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B. Equity Risk

C 52/2017 STA يسري تنفيذه من تاريخ 1/4/2021

27.Market risk can be influenced by changes in equity prices, that is, equity risk.

28.Equity risk is the risk that movement in equity prices will have a negative effect on the value of equity positions. The capital charge for equity risk is the sum of the charges for general and specific market risk.

29.The Central Bank sets out a minimum capital standard to cover the risk of equity positions held in the trading book. It applies to long and short positions in all instruments that exhibit behavior similar to equities, with the exception of non-convertible preference shares, which fall under interest rate risk requirements.

   1.Capital Charges for Equity Risk

30.To calculate the minimum capital charge for equity risk, you must calculate two separate charges:

  1. A general market risk charge of 8% is applied to the net overall position.
  2. A specific risk charge of 8% is applied to the gross equity position. After offsetting long and short positions in the same issue, a bank's gross equity position is the sum of the absolute values of all long equity positions and all short equity positions.

31.Since banks may hold equities in different national markets, separate calculations for general and specific risk must be carried out for each of these markets.

Offsetting

Long and short positions in the same issue can be fully offset, resulting in a single net long or short position.

   2.Treatment of Equity Derivatives

32.Equity derivatives and off-balance-sheet positions that are affected by changes in equity prices should be included in the measurement system, with the exception of certain options positions. This includes futures and swaps on both individual equities and on stock indices.

33.Positions in these equity derivatives should be converted into notional positions in the relevant underlying stock or portfolio of stocks. For example, stock index futures should be reported as the marked-to-market value of the notional underlying equity portfolio. A stock index future is an agreement to buy or sell a standard quantity of a specific stock index, on a recognised exchange, at a price agreed between two parties, and with delivery to be executed on a standardised future settlement date. As it is obviously not feasible to deliver an actual stock index, stock index futures contracts are settled by cash, calculated with reference to the difference between the purchase price and the level of the index at settlement.

34.An equity swap is an agreement between two counterparties to swap the returns on a stock or a stock index for a stream of payments based on some other form of asset return. Often, one payment leg is determined by a stock index with the second leg determined by a fixed or floating rate of interest. Alternatively, the second leg may be determined by some other stock index (often referred to as a relative performance swap).

35.Equity swaps should be treated as two notional positions. For example, in an equity swap where a bank is receiving an amount based on the change in value of one stock index and paying an amount based on a different index, the bank is regarded as having a long position in the former index and a short position in the latter index.

36.In addition to the general market risk requirement, a further capital charge of 2% will be applied to the net long or short position in index contracts on a diversified portfolio of equities, to cover factors such as execution risk. As the standard stated.

Refer to the examples below in this section for numerical illustrations