropriate netting set within the model;
(e) the EPE model shall also include transaction-specific information to capture the effects of
margining; it must take into account both the current amount of margin and margin that would be
passed between counterparties in the future; such a model shall account for the nature of margin
agreements (unilateral or bilateral), the frequency of margin calls, the margin period of risk, the
minimum threshold of unmargined exposure a bank is willing to accept, and the minimum
transfer amount. The model must either model the mark-to-market change in the value of
collateral posted or define the changes in accordance with the Credit Protection Regulation;
(f) static, historical back-testing on representative counterparty portfolios shall be part of the
model validation process; At regular intervals, banks must conduct such back-testing on a number
of representative counterparty portfolios (actual or hypothetical). These representative portfolios
must be chosen based on their sensitivity to the material risk factors and correlations to which the
credit institution is exposed.
5.3.6
Contractual Netting (Contracts for Novation and Netting Agreements)
5.3.6.1
Possible Types of Contractual Netting
Article 69
(general)
(1) For the purpose of Articles 69 to 73 of this regulation the following definitions shall apply:
(a) "counterparty" means any natural or legal person that has the power to conclude a netting
agreement;
(b) "contractual cross product netting agreement" means a written bilateral agreement between a
bank and a counterparty which creates a single legal obligation covering all included bilateral
master agreements and transactions belonging to different product categories.
(2) For the purposes of cross product netting, the following are deemed as different product categories:
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(a) repurchase transactions, reverse repurchase transactions, securities and commodities lending
and borrowing transactions;
(b) margin lending transactions, and
(c) the instruments listed in Annex I of this regulation.
(3) Banks may take the following types of contractual netting into account as risk-reducing:
(a) bilateral contracts for novation between a bank and its counterparty under which the existing
mutual claims and obligations that are the subject of the novation contract, are automatically
amalgamated in such a way that this novation fixes one single binding obligation, i.e. claim and
when it is thus created all former obligations and claims are extinguished;
(b) bilateral netting agreements between a bank and its counterparty;
(c) contractual cross product netting agreements for banks that have received Bank of Slovenia
permission to use the IMM method for transactions falling under the scope of that method; netting
across transactions concluded by members of a group connected in the manner defined by Article
56 of the Companies Act (ZGD-1), where the reference obligation ranks simultaneously with
(pari passu) or is later than (junior to) the underlying obligation, shall not recognised for the
purposes of calculating capital requirements.
5.3.6.2
Conditions for Recognition of Netting Contracts
Article 70
(general)
(1) Banks may only take the contracts set out in Article 69 of this regulation into account as riskreducing, if the following conditions are fulfilled:
(a) the contract stipulates that in the case of a counterparty's default, bankruptcy, liquidation and
other similar circumstances, the bank shall have one single obligation (in the case of net negative
mark-to-market value), or one single claim (in the case of net positive mark-to-market value)
against its counterparty, while all prior obligations and claims which are the subject of the netting
agreement are extinguished;
(b) a bank must have independent reasoned legal opinions with grounds stating that agreement
content is compliant with the conditions referred to in point (a) of this article and that in the case
of a legal action, the contract will be a valid and binding legal source for competent courts of law,
pursuant to:
– the law of the country in which the counterparty has its registered office or in the case
where its counterparty's branch or a bank's branch is involved, also under the law of the
country in which the branch has its registered office;
– the law of the country that applies to the individual transaction that is the subject of the
contract;
– the law of the country that applies to other legal acts necessary to effect the contractual
netting;
(c) banks have procedures in place to ensure that the legal validity of its contractual netting is
kept under review in the light of possible changes in the relevant law;
(d) banks must maintain all relevant documentation;
(e) banks must factor the effects of netting into the measurement of each counterparty's aggregate
credit risk exposure and must manage its CCR on such a basis;
(f) the credit risk to each counterparty is aggregated to establish a single legal exposure across all
transactions; this aggregation shall be factored in when defined credit limit purposes and
calculating internal capital.
(2) Banks cannot take any contract into account as risk-reducing, if it contains a provision enabling a
solvent counterparty to make limited payments or no payments at all to an insolvent counterparty,
even if the insolvent counterparty is a net creditor (i.e. a walkaway clause).
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(3) In addition to the conditions set out in the first paragraph of this article, contractual cross product
netting agreements must also meet the following criteria:
(a) the net sum referred to in point (a) of the first paragraph of this article, must be the sum of the
positive and negative values of each individual master agreement and the positive and negative
mark-to-market values of the individual transactions (the "Cross-Product Net Amount);
(b) the written and reasoned legal opinions referred to in point (b) of the first paragraph of this
article must address the validity and enforceability of the entire contractual cross-product netting
agreement under its terms, and the impact of the netting arrangement on the material provisions
of any individual bilateral master agreement included. A legal opinion shall be generally
recognised in the Member State in which the bank has acquired a permission to perform banking
services, or a memorandum of law that addresses all relevant issues in a reasoned manner;
(c) banks must have the procedure set out in point (c) of the first paragraph of this article to
verify that any transaction that should be included in a netting set is covered by a legal opinion;
(d) taking into account the contractual cross-product netting agreement, banks must continue to
comply with the requirements for the recognition of bilateral netting and the requirements of the
Credit Protection Regulation regarding the recognition of credit risk mitigation with respect to
each individual bilateral master agreement and transaction included.
5.3.6.3
Effects of Recognising Contractual Netting
Article 71
(general)
(1) If banks use the SM set out in Articles 50 to 52 of this regulation or the IMM set out in Articles 53
to 68 of this regulation to calculate the exposure value for financial instruments referred to in Annex I
of this regulation, contractual netting shall be recognised as set out therein.
(2) If banks calculate exposure value for the financial instruments listed in Annex I of this regulation
using the Mark-To-Market Method or the Original Exposure Method, contractual netting shall be
recognised as defined in Articles 72 and 73 of this regulation.
Article 72
(treatment of contracts for novation in the application of the Mark-To-Market Method or
Original Exposure Method)
In contracts for novation the single net amounts fixed by the contracts shall be weighted, rather than
the gross amounts covered by such contracts, as follows:
(a) in the Mark-to-Market Method the replacement costs and nominal amounts or values of
underlying instruments may be acquired by taking into account contracts for novation;
(b) in the original exposure method the nominal amounts of the instruments may be acquired by
taking into account contracts for novation; the conversion factors set out in Table 8 of Article 49
of this regulation shall be used therein.
Article 73
(treatment of contractual netting agreements in the application of the Mark-To-Market Method
or Original Exposure Method)
(1) If banks apply the Mark-to-Market Method, contractual netting agreements shall be treated in the
following manner:
(a) the replacement cost arising from the instruments included in the contractual netting
agreement shall be obtained on the basis of the hypothetical net amount which results from the
netting agreement; where netting leads to net obligations for the bank, the replacement cost shall
be included in the calculation as '0';
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(b) the potential future credit exposure arising from the instruments included in netting
agreements may be reduced by applying the following equation:
PCEred = 0.4 x PCEgross + 0.6 x NGR x PCEgross
Where:
PCEred = the reduced figure for potential future credit exposure for all contracts with a given
counterparty included in a legally valid bilateral netting agreement;
PCEgross = the sum for all potential future credit exposure for all contracts with a given
counterparty which are included in a legally valid bilateral netting agreement and are calculated
by multiplying their notional principal amounts by the percentages set out in Table 7 of Article 48
of this regulation;
NGR =
− separate calculation: the quotient of the net replacement cost for all contracts included in a
legally valid bilateral netting agreement with a given counterparty, and the gross replacement cost
for all contracts included in a legally valid bilateral netting agreement with that counterparty;
− aggregate calculation: the quotient of the sum of the net replacement cost calculated on a
bilateral basis for all counterparties taking into account the contracts included in legally valid
netting agreements, and the gross replacement cost for all contracts included in legally valid
netting agreements.
Banks may decide themselves whether to calculate the NGR pursuant to the first or second indent
above, where the selected method must be applied consistently.
For the calculation of the potential future credit exposure according to the above formula, perfectly
matching contracts included in the netting agreement may be taken into account as a single contract
with a notional principal equivalent to the net receipts. Perfectly matching contracts are forward
foreign-exchange contracts or similar contracts in which a notional principal is equivalent to cash
flows if the cash flows fall due on the same value date and fully or partly in the same currency.
(2) If banks apply the original exposure method, netting contracts shall be treated in the following
manner:
(a) perfectly matching contracts included in the netting agreement may be taken into account as a
single contract with a notional principal equivalent to the net receipts; the notional principal
amounts are multiplied by the relevant conversion factors set out in Table 8 of Article 49 of this
regulation;
(b) for all other contracts included in the netting agreement, the notional (hypothetical) value of
the contract may be multiplied by the reduced conversion factors set out in Table 11 of this item;
for interest rate contracts, banks may select the residual maturity or the original maturity for the
purposes of Table 11 of this article.
Table 11: Reduced conversion factors for calculation of original exposure
Original maturity
Interest rate contracts
One year or less
Over 1 year, not exceeding 2
years
Additional conversion factor
for each additional year
0.35%
0.75%
Contracts concerning
foreign exchange and gold
1.50%
3.75%
0.75%
2.25%
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5.4
Specific Features of Calculating Expected Losses in Line with the IRB Approach
Article 74
(general)
(1) If banks calculate risk weighted exposure amounts for the purposes of the capital requirement for
settlement/delivery risk and CCR using the IRB approach for calculating capital requirement for credit
risk, and if they appropriately take the CCR into account in the valuation of a position included in the
trading book, the expected loss amount for the counterparty risk exposure shall be zero. Banks must be
capable of demonstrating that they have taken CCR sufficiently into account in the valuation of a
position included in the trading book.
(2) If banks fail to sufficiently take CCR into account in the valuation of a position included in the
trading book, they may off-set the expected loss (EL) amount arising therefrom with any excess of
value adjustments/provisions beyond the amount of expected losses from the non-trading book
(calculated in accordance with the fourth paragraph of Article 15 of the IRB Approach Regulation).
6.
CALCULATION OF CAPITAL REQUIREMENTS FOR FOREIGN
EXCHANGE RISK
Article 75
(general)
(1) Banks must calculate capital requirements for foreign exchange risk, if the overall net foreign
exchange position and the net position in gold, calculated in accordance with the second paragraph of
this article, exceed 2% of its own funds. In that case, banks shall calculate their capital requirement for
foreign exchange risk by multiplying the net foreign exchange position and net position in gold by 8%.
(2) The overall net foreign-exchange position and net position in gold shall be calculated in the
following method for the purposes of capital requirements for foreign-exchange risk:
(a) First, the net open position in each currency, including the reporting currency and gold, shall
be calculated. This net position shall consist of the sum of the following elements (positive or
negative):
− the net spot position (i.e. all asset items less all liability items, including accrued interest, in
the currency in question or, for gold, the net spot position in gold);
− the net forward position (all amounts to be received, less all amounts to be paid under forward
exchange and gold transactions, including currency and gold futures, and the principal on
currency swaps not included in the spot position);
− irrevocable guarantees (and similar instruments) that are certain to be called and likely to be
irrecoverable; guarantees and credits in a specific currency with foreign exchange margin in that
currency or any another collateral payable in that currency shall be included in the calculation of
the net open off-balance sheet position in the amount of the uncovered part; if banks also have an
approved general loan for such guarantees or credits, the potential obligation is only included in
the calculation of the net off-balance sheet position once, even if disclosed twice in the bank’s
off-balance sheet;
− net future income/expenses that have not yet matured but are already fully hedged by foreign
currency futures; if the bank decides to apply this treatment, it must be exercised on a consistent
basis;
− the net delta equivalent for the total book of foreign exchange and gold options;
− the market value of other options, i.e. non-foreign exchange and non-gold options.
Any positions which banks have opened in order to hedge against the adverse effect of the exchange
rate on its capital adequacy ratio may be excluded from the calculation of net open foreign exchange
positions. Such positions should be of a non-trading or structural nature and banks must notify the
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Bank of Slovenia of their exclusion, and any variation of the terms of their exclusion in advance.
Banks may exclude positions that are deducted in the calculation of own funds from the calculation of
net open foreign exchange positions. Banks must notify the Bank of Slovenia of their exclusion.
In the case of CIUs, their actual foreign exchange positions shall be taken into account in the
calculation of the net open position. Banks may rely on third party reporting of the foreign exchange
position of the CIU, where the correctness of this report is adequately ensured. If banks are not aware
of the foreign exchange positions in a CIU, it shall be assumed that the CIU is invested up to the
maximum extent allowed under the CIU's investment policy in foreign exchange and banks shall, for
trading book positions, take account of the maximum indirect exposure that they could achieve by
taking leveraged positions through the CIUs. This shall be done by proportionally increasing the
position in the CIU up to the maximum exposure to the underlying investment items resulting from the
CIU’s investment policy. The assumed position of the CIU in foreign exchange shall be treated as a
separate currency according to the treatment of investments in gold, subject to the following
modifications:
− if the CIU’s investment direction is know, the CIU’s total long position may be added to the total
long open foreign exchange position, and the CIU’s total short position may be added to the total short
open foreign exchange position. There would be no netting allowed between such positions prior to
the calculation.
Banks may use the net present value when calculating the net open position in each currency and in
gold;
(b) then the net short and long positions in each currency, except for the reporting currency, and
the net long or short position in gold shall be converted at spot rates into the reporting currency.
They shall then be summed separately to form the total of the net short positions and the total of
the net long positions respectively. The higher of these two totals shall be the institution's overall
net foreign exchange position.
(3) Net positions in composite currencies may be broken down into the component currencies
according to the quotas in force.
Article 76
(calculating capital requirements for positions in foreign currencies within ERM2)
Banks may exclude positions in foreign currencies within ERM2 from the calculation pursuant to
Article 75 of this regulation. The capital requirement for these positions shall be calculated by
calculating the matched positions in these currencies and multiplying them by a weight no lower than
half of the maximum permissible variation laid down by the ERM2 agreement. Banks must treat these
unmatched positions in these currencies in accordance with Article 75 of this regulation.
7.
CALCULATING CAPITAL REQUIREMENTS FOR COMMODITIES
RISK
Article 77
(Calculation of positions in commodities)
(1) Commodities pursuant to this regulation primarily include the following:
(a) precious metals, agricultural products, minerals, etc.;
(b) derivatives and other financial instruments based on commodities.
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(2) Each position in commodities or commodity derivatives shall be expressed in terms of the standard
unit of measurement. The spot price in each commodity shall be expressed in the reporting currency
based on the spot foreign exchange rate.
(3) Positions in gold or gold derivatives shall be considered as being subject to foreign exchange risk
and treated according to the provisions of this regulation for the purpose of calculating the capital
requirement for market risk.
(4) Positions which are purely stock financing may be excluded from the calculation of the capital
requirement for commodities risk.
(5) Interest and foreign exchange risk not covered by Articles 78 to 80 of this regulation shall be
included in the calculation of general risk for debt instruments and the calculation of foreign exchange
risk.
(6) Banks must protect themselves against the liquidity risk that may exist on some markets, when the
short position in a commodity falls due before the long position.
(7) For the purpose of the first paragraph of Article 80 of this regulation, the excess of a bank's long
(short) positions over its short (long) positions in the same commodity and identical commodity
futures, options and warrants shall be its net position in each commodity.
Banks may treat positions in commodity derivatives as positions in the underlying commodity as set
out in the first, second and third paragraph of Article 78 of the regulation.
(8) Banks may treat the following positions as positions in the same commodity:
(a) positions in different subcategories of commodities in cases where the subcategories are
deliverable against each other;
(b) positions in similar commodities if they are close substitutes and if a minimum correlation of
0.9 between price movements can be clearly established over a minimum period of one year.
Article 78
(capital requirements for particular instruments)
(1) Commodity futures and forward commitments to buy or sell individual commodities shall be
incorporated in the measurement system as notional amounts in terms of the standard unit of
measurement and assigned a maturity with reference to the expiry date.
Banks may use, as the capital requirement against the risk associated with commodity futures, if they
are traded on recognised exchanges listed in Annex II of this regulation, a sum that is equal to the
margin required for such contracts by the exchange in question.
Banks may use, as the capital requirement against the risk associated with OTC commodity
derivatives of the type referred to in this paragraph, if they are cleared by a recognised clearing house
referred to in Annex II of this regulation, a sum that is equal to the margin required for such contracts
by the clearing house in question.
(2) Commodity swaps, where one side of the transaction is a fixed price and the other the current
market price, shall be incorporated into the maturity ladder approach as set out in Article 79 of this
regulation, as a series of positions equal to the notional amount of the contract, with each position
corresponding to each payment on the swap. These positions are slotted into the maturity ladder set
out in Table 12 of the first paragraph of Article 79 of this regulation. These positions are treated as
long positions, if the bank is paying a fixed price and receiving a floating price, and short positions if
the bank is receiving a fixed price and paying a floating price.
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Commodity swaps where the sides of the transaction are in different commodities are to be reported in
the relevant reporting ladder for the maturity ladder approach.
(3) Options on commodities or on commodity derivatives must be treated as if they were positions
equal in value to the amount of the underlying instruments to which the options refer, multiplied by
their deltas. These positions may be netted off against any offsetting positions in the identical
underlying commodity or commodity derivative. The delta used shall be the delta calculated by a
recognised exchange listed in Annex II of this regulation where the options are traded. For options for
which there is no available delta from a recognised exchange, or OTC options, banks may calculate
the delta themselves, if they demonstrate that their delta-calculation model is appropriate. The Bank of
Slovenia may prescribe a delta-calculation methodology.
It is essential that banks also take safeguards against other risks associated with options, apart from the
delta calculation. Banks therefore must calculate the additional capital requirement for other risks
associated with options, e.g. risks of changes to the delta (gamma risk), or volatility of the underlying
instrument (vega risk). The gamma and vega computed by a recognised exchange listed in Annex II of
this regulation where the options are traded shall be used. For options for which there is no available
gamma and vega from a recognised exchange, or OTC options, banks may calculate the gamma and
vega themselves, if they demonstrate that their calculation models are appropriate. The Bank of
Slovenia may prescribe a calculation methodology for gamma and vega.
Banks may use, as the capital requirement against written exchange-traded commodity options, if they
are traded on recognised exchanges listed in Annex II of this regulation, a sum that is equal to the
margin required for such contracts by the exchange in question.
Banks may use, as the capital requirement for the contracts set out in the first paragraph of this article,
which are traded OTC and which are cleared by a recognised clearing house listed in Annex II of this
regulation, a sum that is equal to the margin required for such contracts by the clearing in question.
Banks may use, as the capital requirement on bought exchange-traded or OTC commodity options, a
sum that is equal to the requirement required for the type of commodity to which the options refer.
The capital requirement defined in the manner shall not exceed the market value of the options. The
requirement for a written OTC option shall be set in relation to the commodity underlying it.
(4) Warrants relating to commodities shall be treated in the same way as commodity options as
referred to in the third paragraph of this article.
(5) Banks that conclude repurchase agreements or commodities lending transactions which require
them to transfer commodities or guaranteed rights must include such commodities in the calculation of
its capital requirements for commodity risk.
Article 79
(calculation of capital requirement using the maturity ladder approach)
(1) Banks must use their maturity ladder for each commodity in accordance with Table 12 in this
paragraph. All positions in that commodity and all positions which are regarded as positions in the
same commodity in accordance with the eighth paragraph of Article 77 shall be assigned to the
appropriate maturity band. Physical stocks shall be assigned to the first maturity band.
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Table 12:
Maturity ladder for positions in commodity
Maturity band
(1)
0 ≤ 1 month
> 1 month ≤ 3 months
> 3 months ≤ 6 months
> 6 months ≤ 12 months
> 1 year ≤ 2 years
> 2 years ≤ 3 years
> 3 years
Spread rate (%)
(2)
1.50
1.50
1.50
1.50
1.50
1.50
1.50
(2) Banks may offset positions, which are treated as positions in the same commodity in accordance
with the eighth paragraph of Article 77 of this regulation, and assign them on a net basis to the
appropriate maturity bands. These are:
(a) positions in contracts maturing on the same date;
(b) positions in contracts maturing within 10 days of each other if the contracts are traded on
markets which have daily delivery dates.
(3) The banks must then calculate the sum of the long positions and the sum of the short positions in
each maturity band. The sum of the long (short) position that are matched by the short (long) positions
in a given maturity band shall be the matched weighted position in that maturity band, while the
residual long or short position shall be the unmatched position for the same band.
(4) That part of the unmatched long (short) position for a given maturity band that is matched by the
unmatched short (long) position in the next maturity band shall be the matched position between two
maturity bands. That part of the unmatched long or short position between two bands shall be the
unmatched position.
(5) The capital requirement for each commodity shall be calculated on the basis of the relevant
maturity ladder as the sum of the following:
(a) the sum of the matched long and short positions, multiplied by the appropriate spread rate as
indicated in Table 12 in the first paragraph of this article for each maturity band and by the spot
price for the commodity;
(b) the matched position between two maturity bands for each maturity band into which an
unmatched position is carried forward, multiplied by 0.6% (carry rate) and by the spot price for
the commodity;
(c) the residual unmatched positions (the remainder after matching is complete) multiplied by
15% (outright rate) and by the spot price for the commodity.
(6) The overall capital requirement for commodity risk shall be calculated as the sum of the capital
requirements calculated for each commodity, in accordance with the first to fifth paragraphs of this
article.
Article 80
(calculation of capital requirement using the simplified approach)
(1) The capital requirement for each commodity shall be calculated as the sum of:
(a) 15% of the net position, long or short, multiplied by the spot price for the commodity;
(b) 3% of the gross position, long plus short, multiplied by the spot price for the commodity.
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(2) The overall capital requirement for commodity risk shall be calculated as the sum of the capital
requirements calculated for each commodity, in accordance with the first paragraph of this article.
8.
USE OF INTERNAL MODELS TO CALCULATE CAPITAL
REQUIREMENTS FOR POSITION RISK, EXCHANGE RATE RISK
AND/OR COMMODITIES RISK
8.1.
Permission to Use Internal Models
Article 81
(general)
Banks may use internal models or a combination of models and the methods defined in Articles 15 to
42, 75 and 76, and 77 to 80 of this regulation to calculate the capital requirement for position risk,
exchange rate risk and/or commodity risk, but only if authorised by the Bank of Slovenia or on the
basis of the decision set out in the third, fourth and sixth paragraphs of Article 291 of the ZBan-1, on
the use of internal models to calculate the capital requirements for position risk, exchange rate risk
and/or commodity risk, and the use of combinations of internal models and methods set out in Articles
15 to 42, 75 and 76, and 77 to 80 of this regulation.
Article 82
(conditions and documentation for granting permission)
(1) The Bank of Slovenia shall grant permission for the use of internal models to calculate capital
requirements for position risk, foreign currency risk and/or commodity risk, if, in addition to its risk
management system being appropriately planned and fully implemented, banks shall implement the
following conditions:
(a) the qualitative standards set out in Article 84 to 87 of this regulation;
(b) quantitative standards set out in Article 88 of this regulation;
(c) the validation of models and back-testing is implemented in accordance with Articles 90 and
91 of this regulation;
(d) additional conditions for internal models to calculate capital requirements for specific risk, if
the bank uses those set out in Article 89 of this regulation.
(2) Banks shall demonstrate that they meet the conditions specified in the first paragraph of this article
by submitting the following documentation set out in Annex VIII as part of the request for permission:
(a) documentation on general information on internal models and combined use of internal
models and methods defined in Articles 15 to 42, 75 and 76 and 77 to 80 of this regulation, if the
bank decides on such use;
(b) documentation on compliance with the qualitative standards set out in Article 84 to 87 of this
regulation;
(c) documentation on compliance with the quantitative standards set out in Article 88 of this
regulation;
(d) documentation on compliance with the criteria for validation of internal models and backtesting in accordance with Articles 90 and 91 of this regulation;
(e) documentation on meeting additional conditions for the approval of internal models to
calculate capital requirements for specific risk referred to Article 89 of this regulation, if used by
the bank.
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(3) Banks must be in continual compliance with the conditions referred to in the first paragraph of this
article from the day the Bank of Slovenia granted its permission for the use of internal models to
calculate capital requirement for position risk, exchange rate risk and/or commodity risk.
(4) In the Bank of Slovenia's order to grant permission for the use of internal methods to calculate
capital requirements for position risk, foreign currency risk and/or commodity risk, it shall be stated
whether or not, in accordance with Article 87 of this regulation, the bank may use empirical
correlations with risk categories and across them. Banks that do not comply with the conditions for use
of these empirical correlations must immediately submit a request to amend the permission to the
Bank of Slovenia.
(5) In the Bank of Slovenia's order to grant permission for the use of internal methods to calculate
capital requirements for position risk, foreign currency risk and/or commodity risk, it shall be defined
the combined use of the internal models and methods defined in Articles 15 to 42, 75 and 76, and 77 to
80 of this regulation, if a bank decides to use a combined approach. If a bank intends to change its
combined use of internal models and methods defined in Articles 15 to 42, 75 and 76, and 77 to 80 of
the regulation, it must acquire a new permission from the Bank of Slovenia.
(6) More detailed instructions on the form for requesting a Bank of Slovenia permission to use internal
models to calculate capital requirement for position risk, exchange rate risk and/or commodity risk or
the form for requesting an amendment to this permission are set out in Annex VIII of this regulation.
(7) The provisions of the first to sixth paragraphs of this article shall also apply mutatis mutandis
when an EU parent bank and its subsidiaries or banks and other institutions subordinate to an EU
parent financial holding company intend to use internal models in a bank group and, on the basis of
Article 291 of the ZBan-1, jointly submit a request for permission to use internal models to calculate
capital requirements for position risk, exchange rate risk and/or commodity risk.
(8) The Bank of Slovenia shall issue an EU parent bank or a bank controlled by an EU parent financial
holding company a permission to use internal methods to calculate capital requirement for position
risk, exchange rate risk and/or commodity risk, on the basis of the decision set out in the third and
fourth paragraphs of Article 291 of the ZBan-1.
(9) The Bank of Slovenia shall issue a subsidiary bank with registered office in the Republic of
Slovenia that has submitted a request for issue of a permission together with an EU parent bank or a
bank controlled by an EU financial holding company with a permission to use internal methods to
calculate capital requirements for position risk, exchange rate risk and/or commodity risk, on the basis
of the decision set out in the third, fourth and sixth paragraphs of Article 291 of the ZBan-1.
Article 83
(withdrawal of permission)
(1) The Bank of Slovenia shall withdraw the permission to use internal models to calculate its capital
requirements for position risk, foreign exchange risk and commodities risk:
(a) if banks act in contradiction with the Bank of Slovenia order, or an order with additional
measures ordering the correction of a violation in fulfilment of the conditions set out in the first
paragraph of Article 82 of this regulation;
(b) if banks seriously violate the conditions set out in the first paragraph of Article 82 of this
regulation;
(c) if banks act in contradiction with the Bank of Slovenia's order, or an order with additional
measures ordering the correction of a violation relating to inaccuracy in the calculation of internal
models (when numerous overshootings in the actual/hypothetical changes in portfolio value
compared to changes in portfolio value calculated by the model indicator the inaccuracy of
internal models).
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(2) The Bank of Slovenia shall also withdraw a bank’s permission to use advance approach in a
banking group on the basis of a decision on the withdrawal of a permission to use internal methods to
calculate capital requirements for position risk, exchange rate risk and/or commodity risk in a banking
group, which shall follow mutatis mutandis the third, fourth and sixth paragraphs of Article 291 of the
ZBan-1.
8.2.
Qualitative Standards
Article 84
(general)
Banks using internal models to calculate their capital requirements for position risk, foreign exchange
risk and commodities risk must comply with the following qualitative standards:
(a) the internal risk measurement model must be closely integrated with the daily risk
management process and must serve as the basis for reporting risk exposures to senior
management;
(b) they must have a risk management unit that is organisationally and operationally independent
of business trading units, and it must report directly to senior bank management. The unit must be
responsible for designing and implementing the risk management system and the production and
analysis of daily reports on the output of the model and on the appropriate measures to be taken in
terms of trading limits. The unit must also conduct the initial and on-going validation of the
internal model;
(c) banks’ management board and senior management must be actively involved in the risk
management process; the daily reports produced by the risk management unit must be reviewed
by a level of management with sufficient authority to enforce both reductions of positions taken
by individual traders as well as in the institution's overall risk exposure;
(d) they must have sufficient numbers of staff skilled in the use of models in the trading, risk
management, auditing and back-office areas;
(e) they must have established procedures for monitoring and ensuring compliance with a
documented set of internal policies and controls concerning the overall operation of the risk
measurement system;
(f) their models must have a proven track record of reasonable accuracy in measuring risks;
(g) they must frequently conduct a programme of stress testing and the results of these tests are
reviewed by senior management and reflected in the policies and limits it sets. When stress
testing detects particular sensitivity to various circumstances, the bank must immediately adopt
measures to manage the risks appropriately. The stress test programme shall particularly address
illiquidity of markets in stressed market conditions, concentration risk, one way markets (markets
in which either supply or demand dominates), event and jump-to-default risks, non-linearity of
products, deep out-of-the-money positions, positions subject to the gapping of prices and other
risks that may not be captured appropriately in a VaR model. The shocks applied shall reflect the
nature of the portfolios and the time it could take to hedge out or manage risks under severe
market conditions;
(h) the risk management unit must regularly carry out back-testing;
(i) the risk measurement system must be subject to regular reviews by the internal audit service;
the reviews must cover the operations of the business trading units and the risk management
units; at least once a year, banks must conduct an overall review of risk management processes,
which must include at least:
− the adequacy of the documentation of the risk management system and processes and the
organisation of the risk management unit;
− the integration of market risk measures into daily risk management and the integrity of the
management information system;
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− the process for approving the risk pricing models and valuation models used by front and
back-office staff;
− the scope of market risks captured by the risk measurement model and the validation of any
significant changes in the risk measurement process;
− the accuracy and completeness of position data, the accuracy and appropriateness of
volatility and correlation assumptions, and the accuracy of valuation and risk sensitivity
calculations;
− the verification process the institution employs to evaluate the consistency, timeliness and
reliability of data sources used to run internal models, including the independence of such
data sources; and
− the verification process used to evaluate the back-testing that is conducted to assess the
models' accuracy.
Article 85
(other option risks)
Models must accurately capture all the material price risks of options or option-like instruments. All
other risks not captured in the model must be adequately covered by own funds.
Article 86
(risk factors)
Internal models must capture a sufficient number of risk factors, depending on a bank's level of
activity in the respective markets and in particular the following:
(a) interest rate risk:
internal models must incorporate a set of risk factors corresponding to the interest rates in each
currency in which the bank has interest rate sensitive on- or off-balance sheet positions. The banks
must model the yield curves using one of the generally accepted approaches. For material exposures to
interest rate risk in the major currencies and markets, the yield curve shall be divided into a minimum
of six maturity segments, to capture the variations of volatility of rates along the yield curve. The
models must also capture the risk of less than perfectly correlated movements between different yield
curves;
(b) exchange rate risk:
internal models must incorporate risk factors corresponding to gold and to the individual foreign
currencies in which the institution's positions are denominated;
for CIUs the actual foreign exchange positions of the CIU shall be taken into account. Banks may rely
on third party reporting of the foreign exchange position of the CIU, where the correctness of this
report is adequately ensured. If banks are not aware of the foreign exchange positions of a CIU, this
position should be carved out and treated in accordance with the first and second paragraphs of Article
75 of this regulation.
(c) equity risk:
models must use a separate risk factor at least for each of the equity markets in which the bank holds
significant positions;
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(d) commodity risk:
models must use a separate risk factor at least for each commodity in which banks hold significant
positions. The models must also capture the risk of less than perfectly correlated movements between
similar, but not identical, commodities and the exposure to changes in forward prices arising from
maturity mismatches. Models must also take account of market characteristics, and particularly
delivery dates and the scope provided to traders to close out positions.
Article 87
(use of empirical correlations)
Banks may use empirical correlations within risk categories and across risk categories if their system
for measuring correlations is sound and implemented with integrity.
8.3.
Quantitative Standards
Article 88
(general)
Banks’ internal models must take into consideration the following quantitative standards in calculating
value-at-risk (VaR):
(a) at least daily calculation of the value-at-risk measure;
(b) the value-at-risk (VaR) must be calculated with a 99th percentile, one-tailed confidence
interval (effective trading loss cannot exceed losses calculated using the model in more than 1
case out of 100);
(c) In calculating the value-at-risk, a factor that reflects price volatility over a 10-day period
(holding period) shall be used;
(d) the value-at-risk is calculated on the basis of an effective historic observation period of at least
one year, except where a shorter observation period is justified by a significant upsurge in price
volatility;
(e) the data sets used for calculating value-at-risks shall be updated at least once every three
months, and whenever market prices are subject to material changes this shall be done more
often.
8.4.
Additional Conditions for the Use of Internal Models to Calculate Capital
Requirements for Specific Risk
Article 89
(general)
(1) If banks also use internal models to calculate capital requirements for specific risk arising from
debt instruments and equities, the models must meet the following conditions:
(a) they must explain the historical price variation in the portfolio;
(b) they must capture concentration in terms of magnitude and changes of composition of the
portfolio;
(c) they cannot be too sensitive to adverse market movement (they must be robust);
(d) they must be validated through back-testing aimed at assessing whether specific risk is being
accurately captured;
(e) they must capture basis risk; banks must demonstrate that the internal model is sensitive to
material idiosyncratic differences between similar but not identical positions;
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(f) they must capture event risk.
(2) The banks referred to in the first paragraph of this article must also meet the following conditions:
(a) when a bank is subject to event risk that is not reflected in its VaR (value-at-risk) measure,
because it is beyond the 10-day holding period and 99-percent confidence interval (low
probability and high severity events), the bank must ensure that the impact of such events is
factored in to its internal capital assessment;
(b) internal models must conservatively assess the risk arising from less liquid positions and
positions with limited price transparency under realistic market scenarios. In addition, the models
must also meet minimum data standards. Proxies must be appropriately conservative and may
only be used where the data available is insufficient or is not reflective of the true volatility of a
position or portfolio.
(3) The banks referred to in the first paragraph of this article must take into account the development
of techniques and best practice in the use of models.
(4) Furthermore, the banks referred to in the first paragraph of this article must have a method in place
to capture, in the calculation of its capital requirements, the default risk of its trading book positions
that exceeds the default risk captured by the value-at-risk measure. To avoid double counting when
calculating their incremental default risk charge (additional capital requirement for default risk), banks
may take into account the extent to which default risk has already been incorporated into the value-atrisk measure, especially for risk positions that could and would be closed within 10 days in the event
of adverse market conditions or other indications of deterioration in the credit environment. If banks
capture their incremental default risk through a surcharge, they shall have methodologies for
validating the measure in place.
Banks must demonstrate that their approach meets soundness standards comparable to the IRB
approach, under the assumption of a constant level of risk, and adjusted where appropriate to reflect
the impact of liquidity, concentrations, hedging and optionality.
Banks that do not capture the increment default risk with internal models, must calculate the surcharge
on the basis of the standardised approach or the IRB approach.
(5) For cash or synthetic securitisation exposures that would be subject to a deduction treatment set out
in Articles 14, 16 and 22 and 26 and 29 of the Securitisation Regulation, or risk weighted at 1250% as
set out in the Securitisation Regulation, these positions shall be subject to a capital requirement that is
no less than the requirement set forth under that treatment. Banks dealing in these exposures may
apply a different approach, if they can demonstrate, in addition to trading intent, that a liquid two-way
market exists for the securitisation exposures or, in the case of synthetic securitisations that rely solely
on credit derivatives, for the securitisation exposures themselves or all their constituent risk
components. A two-way market shall be deemed to exist, if there are independent good faith offers to
buy and sell so that a price reasonably related to the last sales price or current good faith competitive
bid and offer quotations can be determined within one day and settled at such a price within a
relatively short time conforming to trade custom.
Banks may act in a different manner, if they have sufficient market data to ensure that they fully
capture the concentrated default risk of these exposures in their internal models for measuring the
incremental default risk in accordance with the rules set out in the fourth paragraph of this article.
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8.5.
Internal Model Validation and Back-Testing
Article 90
(validation processes)
Banks must have adequate processes in place to ensure that their internal models have been adequately
validated by suitably qualified parties independent of the model development process, and to ensure
that they are conceptually sound and adequately capture all material risks. Validation must be
conducted when internal models are initially developed and when any significant changes are made.
Validation must also be conducted on a periodic basis, especially when significant structural changes
in the market or changes to the composition of the portfolio occur that might lead to the internal
models no longer being adequate. Banks must take developments in technique and best practice into
account when validating models. Model validation must not be limited to back-testing, but must
include at least the following:
(a) tests to demonstrate that any assumptions made within the internal model are appropriate and
do not underestimate or overestimate the risk;
(b) in addition to the back-testing defined in Articles 90 and 91 of this regulation, banks must also
carry out their own internal model validation tests in relation to the risks and structures of their
portfolios;
(c) the use of hypothetical portfolios to demonstrate that the internal models can account for
particular structural features that may arise, for example material basis risks and concentration
risk.
Article 91
(back-testing)
(1) Banks must monitor the accuracy and performance of their internal models by conducting backtesting. Back-testing must provide a comparison for each business day between the one-day value-atrisk measure generated by the internal model to calculate the portfolio's end-of-day positions and the
one-day change of the portfolio's value by the end of the subsequent business day.
(2) Banks must demonstrate their capability to perform back-testing on both actual and hypothetical
changes in the portfolio's value. Back-testing on hypothetical changes in the portfolio's value shall be
based on a comparison between the portfolio's end-of-day value and, assuming unchanged positions,
its value at the end of the subsequent day. Banks must carry out appropriate measures to improve their
back-testing programmes, if they are deemed deficient.
Banks must perform back-testing on hypothetical trading portfolio (using changes in portfolio value
that would occur were end-of-day positions to remain unchanged) and on actual trading (excluding
fees, commissions, and net interest income) outcomes.
8.6.
Calculation of Capital Requirements
Article 92
(capital requirement amount)
(1) The capital requirements for position risk, exchange rate risk and/or commodities risk is the higher
figure of:
(a) the previous day’s value-at-risk measure, plus, where appropriate, the incremental default risk
charge (additional capital requirement for default risk), calculated in accordance with the fourth
paragraph of Article 89 of this regulation;
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(b) the average daily value-at-risk for the preceding 60 business days, multiplied by a factor of at
least 3, adjusted by the plus factor referred to in the second paragraph of this article, to which is
added, where appropriate, the incremental default risk charge, calculated in accordance with the
fourth paragraph of Article 89 of this regulation.
(2) The multiplication factor from point (b) of the first paragraph of this article shall be increased by a
plus-factor ranging from 0 to 1 in accordance with Table 14 of this paragraph, depending on the
number of overshootings over the limits set out under the established value-at-risk model, and
established by means of back-testing for the preceding 250 business days. The overshootings must be
calculated consistently by means of actual and hypothetical changes in the portfolio value. An
overshooting shall mean a one-day change in the portfolio value, which overshoots the appropriate
one-day measure of value-at-risk (VaR), calculated by applying the model. In order to determine the
plus factor, the bank shall consistently determine the number of excesses on limits at least quarterly.
Table 14: Plus factors for overshooting actual/hypothetical changes in the portfolio value with respect
to changes calculated by the model
Number of
overshootings
Plus factor
(1)
(2)
Fewer than 5
0.00
5
0.40
6
0.50
7
0.65
8
0.75
9
0.85
10 or more
1.00
For the purpose of ongoing monitoring of the adequacy of the plus factor, banks must immediately,
and no later than within 5 business days, notify the Bank of Slovenia of overshootings identified by
means of back-testing, which would trigger an increase in the plus factor.
9.
CAPITAL REQUIREMENT FOR RISK OF EXCEEDING THE MAXIMUM
ALLOWABLE EXPOSURE FROM TRADING
Article 93
(calculation of capital requirement)
(1) Banks must calculate the capital requirement for exceeding the maximum-permitted exposure from
the trading book, if the total exposure calculated in accordance with Article 4 of the Regulation on
Large Exposures of Banks and Savings Banks (Official Gazette of the Republic of Slovenia, No
135/06; hereinafter: Large Exposure Regulation), overshoots the restrictions set out in Article 8 of the
Large Exposure Regulation.
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(2) The capital requirement for the risk of exceeding the maximum allowable exposure from the
trading book shall be calculated on the basis of the individual trading exposures to individual persons
which requires the calculation of the highest capital requirement for specific risk and/or the highest
capital risk for counterparty/settlement risk and CCR and the amount which equals the amount of the
excess trading exposure (overshooting referred to in the first paragraph of Article 11 of the Large
Exposure Regulation).
(3) If the excess trading exposure persists for 10 days or less, the additional capital requirement for the
risk of exceeding the maximum allowable exposure shall be 200% of capital requirement for specific
risk and/or counterparty/settlement risk for the relevant exposures referred to in the second paragraph
of this article.
(4) If the excess trading exposure persists for over 10 days, banks must classify the individual
exposures referred to in the second paragraph of this article in an appropriate category of column 1 of
Table 15 of this paragraph in ascending order (from lowest to highest) of their capital requirement for
specific risk and/or counterparty/settlement risk. Banks shall calculate the capital requirement as the
sum of the specific risk requirements and/or the counterparty/settlement risk, multiplied by the
corresponding factor in column 2 in Table 15 of this paragraph.
Table 15: Factors for increasing capital requirements for risk of exceeding the maximum allowable
exposure
10.
Excess over capital
limits
Factor
(1)
(2)
up to 40%
200%
From 40% to 60%
300%
From 60% to 80%
400%
From 80% to 100%
500%
From 100% to 250%
600%
over 250%
900%
SPECIAL FEATURES OF CALCULATING CONSOLIDATED CAPITAL
REQUIREMENTS FOR MARKET RISK
Article 94
(possibility of offsetting positions)
(1) For the purposes of calculating capital requirements for position risk and risk from exceeding the
maximum allowable exposure from trading on a consolidated basis, it may be permitted to offset
positions in trading books of other institutions in accordance with the rules set out in Articles 15 to 42
and/or Articles 81 to 92 of this regulation or in accordance with the Large Exposure Regulation and
Article 93 of this regulation.
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For the purposes of calculating capital requirements for foreign exchange risk on a consolidated basis,
foreign exchange positions in one institution may be permitted to offset foreign exchange positions in
other institutions, in accordance with the rules set out in Articles 75 and 76 and/or Articles 81 to 92 of
this regulation.
For the purposes of calculating capital requirements for commodities risk on a consolidated basis,
commodities positions in one institution may be permitted to offset commodities positions in other
institutions, in accordance with the rules set out in Articles 77 and 80 and/or Articles 81 to 92 of this
regulation.
(2) For the purposes of calculating capital requirements on a consolidated basis, the offsetting referred
to in the first paragraph of this article may only be permitted with institutions that operate on the basis
of a permission from the Bank of Slovenia or Securities Market Agency. Furthermore, the following
conditions must also be fulfilled:
(a) the institutions in question must have sufficient capital on an individual basis;
(b) the institutions in question must have concluded contracts guaranteeing mutual financial
support between them.
(3) The offsetting referred to in the first paragraph of this article may also be permitted with
institutions operating on the basis of permission from the competent authorities of other member
states, if they fulfil the criteria from points (a) and (b) of the second paragraph of this article, and if the
institutions are obliged to fulfil on an individual basis the capital requirements imposed in Articles 18,
20 and 28 of Directive 2006/49/EC of the European Parliament and the Council on the capital
adequacy of investment firms and credit institutions (hereinafter: Directive 2006/49/EC).
(4) The offsetting referred to in the first paragraph of this article may also be permitted with firms
from the appropriate third countries listed in Annex V of this regulation, if, in addition to the
conditions set out in points (a) and (b) of the second paragraph of this article, the following conditions
are also fulfilled:
(a) if they operate on the basis of a permission from a competent authority in the appropriate third
country in question, and if they satisfy the definition of a bank, or are classified as an investment
firm from an appropriate third country;
(b) if on an individual basis they meet capital requirements that comply with the capital
requirements laid down in Directive 2006/49/ES;
(c) no regulation exists in the third country in question that would significantly affect the
conclusion of contracts to guarantee mutual support between members of a group.
11.
TRANSITIONAL AND FINAL PROVISION
Article 95
(postponement of use of standardised approach to calculating credit risk capital requirements)
Banks that pursuant to Article 405 of the Banking Act (ZBan-1) defer the start of use of the
standardised approach for calculating capital requirements for credit risk until 1 January 2008, shall
until that date, when calculating capital requirements for market risk:
(a) for the purposes of the first paragraph of Article 46 of this regulation apply, instead of Annex I
of this regulation, Annex I of the Regulation on the Capital Adequacy of Banks and Savings
Banks (Official Gazette of the Republic of Slovenia, Nos 24/02, 85/02, 22/03, 36/04, 68/04,
103/04, 124/04, 62/05, 67/05 and 74/06) and, instead of the provisions of Articles 47 to 73 of this
regulation, shall apply Item 14 and Annex III of the Regulation on the Capital Adequacy of Banks
and Savings Banks;
(b) instead of the fourth paragraph of Article 46 of this regulation, apply Item 28.2.2 of the
Regulation on the Capital Adequacy of Banks and Savings Banks;
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(c) read references to Article 4 of the Large Exposure Regulation in Article 93 of this regulation
as references to Chapter XI of the Regulation on the Capital Adequacy of Banks and Savings
Banks;
(d) read references to Article 8 of the Large Exposure Regulation in Article 93 of this regulation
as references to Chapter III of the Regulation on the Capital Adequacy of Banks and Savings
Banks (Official Gazette of the Republic of Slovenia, Nos 24/02, 22/03, 65/03 and 44/04).
(2) Banks that begin to use the standardised approach or the IRB approach to calculate the capital
requirement for credit risk during 2007 must begin to apply the provisions of this regulation from the
date it begins using the above mentioned approach.
Article 96
(entry into force and commencement of application of the regulation)
This regulation shall commence application on 1 January 2007, except for the provisions relating to
own estimates of LGDs (and CFs), which shall commence application on 1 January 2008.
President
of the Governing Board of
the Bank of Slovenia
dr. Marko Kranjec
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ANNEX I: TYPES OF DERIVATIVES
1. INTEREST RATE CONTRACTS
(a)
(b)
(c)
(d)
(e)
(f)
single-currency interest rate swaps
basis swaps
forward rate agreements
interest rate futures
interest rate options purchased
other derivative financial instruments of similar nature.
2. FOREIGN EXCHANGE CONTRACTS AND CONTRACTS CONCERNING GOLD
(a)
(b)
(c)
(d)
(e)
(f)
cross-currency interest rate swaps
forward foreign exchange contracts
currency futures
currency options purchased
other derivative financial instruments of similar nature
contracts concerning gold of a nature similar to instruments in (a) to (e).
3. CONTRACTS OF A SIMILAR NATURE
Contracts of a similar nature include contracts similar to those listed in points 1(a) to (e) and 2(a) to
(d) that are related to a different basis. These include as a minimum the following financial
instruments:
(a) options, futures, swaps, forward rate agreements and any derivative contracts based on
securities, currencies, interest rates or yields, or other derivatives, financial indices or financial
measures that can be settled physically or in cash;
(b) options, futures, swaps, forward rate agreements and any derivative contracts based on
commodities that must be settled in cash or may be settled with cash at the option of one of the
parties;
(c) options, futures, swaps, and any derivative contract relating to commodities that can be
physically settled either by trading on a stock exchange and/or on Multilateral Trading Facilities
(MTF);
(d) options, futures, swaps, forward contracts, and any derivative contracts based on commodities
that can be physically settled and are not dealt with in point (c) and not traded for commercial
purposes, which have the characteristics of other derivative financial instruments, and which may
be settled via recognised clearing houses or are subject to daily settlements;
(e) financial contracts for differences;
(f) options, futures, swaps, forward rate agreements and any other derivative contracts relating to
climatic variables, freight rates, emission allowances or inflation rates or other official economic
statistics that must be settled in cash or may be settled in cash at the option of one of the parties,
as well as any other derivative contracts relating to assets, rights, obligations, indices and
measures not otherwise mentioned in this part, which have the characteristics of other derivative
financial instruments, having regard to whether they are traded on a regulated market or an MTF,
are cleared and settled through recognised clearing houses or are subject to daily settlements.
4. CREDIT DERIVATIVES
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ANNEX II: RECOGNISED EXCHANGES AND CLEARING HOUSES
Banks may request that stock exchanges or clearing houses be added to this list.
Recognised stock exchanges
Alberta Stock Exchange
American Stock Exchange
Amsterdam Pork and Potato Terminal Market (Termijnmarkt Amsterdam BV)
Amsterdam Stock Exchange (Amsterdamse Effectenbeurs)
Antwerp (Effectenbeursvennootschap van Antwerpen)
Athens Stock Exchange (ASE)
Australian Stock Exchange
Basle Stock Exchange (Basler Effektenborse)
Barcelona Stock Exchange (Bolsa de Valores de Barcelona)
Belgian Futures & Options Exchange (BELFOX)
Berlin Stock Exchange (Berliner Börse)
Bilbao Stock Exchange (Bolsa de Valores de Bilbao)
Bologna Stock Exchange (Borsa Valori de Bologna)
Bordeaux (Bourse de Bordeaux)
Bremen Stock Exchange (Bremer Wertpapierbörse)
Brussels Stock Exchange (Société de la Bourse des Valeurs Mobilières)/ (Effecten Beursvennootschap
van Brussel)
Chicago Board of Trade
Chicago Board Options Exchange
Chicago Mercantile Exchange
Coffee, Sugar and Cocoa Exchange Inc.
Copenhagen Stock Exchange (Kobenhavns Fondsbors)
DTB Deutsche Terminbörse
The Dublin Stock Exchange
Düsseldorf Stock Exchange (Rheinisch-Westfalische Börse zu Düsseldorf)
European Options Exchange
Financiele Termijnmarkt, Amsterdam
Finnish Options Exchange
Florence Stock Exchange (Borsa Valori di Firenze)
Frankfurt Stock Exchange (Frankfurter Wertpapierbörse)
Genoa Stock Exchange (Borsa Valori di Genova)
Geneva Stock Exchange (Bourse de Geneve)
Hamburg Stock Exchange (Hanseatische Vertpapier Börse Hamburg)
Hannover (Niedersächsische Börse zu Hannover)
Helsinki Stock Exchange (Helsingin Arvopaperipörssi Osuuskunta)
Hong Kong Futures Exchange
International Petroleum Exchange of London Ltd
Irish Futures & Options Exchange (IFOX)
Kansas City Board of Trade
Lille (Bourse de Lille)
Lisbon Stock Exchange (Bolsa de Valores de Lisboa)
Ljubljana Stock Exchange (Ljubljanska Borza d.d.)
London International Financial Futures & Options Exchange
London Metal Exchange Ltd
London Stock Exchange
Luxembourg Stock Exchange (Société de la Bourse de Luxembourg SA)
Lyon (Bourse de Lyon)
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Madrid Stock Exchange (Bolsa de Valores de Madrid)
Marché à Terme International de France (MATIF)
Marché des Options Négociables de Paris (MONEP)
Marseille (Bourse de Marseille)
MEFF Renta Fija
MEFF Renta Variable
Mercato Italiano Derivati (IDEM)
Mercato Italiano Futures (MIF)
Mid American Commodity Exchange
Milan Stock Exchange (Borsa Valori de Milano)
Montreal Exchange
Munich Stock Exchange (Bayerische Börse in München)
Nagoya Stock Exchange
Nancy (Bourse de Nancy)
Nantes (Bourse de Nantes)
Naples Stock Exchange (Borsa Valori di Napoli)
National Association of Securities Dealers Incorporated
(NASDAQ)
New York Cotton Exchange
New York Futures Exchange
New York Mercantile Exchange
New York Stock Exchange
OM Stockholm AB
OMLX, The London Securities and Derivatives Exchange Ltd
Oporto Stock Exchange (Bolsa de Valores do Porto)
Osaka Securities Exchange
Oslo Stock Exchange (Oslo Bors)
Pacific Stock Exchange
Palermo Stock Exchange (Borsa Valori de Palermo)
Paris Stock Exchange
Philadelphia Board of Trade
Philadelphia Stock Exchange
Rome Stock Exchange (Borsa Valori di Roma)
Singapore International Monetary Exchange Limited (SIMEX)
Stockholm Stock Exchange (Stockholm Fondbörs)
Stock Exchange of Hong Kong Ltd
Stock Exchange of Singapore
Stuttgart Stock Exchange (Baden-Württembergische Wertpapierbörse zu Stuttgart)
Swiss Futures and Options Exchange (SOFFEX)
Sydney Futures Exchange
Tokyo Stock Exchange
Tokyo International Financial Futures Exchange
Toronto Stock Exchange
Trieste Stock Exchange (Borsa Valori di Trieste)
Turin Stock Exchange (Borsa Valori de Torino)
Valencia Stock Exchange (Bolsa de Valores de Valencia)
Vancouver Stock Exchange
Venice Stock Exchange (Borsa Valori de Venezia)
Vienna Stock Exchange
Zurich Stock Exchange (Zürcher Börse)
Recognised clearing houses
Austrian Kontroll Bank (OKB)
Board of Trade Clearing Corporation
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Cassa di Compensazione e Garanzia S. p. A (CCG)
Central Securities Clearing Corporation (KDD Centralna Klirinško Depotna Družba d.d.)
Commodity Clearing Corporation
The Emerging Markets Clearing Corporation
European Options Clearing Corporation Holding BV (EOCC)
Guarantee Fund for Danish Options and Futures (Garantifonden for Danske Optioner OG Futures)
(FUTOP)
Kansas City Board of Trade Clearing Corporation
Hong Kong Futures Exchange Clearing Corporation Ltd
Hong Kong Securities Clearing Company Ltd
London Clearing House (LCH)
Norwegian Futures & Options Clearing House (Norsk Opsjonssentral A.S.)
N.V. Nederlandse Liquidatiekas (NLKKAS)
OM Stockholm AB (OM)
Options Clearing Corporation
OTOB Clearing Bank AG (OTOB)
Société de Compensation des Marchés Conditionnels (SCMC)
Sydney Futures Exchange Clearing House (SFECH Ltd)
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ANNEX III
Recipient:
Banka Slovenije
Slovenska cesta 35
1505 Ljubljana
Applicant:
(Name and registered office of the bank, list of legal representatives entitled to submit an application or issue an authorisation to submit an
application)
Authorised person 1:
(Personal name or company name, address of residence or registered office)
APPLICATION FOR THE ISSUE OF BANK OF SLOVENIA'S PERMISSION TO USE
SENSITIVITY MODELS TO CALCULATE POSITIONS IN DERIVATIVES
Contact person in charge of
the application
Position
Title
Telephone
E-mail
Signatures of legal representatives and/or authorised persons
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
___________________________________________________________________________
______
1
Only completed if the bank has one. In that case the appropriate authorisation must be submitted with the
application.
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JUSTIFICATION OF THE APPLICATION
SECTION A – Documentation on types of financial instruments for which you intend to use the
sensitivity model and the basic information on the models, as defined in point (a) of the fourth
paragraph of Article 22 of this regulation.
A1.
Submit a table of the sensitivity models you intend to use and for each one state the product
for which it will be used (types of financial instrument set out in Articles 17 to 20 of this
regulation, and bonds that are amortised over the residual life, rather than one final repayment
of principal).
A2.
Describe the sensitivity models and the sensitivity assessment methodology.
SECTION B – Documentation proving that the models generate positions that have the same
sensitivity to interest rate changes as the underlying instruments, as set out in point (b) of the
fourth paragraph of Article 22 of this regulation. Submit the required information and
documentation for each sensitivity model intended for use.
B1.
Describe the model, with a special emphasis on the sensitivity assessment methodology.
B2.
How do you take into account the underlying financial instruments in assessing sensitivity?
SECTION C – Documentation that demonstrates that the sensitivity is assessed with reference to
independent movements in sample rates across the yield curve, with at least one sensitivity point
in each of the maturity bands set out in Table 2 of the fourth paragraph of Article 32, as
stipulated in point (c) of the fourth paragraph of Article 22 of this regulation. Submit the
required information and documentation for each sensitivity model intended for use.
C1.
Describe in detail the design of your own yield curve, including:
− what period is taken into account;
− which financial instruments are taken into account?
C2.
What assumptions are used in designing your own yield curve, for example:
− the use of positive or negative movement in the yield curve and explanation of this use;
− range of changes taken into account (one or more base points based on the maturity or
financial instrument);
− how many maturity bands or points representing the yield curve do you use?
C3.
Describe the reasons for the use of individual assumptions in designing changes in your own
yield curve.
C4.
Which sample interest rates are used to assess sensitivity?
C5.
Banks should also add mutatis mutandis the required documentation from the application for
issue of the Bank of Slovenia permission for the use of internal models to calculate capital
requirement for position risk, exchange rate risk and/or commodity risk set out in Annex VIII.
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ANNEX IV: VERY LIQUID EQUITY INDICES
Individual shares on the following indices shall be deemed as liquid:
Country
Australia
Index
All Ordinaries
Austria
Hong Kong
ATX
(Austrian Korea
Traded Index)
BEL20
The
Netherlands
TSE35, TSE 100, Singapore
TSE 300
CAC40, SBF 250
Spain
DAX
Sweden
Dow Jones Stoxx Switzerland
50 Index, FTSE
Eurotop
300,
MSCI Euro Index
Hang Seng 33
UK
Italy
MIB-30
Belgium
Canada
France
Germany
European
Country
Japan
USA
70
Index
Nikkei 225, Nikkei
300, TOPIX
Kospi
AEX
Straits Time Index
IBEX 35
OMX
SMI
FTSE 100, FTSE
Mid 250, FTSE All
Share
S&P 500, Dow
Jones
Industrial
Average,
NASDAQ
Composite, Russell
2000
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ANNEX V: LIST OF APPROPRIATE THIRD COUNTRIES
The following countries shall be dealt with as appropriate third countries for the purposes of this
regulation:
Australia
Canada
Hong Kong
Japan
Singapore
Switzerland
USA
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ANNEX VI
Recipient:
Bank of Slovenia
Slovenska cesta 35
1505 Ljubljana
Applicant:
(Name and registered office of bank, list of legal representatives entitled to submit an application or issue an authorisation to submit an
application)
Authorised person 1:
(Personal name or company name, address of residence or registered office)
APPLICATION FOR THE ISSUE OF BANK OF SLOVENIA'S PERMISSION TO
USE THE INTERNAL MODEL METHOD (IMM) TO CALCULATE EXPOSURE
VALUES
Contact person in charge of
the application
Position
Title
Telephone
E-mail
Signatures of legal representatives and/or authorised persons
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
___________________________________________________________________________
______
1
Only completed if the bank has one. In that case the appropriate authorisation must be submitted with the
application.
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JUSTIFICATION OF THE APPLICATION
SECTION A – Documentation on the type of transactions for which it intends to use the internal
models methodology (IMM) (for transactions from points (a) or (b) or (c) of the second
paragraph of Article 53 of this regulation), on its roll out plan for the sequential implementation
of IMM and basic information on the internal models, as set out in point (a) of the second
paragraph of Article 56 of this regulation.
A1.
Clarify whether you are submitting this application at the group or individual level.
A2.
Submit a list of persons included in the calculation of capital requirements for market risk
using IMM in a group, and state the responsible persons. If, pursuant to Article 291 of the
ZBan-1, an EU parent bank and its subsidiaries or banks and other institutions subordinate to
an EU parent financial holding company jointly submit an application to the Bank of Slovenia
for the issue and permission to use the IMM, state a list of these persons and the responsible
persons.
A3.
For which types of transaction do you intend to use the IMM (for transactions from Items (a)
or (b) or (c) of the second paragraph of Article 53 of this regulation)?
A4.
Do you intend to use your own estimate of alpha (α)?
A5.
Submit a table of the internal models you intend to use, and for each of them state:
− which transactions they will used for;
− a list of products which the internal model will cover.
A6.
If you intend to implement IMM sequentially, describe in detail the sequential implementation:
− start and end of implementation;
− types of transaction for which IMM will be used.
SECTION B – Documentation on meeting the requirements for the correct calculation of
exposure values using IMM, as defined in point (b) of the second paragraph of Article 56 of this
regulation.
B1.
Full description of the methodology for calculating exposure with calculation examples. Banks
must present:
− calculation of exposure values;
− calculation of EPE and EE;
− own estimate of alpha (α), if produced in-house;
− list of assumptions used in calculations and analysis thereof;
− assumptions used in the distribution of movements in the market value of variables used;
− use of margin agreements and inclusion of collateral values;
− method of taking EPE into account.
SECTION C – Documentation on meeting the minimum requirements for the EPE model, as
defined in point (c) of the second paragraph of Article 56 of this regulation. Submit the required
information and documentation for each internal model intended for use.
C1.
Submit an organisational chart, emphasising the display of organisational units responsible for
the design and application of the counterparty credit risk (CCR) management system.
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C2.
Describe in detail all the tasks, powers and responsibilities of the organisational units or
employees that relate to the IMM, and particularly CCR control units.
C3.
Describe the procedures used to evaluate the EPE model, and particularly:
− controlling integrity of input data;
− producing analyses of EPE model results;
− verifying the ratios between measures of risk exposure and credit and trading limits.
C4.
Describe the reporting chain for CCR control units and the inclusion of senior management in
the CCR management system.
C5.
Submit documentation relating to the overall functioning of the EPE model, policies and
descriptions of procedures to monitoring and ensuring compliance with a documented set of
internal policies and controls and providing an explanation of the empirical techniques used to
measure CCR.
C6.
Submit examples of CCR exposure reports, reports on limit utilisation, and list of report
recipients that use the reports in their work.
C7.
Describe the system for linking credit and trading limits within the CCR management system.
C8.
Describe the CCR exposure monitoring system by demonstrating calculations of peak or
potential future exposure.
C9.
Submit the internal audit service's annual plan including reviews of trading unit operations and
CCR control unit operations, with an emphasis on:
− the documentation of the CCR management system;
− the organisation of the CCR control unit;
− the inclusion of CCR management measures;
− the scope of CCR captured by the model;
− the integrity of the management information system;
− the accuracy and completeness of CCR data;
− the accuracy and appropriateness of volatility and correlation assumptions;
− the verification of the model's accuracy by back-testing.
C10.
Describe how the distribution of exposures generated by the model is included in the daily
CCR management process, how EPE model results are taken into account in credit approval,
CCR management and internal capital allocation.
C11.
Submit records on the use of the EPE model to generate the CCR exposure distribution for at
least one past year.
C12.
Describe how the EPE model to generate the CCR exposure distribution is included in CCR
management and submit use test documentation.
C13.
How frequently is EE assessed? Clarify the reasons for this frequency.
C14.
How do you determine and control CCR where exposure rises beyond the one-year horizon?
C15.
Submit a report on the results of stress testing with a detailed written analysis and measures
adopted, and representation of the relationship between the results of stress-testing results and
the limit system.
C16.
Describe the results of the stress testing for CCR exposure with an emphasis on concentration
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risk, correlation risk across market and credit risk, and the risk that liquidating positions could
move the market.
C17.
Describe the method of giving due consideration to exposures that give rise to a significant
degree of General Wrong-Way Risk.
C18.
Describe the method of giving due consideration to exposures that give rise to a significant
degree of Specific Wrong-Way Risk.
C19.
Describe procedures established for recognising netting agreements.
C20.
How are transaction specifications inputted into the database and what are the formal
procedures in place to verify that transactions terms and specifications on an ongoing basis?
How is this expressed in the EPE model?
C21.
Describe the method of acquiring data or proxies used in the EPE model, the length of time
series for observations, frequency of updating, price verification procedure, and the quality of
data or proxies.
C22.
Describe the method of taking into account the volatility of collateral in the EPE model.
C23.
Submit documentation on the EPE model validation process.
C24.
Describe how EPE model estimates are adapted.
C25.
Describe procedures used to verify whether a transaction including in a netting set is covered
by a legally enforceable netting contract.
C26.
Describe the procedures used to verify whether collateral to mitigate CCR meets the regulatory
requirements.
SECTION D – Documentation on meeting the requirements for EPE model validation, as
defined in point (d) of the second paragraph of Article 56 of this regulation. Submit the required
information and documentation for each internal model intended for use.
D1.
Describe how the EPE model is included in the daily risk management process.
D2.
Submit an organisational chart of the bank with an emphasis on representing the organisational
units for trading, risk management, back office, internal audit services and other units related
to the EPE model.
D3.
Describe in detail all the tasks, powers and responsibilities of the organisational units or
employees that relate to the EPE model.
D4.
Describe the tasks of senior management responsible for trading, and senior management
responsible for back office and market risk management.
D5.
Submit documentation relating to the overall functioning of the EPE model, policies and
descriptions of procedures to monitoring and ensuring compliance with a documented set of
internal policies and controls, as follows:
− policy used for integrated market risk management;
− detailed description of instruments captured by the model;
− the description of technical implementation of EPE model (software and hardware) with a
manual describing managing software for internal model application;
− documentation describing the method of allocating an individual position in the non-
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trading or trading book;
− management board resolution approving the EPE model.
D6.
Describe the procedures used to evaluate the accuracy and validity of the EPE model.
D7.
Submit a list of all market risk factors used in the EPE model, together with a statement of the
source of data on the factors (e.g. Reuters), a statement of the length of time series for the data,
and the frequency of acquiring current data.
D8.
Describe the action plan in case of problems in daily data acquisition.
D9.
Submit the internal audit services' annual review plan, with an emphasis on the planned review
of the EPE model and organisational units related to internal models.
D10.
Submit the internal audit service's findings relating to reviews of the EPE model and processes
and organisational units related to the EPE model.
D11.
Submit internal audit service’s findings on the verification of the quality of input data used by
the EPE model.
D12.
Describe how the forecasting accuracy of the EPE model is verified in respect of marketing
risk factors.
D13.
Describe how specific information for an individual transaction in a netting set (aggregated
exposure at the netting set level, margin data, data on the market value of collateral or changes
in the market value of collateral).
D14.
Describe the method of static back-testing on representative counterparty portfolios (actual or
hypothetical).
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ANNEX VII
Recipient:
Banka Slovenije
Slovenska cesta 35
1505 Ljubljana
Applicant:
(Name and registered office of bank, list of legal representatives entitled to submit an application or issue an authorisation to submit an
application)
Authorised person 1:
(Personal name or company name, address of residence or registered office)
APPLICATION FOR THE ISSUE OF BANK OF SLOVENIA'S PERMISSION FOR
THE TRANSFER FROM THE INTERNAL MODEL METHOD (IMM) TO THE
MARK-TO-MARKET METHOD OR THE STANDARDISED METHOD (SM) FOR
CALCULATING EXPOSURE VALUES
Contact person in charge of
the application
Position
Title
Telephone
E-mail
Signatures of legal representatives and/or authorised persons
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
___________________________________________________________________________
______
1
Only completed if the bank has one. In that case the appropriate authorisation must be submitted with the
application.
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JUSTIFICATION OF THE APPLICATION
General data on the change in approach as defined in Article 58 of this regulation
A1.
Reason the grounds for the transfer from the internal model method (IMM) to the mark-tomarket method or the standardised method (SM) for calculating exposure values.
A2.
State and provide grounds for the date of transfer.
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ANNEX VIII
Recipient:
Banka Slovenije
Slovenska cesta 35
1505 Ljubljana
Applicant:
(Name and registered office of bank, list of legal representatives entitled to submit an application or issue an authorisation to submit an
application)
Authorised person 1:
(Personal name or company name, address of residence or registered office)
APPLICATION FOR THE ISSUE OF BANK OF SLOVENIA'S PERMISSION FOR
THE USE OF INTERNAL MODELS TO CALCULATE CAPITAL REQUIREMENTS
FOR POSITION RISK, FOREIGN EXCHANGE RISK AND/OR COMMODITIES
RISK
Contact person in charge of
the application
Position
Title
Telephone
E-mail
Signatures of legal representatives and/or authorised persons
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
___________________________________________________________________________
______
1
Only completed if the bank has one. In that case the appropriate authorisation must be submitted with the
application.
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JUSTIFICATION OF THE APPLICATION
SECTION A – Documentation on general information on models and potential combined use of
internal models and other methods of calculating capital requirements for position risk, foreign
exchange risk and commodities risk defined in this regulation, as set out in point (a) of the
second paragraph of Article 82 of this regulation.
A1.
Clarify whether you are submitting this application at the group or individual level.
A2.
Submit a list of persons included in the calculation of capital requirements for position risk,
foreign exchange risk and/or commodities risk using internal models in a group, and state the
responsible persons. If, pursuant to Article 291 of the ZBan-1, an EU parent bank and its
subsidiaries or banks and other institutions subordinate to an EU parent financial holding
company jointly submit to the Bank of Slovenia an application for the issue and permission to
use the internal models to calculate the capital requirements for position risk, foreign exchange
risk and/or commodities risk, state a list of these persons and the responsible persons.
A3.
Submit a table of the internal models you intend to use, and for each of them state:
– for the calculation of which capital requirement you will use it;
– a list of products which the internal model will cover.
A4.
Do you intend to combine the use of internal models with the use of other methods to calculate
capital requirements for position risk, foreign exchange risk and/or commodities risk set out in
this regulation? If you do intend to do so, describe the combined use in detail.
A5.
Describe the reasons for the combined use of internal models with the use of other methods to
calculate capital requirements for position risk, foreign exchange risk and/or commodities risk
set out in this regulation.
SECTION B – Documentation on meeting the qualitative standards for the use of internal
models, as defined in point (b) of the second paragraph of Article 82 of this regulation. Submit
the required information and documentation for each internal model intended for use.
B1.
State which risks are covered by the internal model (general risk, specific risk, foreign
exchange risk, commodities risk).
B2.
Describe how the internal model is included in the daily risk management process.
B3.
Submit an organisational chart of the bank with an emphasis on representing the organisational
units for trading, risk management, back office, internal audit services and other units related
to the internal model.
B4.
Describe in detail all the tasks, powers and responsibilities of the organisational units or
employees that relate to the internal model.
B5.
Describe the tasks of senior management responsible for trading, and senior management
responsible for back office and market risk management.
B6.
Describe the reporting chain for internal model results and state the uses of model results.
Submit cases of daily reports and analyses of internal model results.
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B7.
Submit documentation relating to the overall functioning of the internal model, policies and
descriptions of procedures to monitoring and ensuring compliance with a documented set of
internal policies and controls, as follows:
− policy used for integrated market risk management;
− detailed description of instruments captured by the model;
− the description of technical implementation of the internal model (software and hardware)
with a manual describing managing software for internal model application;
− documentation describing the method of allocating an individual position in the nontrading or trading book;
− management board resolution approving the internal model.
B8.
Describe in detail and provide grounds for the model approach used (Variance-Covariance
Approach, Historical Simulation, Monte Carlo simulation) with all strengths and weaknesses
of the validation methods used.
B9.
Describe the procedures used to evaluate the accuracy and validity of the internal model.
B10.
Describe in detail the limits system (definition, control, measures in case of overdraft…).
B11.
Describe in detail the method for defining the sensitivity measure.
B12.
Submit a list of all market risk factors used in the internal model, together with a statement of
the source of data on the factors (e.g. Reuters), a statement of the length of time series for the
data, and the frequency of acquiring current data.
B13.
Describe the method for calculating return for instruments included in the internal model from
risk factors (e.g. logarithmic yields).
B14.
Describe the validation methods and methodological bases for defining the variability and
covariance and a detailed description of the measures used to define the compliance of the
variance-covariance matrix (including a test of the probability distribution's stability).
B15.
Describe in detail the data integrity verification method.
B16.
Describe the action plan in case of problems in daily data acquisition.
B17.
Submit the internal audit services' annual review plan, with an emphasis on the planned review
of the internal model and organisational units related to internal model.
B18.
Submit the internal audit service's findings relating to reviews of the internal model and
processes and organisational units related to the internal model.
B19.
Submit the internal audit service’s findings on the verification of the quality of input data used
in the internal model.
SECTION C – Documentation on meeting the quantitative standards for the use of internal
models, as defined in point (c) of the second paragraph of Article 82 of this regulation. Submit
the required information and documentation for each internal model intended for use.
C1.
Describe the frequency of value-at-risk (VaR) calculations and the frequency with which data
time series are updated.
C2.
Describe the procedures for achieving, in accordance with this regulation, the defined
confidence level and the holding period (factor reflecting a holding period defined in
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accordance with this regulation).
C3.
State the length of the data observation period and provide grounds for this definition.
C4.
Describe the statistical assumptions on the distribution of market risk factors used.
SECTION D – Documentation on compliance with the criteria for internal model validation and
back-testing, as defined in point (d) of the second paragraph of Article 82 of this regulation.
Submit the required information and documentation for each internal model intended for use.
D1.
Submit the test schedule and results of testing internal model implementation, which indicates
that none of the assumptions included in the internal model overvalue or undervalue risk.
D2.
Submit documentation indicating that the risk management unit regularly implements backtesting, which must clearly indicate that the back-testing is carried out in accordance with this
regulation.
D3.
Submit reports on the results of back-testing for the preceding 250 business days.
D4.
Describe and clarify the methods for calculating trading results used in back-testing.
D5.
Submit documentation indicating that the risk management unit regularly implements stresstesting, which must clearly indicate that the stress-testing is carried out in accordance with this
regulation.
D6.
Submit documentation on the selection of stress test scenarios and a detailed description of the
exclusion of irrelevant stress-test scenarios from the mass of possible scenarios.
D7.
Submit reports on stress-testing results with a detailed written analysis and measured adopted.
D8.
Describe the methodology for calculating potential losses from various stress-testing scenarios.
D9.
Describe how the results of stress-testing are taken into account when defining limits.
D10.
Submit a report on processing errors internal model results.
D11.
Describe the methods and procedures for identifying and verifying unusual phenomena
(divergence from average calculations, extreme results, results that cause suspicion that the
input data were inappropriate).
D12.
Describing tests used in (sub)portfolios to confirm the correctness and completeness of position
data.
SECTION E – Documentation on compliance with additional conditions for approval of internal
models to calculate capital requirements for specific risk, as defined in point (e) of the second
paragraph of Article 82 of this regulation. Submit the required information and documentation
for each internal model intended for use.
E1.
Describe the testing method that confirms that the internal model is capable of explaining the
historical price variation in the portfolio.
E2.
Describe the verification method that ensures that the internal model is sensitive to changes in
portfolio structure. The internal model must adequately explain increased concentration of the
portfolio in an individual sector or increased exposure to an individual issuer via VaR.
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E3.
Describe the verification method that ensures that the internal model is capable of explaining
the increased risk in case of an unfavourable economic environment.
E4.
Submit a report on the results of back-testing that makes clear that the internal model is capable
of capturing the specific and general risk with sufficient accuracy.
E5.
Describe the verification method that ensures that the internal model is capable of explaining
material idiosyncratic differences between similar but not identical positions with sufficient
accuracy.
E6.
Describe the verification method that ensures that the internal model is capable of capturing
unanticipated events with sufficient accuracy (changes in issuer credit assessment = migration
risk, mergers, takeovers, etc.).
E7.
Describe how the effects of event risk are managed that are not captured by value-at-risk (VaR)
and must be included in the internal capital assessment.
E8.
Clarify how risk arising from less liquid positions and positions with limited price transparency
is assessed.
E9.
Describe the methodology used to calculate the default charge for trading book positions that
exceed the default risk captured in the value-at-risk (VaR) calculation on the basis of the an
internal model.
E10.
Describe the methodology used to calculate capital requirements for synthetic exposures arising
from synthetic securitisation.
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THIS TEXT IS UNOFFICIAL TRANSLATION AND MAY NOT BE USED AS A BASIS FOR SOLVING ANY DISPUTE
ANNEX IX: CAPITAL REQUIREMENTS FOR GAMMA AND VEGA RISK
RELATING TO OPTIONS
When banks issue options and do not use internal option-valuation models to calculate capital
requirements for options-related risk, the capital requirements for options may be calculated using the
delta-plus approach. Since the delta-plus approach does not cover all risks stemming from options, the
banks must calculate additional capital requirements against other non-delta risks (gamma and vega
risks), and namely for each option position (also for hedged positions) separately.
The banks must, for the purpose of calculating the capital requirements against gamma and vega risk
on portfolios of options, classify individual positions in options for each risk category. The offsetting
of gamma and vega impacts of individual positions may only be allowed within an individual risk
category, as follows:
− for foreign currencies and gold options, gold and each foreign currency pair represent a separate
risk category;
− for options on equities, equities of individual markets of one country represent their own risk
category; if a stock is listed on more markets in different countries, the qualifying market is the
one with the largest volume of trading in the respective stock, i.e. the market where the issuer has
its registered office;
− for options on bonds and interest rates, each currency and each maturity band (as set out under the
approach based on maturity, and the approach based on duration) represents its risk category.
1. Delta risk
The delta (δ) of an option represents the change in the price of option in the case of a minor change in
the price of the underlying instrument. In mathematical terms, delta is the first partial derivative of the
function of the option price with respect to the price of the underlying instrument.
δ =
∂ of option price
∂ of underlying instrument price
For the purpose of calculating the capital requirement for position and foreign exchange risks, the
positions in options shall be treated as a combination of hypothetical long and short positions, i.e. they
are broken down into the positions in the underlying financial instruments. These positions are then
multiplied by the appropriate delta, which represents the position delta value. The delta value of the
positions are taken into account in calculating capital requirements for position risk in accordance with
the third paragraph of Article 18 of this regulation, and exchange rate risk in accordance with Articles
75 and 76 of this regulation.
2. Gamma risk
The gamma (γ) of an option represents the relative change of the delta of an option in the case of a
minor price change in the underlying instrument. In mathematical terms, gamma is the second partial
derivative of the function of the option price with respect to the underlying instrument. Calculating the
gamma risk requires calculating the so-called gamma impact, which arises from a Taylor series
expansion as the following function of the option price:
gamma impact =
1
2
× position × γ × (ΔB )
2
ΔB from the equation above is the expected change in the price of the underlying instrument, while the
position is defined according to the instrument type (see Table 1).
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Table 1
position
ΔB (maturity-based
approach)
ΔB(duration-based
approach)
Equity
Individual equity
Market value × 0.08
Foreign currency
Nominal value
Market value × 0.08
Market value × 0.08
Market value × 0.08
Interest rates
Nominal value
Assumed interest
rate change as per
Table 2
Assumed interest
rate change as per
Table 3
Bonds
Nominal value/100
Weight as per Table
2 × future price
bonds
Duration × assumed
interest rate change
as per Table 3 ×
future price bonds
Table 2
Rank
Weight (%)
Assumed interest
rate change
0.00
0.20
0.40
0.70
1.25
1.75
2.25
2.75
3.25
3.75
4.50
5.25
6.00
1.00
1.00
1.00
0.90
0.80
0.75
0.75
0.70
0.65
0.60
0.60
0.60
8.00
0.60
12.50
0.60
Zone
1
1
1
1
2
2
2
3
3
3
3
3
3
Interest rate of 3% or
more
0 to 1 month
From 1 to 3 months
From 3 to 6 months
From 6 to 12 months
From 1 to 2 years
From 2 to 3 years
From 3 to 4 years
From 4 to 5 years
From 5 to 7 years
From 5 to 10 years
From 10 to 15 years
From 15 to 20 years
More than 20 years
3
3
Interest rate of less
than 3%
0 to 1 month
From 1 to 3 months
From 3 to 6 months
From 6 to 12 months
From 1.0 to 1.9 years
From 1.9 to 2.8 years
From 2.8 to 3.6 years
From 3.6 to 4.3 years
From 4.3 to 5.7 years
From 5.7 to 7.3 years
From 7.3 to 9.3 years
From 9.3 to 10.6 years
From 10.6 to 12.0
years
From 12.0 to 20.0
years
More than 20.0 years
Table 3
Zone
1
2
3
Modified duration (in years)
0.0 to 1.0
From 1.0 to 3.6 years
More than 3.6 years
Assumed interest rate change (%)
1.00
0.85
0.70
Aggregation of gamma impacts
For the calculation of the capital requirement for the gamma risk associated with an options portfolio,
banks shall first add individual gamma impacts within individual risk categories resulting in either a
positive or a negative net gamma impact for each risk category. The absolute value of the sum of all
net gamma impacts that are negative for each risk category represents the capital requirement for
gamma risk.
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THIS TEXT IS UNOFFICIAL TRANSLATION AND MAY NOT BE USED AS A BASIS FOR SOLVING ANY DISPUTE
3. Vega risk
The vega (Λ) of an option expresses the change in the price of options due to a minor change in the
price volatility of the underlying instrument. In mathematical terms vega is the first partial derivative
of the function of the price option relating to price volatility of its underlying instrument. Calculating
vega requires calculating the so-called vega impact, which arises from a Taylor series expansion as the
following function of the option price:
Vega impact = position × Λ ×
volatility
4
It is assumed that a change in volatility is one quarter of current volatility (± 25%).
Aggregation of vega impacts
For the calculation of capital requirements for the vega risk associated with an options portfolio, banks
shall first add individual vega impacts within individual risk categories resulting in either a positive or
a negative net vega impact for each risk category. The absolute value of the sum of all net vega
impacts represents the capital requirement for vega risk.
In addition to the aforementioned options risks, the banks must be conscious of other risks also
associated with options, such as rho risk (the rate of change of the value of the option with respect to
the interest rate) and theta risk (the rate of change of the value of the option with respect to time).
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