Directive 2006/49/EC of the European Parliament and of the Council
of 14 June 2006
on the capital adequacy of investment firms and credit institutions (recast) (repealed)
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F1CHAPTER ISubject matter, scope and definitions
F1Section 1Subject matter and scope
F1Article 1
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F1Article 2
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F1Section 2Definitions
F1Article 3
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F1CHAPTER IIInitial capital
F1Article 4
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F1Article 5
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F1Article 6
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F1Article 7
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F1Article 8
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F1Article 9
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F1Article 10
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F1CHAPTER IIITrading book
F1Article 11
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F1CHAPTER IVOwn funds
F1Article 12
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F1Article 13
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F1Article 14
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F1Article 15
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F1Article 16
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F1Article 17
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F1CHAPTER V
F1Section 1Provisions against risks
F1Article 18
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F1Article 19
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F1Article 20
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F1Article 21
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F1Section 2Application of requirements on a consolidated basis
F1Article 22
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F1Article 23
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F1Article 24
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F1Article 25
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F1Section 3Calculation of consolidated requirements
F1Article 26
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F1Article 27
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F1Section 4Monitoring and control of large exposures
F1Article 28
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F1Article 29
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F1Article 30
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F1Article 31
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F1Article 32
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F1Section 5Valuation of positions for reporting purposes
F1Article 33
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F1Section 6Risk management and capital assessment
F1Article 34
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F1Section 7Reporting requirements
F1Article 35
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F1CHAPTER VI
F1Section 1Competent authorities
F1Article 36
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F1Section 2Supervision
F1Article 37
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F1Article 38
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F1CHAPTER VIIDisclosure
F1Article 39
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F1CHAPTER VIII
F1Section 1
F1Article 40
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F1Section 2Delegated acts and powers of execution
F1Article 41
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F1Article 42
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F1Article 42aExercise of the delegation
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F1Article 42bRevocation of the delegation
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F1Article 42cObjections to delegated acts
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F1Section 3Transitional provisions
F1Article 43
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F1Article 44
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F1Article 45
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F1Article 46
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F1Article 47
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F1Article 48
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F1Section 4Final provisions
F1Article 49
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F1Article 50
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F1Article 51
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F1Article 52
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F1Article 53
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F1Article 54
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F1ANNEX ICALCULATING CAPITAL REQUIREMENTS FOR POSITION RISK
GENERAL PROVISIONS
Netting
F11.
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F12.
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F13.
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F1Particular instruments
F14.Interest-rate futures, forward-rate agreements (FRAs) and forward commitments to buy or sell debt instruments shall be treated as combinations of long and short positions. Thus a long interest-rate futures position shall be treated as a combination of a borrowing maturing on the delivery date of the futures contract and a holding of an asset with maturity date equal to that of the instrument or notional position underlying the futures contract in question. Similarly a sold FRA will be treated as a long position with a maturity date equal to the settlement date plus the contract period, and a short position with maturity equal to the settlement date. Both the borrowing and the asset holding shall be included in the first category set out in Table 1 in point 14 in order to calculate the capital required against specific risk for interest-rate futures and FRAs. A forward commitment to buy a debt instrument shall be treated as a combination of a borrowing maturing on the delivery date and a long (spot) position in the debt instrument itself. The borrowing shall be included in the first category set out in Table 1 in point 14 for purposes of specific risk, and the debt instrument under whichever column is appropriate for it in the same table.
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F15.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 Annex. The latter positions may be netted off against any offsetting positions in the identical underlying securities or derivatives. The delta used shall be that of the exchange concerned, that calculated by the competent authorities or, where that is not available or for OTC-options, that calculated by the institution itself, subject to the competent authorities being satisfied that the model used by the institution is reasonable.
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F16.
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F17.
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F1A.TREATMENT OF THE PROTECTION SELLER
F18.When calculating the capital requirement for market risk of the party who assumes the credit risk (the ‘protection seller’), unless specified differently, the notional amount of the credit derivative contract shall be used. Notwithstanding the first sentence, the institution may elect to replace the notional value by the notional value, minus any market value changes of the credit derivative since trade inception. For the purpose of calculating the specific risk charge, other than for total return swaps, the maturity of the credit derivative contract, rather than the maturity of the obligation, shall apply. Positions are determined as follows:
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F1B.TREATMENT OF THE PROTECTION BUYER
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First-to-default credit derivatives
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nth-to-default credit derivatives
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F19.
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F110.
F111.
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Specific and general risks
F112.
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TRADED DEBT INSTRUMENTS
F113.
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Specific risk
F114.The institution shall assign its net positions in the trading book in instruments that are not securitisation positions as calculated in accordance with point 1 to the appropriate categories in Table 1 on the basis of their issuer/obligor, external or internal credit assessment, and residual maturity, and then multiply them by the weightings shown in that table. It shall sum its weighted positions resulting from the application of this point (regardless of whether they are long or short) in order to calculate its capital requirement against specific risk. It shall calculate its capital requirement against specific risk for positions that are securitisation positions in accordance with point 16a.
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F114a.By way of derogation from point 14, an institution may determine the larger of the following amounts as the specific risk capital charge for the correlation trading portfolio:
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F114b.The correlation trading portfolio shall consist of securitisation positions and n-th-to-default credit derivatives that meet the following criteria:
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F114c.Positions which reference either of the following shall not be part of the correlation trading portfolio:
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F115.For the purposes of point 14 qualifying items shall include:
- (a)
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- (b)
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- (c)
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- (d)
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- (e)
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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F116.
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F116a.For instruments in the trading book that are securitisation positions, the institution shall weight with the following its net positions as calculated in accordance with point 1:
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General risk
F1(a)Maturity-based
F117.
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F118.
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F119.
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F120.
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F121.
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F122.
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F123.
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F124.
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F125.
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- (a)
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- (b)
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- (c)
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- (d)
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- (e)
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- (f)
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- (g)
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F1(b)Duration-based
F126.
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F127.
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F128.The institution shall then calculate the modified duration of each debt instrument on the basis of the following formula: modified duration = ((duration (D))/(1 + r)), where:
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F129.
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F130.
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F131.The institution shall calculate its duration-weighted long and its duration-weighted short positions within each zone. The amount of the former which are matched by the latter within each zone shall be the matched duration-weighted position for that zone.
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F132.
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EQUITIES
F133.
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Specific risk
F134.
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F135.By derogation from point 34, the competent authorities may allow the capital requirement against specific risk to be 2 % rather than 4 % for those portfolios of equities that an institution holds which meet the following conditions:
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General risk
F136.
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Stock-index futures
F137.
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F138.
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F139.
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F140.
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UNDERWRITING
F141.
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SPECIFIC RISK CAPITAL CHARGES FOR TRADING BOOK POSITIONS HEDGED BY CREDIT DERIVATIVES
F142.
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F143.Full allowance shall be given when the value of two legs always move in the opposite direction and broadly to the same extent. This will be the case in the following situations:
F144.
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F145.Partial allowance shall be given when the value of two legs usually move in the opposite direction. This would be the case in the following situations:
F146.
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Capital charges for CIUs in the trading book
F147.
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F148.
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F149.
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F150.
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GENERAL CRITERIA
F151.
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- (a)
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- (b)
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- (c)
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- (d)
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- (e)
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F152.
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SPECIFIC METHODS
F153.
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F154.
F155.
F156.
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F1ANNEX IICALCULATING CAPITAL REQUIREMETNS FOR SETTLEMENT AND COUNTERPARTY CREDIT RISK
SETTLEMENT/DELIVERY RISK
F11.
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FREE DELIVERIES
F12.
F13.In applying a risk weight to free delivery exposures treated according to column 3 of Table 2, institutions using the approach set out in Articles 84 to 89 of Directive 2006/48/EC, may assign PDs to counterparties, for which they have no other non-trading book exposure, on the basis of the counterparty's external rating. Institutions using own estimates of loss given defaults (‘LGDs’) may apply the LGD set out in point 8 of Part 2 of Annex VII to Directive 2006/48/EC to free delivery exposures treated according to column 3 of Table 2 provided that they apply it to all such exposures. Alternatively, institutions using the approach set out in Articles 84 to 89 of Directive 2006/48/EC may apply the risk weights, as set out in Articles 78 to 83 of that Directive provided that they apply them to all such exposures or may apply a 100 % risk weight to all such exposures.
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F14.
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COUNTERPARTY CREDIT RISK (CCR)
F15.
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F16.
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F17.For the purposes of point 6:
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F18.
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F19.For the purposes of point 6 , 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 such financial instruments or commodities which are not eligible under Annex VIII of Directive 2006/48/EC are lent, sold or provided, or borrowed, purchased or received by way of collateral or otherwise under such a transaction, and the institution is using the Supervisory volatility adjustments approach under Part 3 of Annex VIII to that Directive, such instruments and commodities shall be treated in the same way as non-main index equities listed on a recognised exchange.
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F110.
F111.
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F112.
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F1ANNEX IIICALCULATING CAPITAL REQUIREMENTS FOR FOREIGN-EXCHANGE RISK
F11.
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F12.
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F12.1.Firstly, the institution's net open position in each currency (including the reporting currency) and in gold shall be calculated.
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F12.2.
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F13.
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F13.1.
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F13.2.The competent authorities may allow institutions to remove positions in any currency which is subject to a legally binding intergovernmental agreement to limit its variation relative to other currencies covered by the same agreement from whichever of the methods described in points 1, 2 and 3.1 that they apply. Institutions shall calculate their matched positions in such currencies and subject them to a capital requirement no lower than half of the maximum permissible variation laid down in the intergovernmental agreement in question in respect of the currencies concerned. Unmatched positions in those currencies shall be treated in the same way as other currencies.
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F14.
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F1ANNEX IVCALCULATING CAPITAL REQUIREMENTS FOR COMMODITIES RISK
F11.
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F12.
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F13.
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F14.
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F15.
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F16.For the purpose of point 19, the excess of an institution'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.
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F17.The competent authorities may regard the following positions as positions in the same commodity:
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F1Particular instruments
F18.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 expiry date.
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F19.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 points 13 to 18, as a series of positions equal to the notional amount of the contract, with one position corresponding with each payment on the swap and slotted into the maturity ladder set out in Table 1 to point 13. The positions would be long positions if the institution is paying a fixed price and receiving a floating price and short positions if the institution is receiving a fixed price and paying a floating price.
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F110.Options on commodities or on commodity derivatives shall be treated as if they were positions equal in value to the amount of the underlying to which the option refers, multiplied by its delta for the purposes of this Annex. The latter positions may be netted off against any offsetting positions in the identical underlying commodity or commodity derivative. The delta used shall be that of the exchange concerned, that calculated by the competent authorities or, where none of those is available, or for OTC options, that calculated by the institution itself, subject to the competent authorities being satisfied that the model used by the institution is reasonable.
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F111.
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F112.
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F1(a)Maturity ladder approach
F113.The institution shall use a separate maturity ladder in line with Table 1 for each commodity. All positions in that commodity and all positions which are regarded as positions in the same commodity pursuant to point 7 shall be assigned to the appropriate maturity bands. Physical stocks shall be assigned to the first maturity band.
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F114.Competent authorities may allow positions which are, or are regarded pursuant to point 7 as, positions in the same commodity to be offset and assigned to the appropriate maturity bands on a net basis for the following:
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F115.
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F116.
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F117.The institution's capital requirement for each commodity shall be calculated on the basis of the relevant maturity ladder as the sum of the following:
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F118.
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F1(b)Simplified approach
F119.The institution's capital requirement for each commodity shall be calculated as the sum of:
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F120.
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F1(c)Extended Maturity ladder approach
F121.Competent authorities may authorise institutions to use the minimum spread, carry and outright rates set out in the following table (Table 2) instead of those indicated in points 13, 14, 17 and 18 provided that the institutions, in the opinion of their competent authorities:
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F1ANNEX VUSE OF INTERNAL MODELS TO CALCULATE CAPITAL REQUIREMENTS
F11.
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F12.Recognition shall only be given if the competent authority is satisfied that the institution's risk-management system is conceptually sound and implemented with integrity and that, in particular, the following qualitative standards are met:
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F13.Institutions shall have processes in place to ensure that their internal models have been adequately validated by suitably qualified parties independent of the development process to ensure that they are conceptually sound and adequately capture all material risks. The validation shall be conducted when the internal model is initially developed and when any significant changes are made to the internal model. The validation shall also be conducted on a periodic basis but especially where there have been any significant structural changes in the market or changes to the composition of the portfolio which might lead to the internal model no longer being adequate. As techniques and best practices evolve, institutions shall avail themselves of these advances. Internal model validation shall not be limited to back-testing, but shall, at a minimum, also include the following:
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F14.The institution shall monitor the accuracy and performance of its model by conducting a back-testing programme. The back-testing has to provide for each business day a comparison of the one-day value-at-risk measure generated by the institution's model for the portfolio's end-of-day positions to the one-day change of the portfolio's value by the end of the subsequent business day.
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F15.For the purpose of calculating capital requirements for specific risk associated with traded debt and equity positions, the competent authorities shall recognise the use of an institution’s internal model if, in addition to compliance with the conditions in the remainder of this Annex, the internal model meets the following conditions:
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F15a.
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Scope
F15b.
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Parameters
F15c.The approach to capture the incremental risks shall measure losses due to default and internal or external ratings migration at the 99,9 % confidence interval over a capital horizon of 1 year.
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F15d.The liquidity horizons shall be set according to the time required to sell the position or to hedge all material relevant price risks in a stressed market, having particular regard to the size of the position. Liquidity horizons shall reflect actual practice and experience during periods of both systematic and idiosyncratic stresses. The liquidity horizon shall be measured under conservative assumptions and shall be sufficiently long that the act of selling or hedging, in itself, would not materially affect the price at which the selling or hedging would be executed.
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F15e.Hedges may be incorporated into an institution’s approach to capture the incremental default and migration risks. Positions may be netted when long and short positions refer to the same financial instrument. Hedging or diversification effects associated with long and short positions involving different instruments or different securities of the same obligor, as well as long and short positions in different issuers, may only be recognised by explicitly modelling gross long and short positions in the different instruments. Institutions shall reflect the impact of material risks that could occur during the interval between the hedge’s maturity and the liquidity horizon as well as the potential for significant basis risks in hedging strategies by product, seniority in the capital structure, internal or external rating, maturity, vintage and other differences in the instruments. An institution shall reflect a hedge only to the extent that it can be maintained even as the obligor approaches a credit or other event.
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F15f.
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F15g.
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Validation
F15h.As part of the independent review of their risk measurement system and the validation of their internal models as required in this Annex, institutions shall, with a view to the approach to capture incremental default and migration risks, in particular:
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Documentation
F15i.
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Internal approaches based on different parameters
F15j.
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Frequency of calculation
F15k.
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F15l.The competent authorities shall recognise the use of an internal approach for calculating an additional capital charge instead of a capital charge for the correlation trading portfolio in accordance with point 14a of Annex I provided that all conditions in this point are fulfilled.
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F16.
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F17.
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F18.For the purposes of points 10b(a) and (b), the multiplication factors (mc) and (ms) shall be increased by a plus-factor of between 0 and 1 in accordance with Table 1, depending on the number of overshootings for the most recent 250 business days as evidenced by the institution’s back-testing of the value-at-risk measure as set out in point 10. The competent authorities shall require the institutions to calculate overshootings consistently on the basis of back-testing on hypothetical and actual changes in the portfolio’s value. An overshooting is a one-day change in the portfolio’s value that exceeds the related one-day value-at-risk measure generated by the institution’s model. For the purpose of determining the plus-factor the number of overshootings shall be assessed at least quarterly and shall be equal to the higher of the number of overshootings under hypothetical and actual changes in the value of the portfolio.
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F19.Each institution must meet a capital requirement expressed as the higher of:
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F110.The calculation of the value-at-risk measure shall be subject to the following minimum standards:
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F110a.
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F110b.Each institution shall meet, on a daily basis, a capital requirement expressed as the sum of points (a) and (b) and an institution that uses its internal model to calculate the capital requirement for specific position risk shall meet a capital requirement expressed as the sum of points (c) and (d), as follows:
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F110c.
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F111.
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F112.
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Interest rate risk
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign-exchange risk
Equity risk
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commodity risk
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F113.
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F1ANNEX VICALCULATING CAPITAL REQUIREMENTS FOR LARGE EXPOSURES
F11.
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F12.
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F13.As from 10 days after the excess has occurred, the components of the excess, selected in accordance with point 1, shall be allocated to the appropriate line in column 1 of Table 1 in ascending order of specific-risk requirements in Annex I and/or requirements in Annex II. The additional capital requirement shall be equal to the sum of the specific-risk requirements in Annex I and/or the Annex II requirements on these components, multiplied by the corresponding factor in column 2 of Table 1.
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F1ANNEX VIITRADING
F1PART ATrading Intent
F11.Positions/portfolios held with trading intent shall comply with the following requirements:
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F1PART BSystems and Controls
F11.
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F12.Systems and controls shall include at least the following elements:
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Prudent Valuation Methods
F13.
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F14.
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F15.
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F16.The following requirements must be complied with when marking to model:
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F17.
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Valuation adjustments
F18.
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General standards
F19.
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Standards for less liquid positions
F110.
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F111.
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F112.
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F113.
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F1PART CInternal Hedges
F11.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 Parts A and B are met. In particular:
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F12.
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F13.
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F1PART DInclusion In The Trading Book
F11.
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F12.Institutions shall have clearly defined policies and procedures for overall management of the trading book. At a minimum these policies and procedures shall address:
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F13.
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F14.
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F1ANNEX VIIIREPEALED DIRECTIVES
F1PART A
F1Repealed directives together with their successive amendments(referred to in Article 52)
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F1PART B
F1Deadlines for transposition(referred to in Article 52)
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F1ANNEX IXCORRELATION TABLE
F1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repealed by Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (Text with EEA relevance).