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Commonwealth legislation
This Act has been repealed and is no longer in force. It is retained for historical reference.
This Determination replaces the previous APS 116 and sets detailed rules for how authorised deposit‑taking institutions (ADIs) and relevant authorised NOHCs must measure, manage and hold capital against market risk (trading book, foreign‑exchange and commodity risks). It prescribes governance, trading‑book allocation and valuation practices and gives two routes to calculate capital: a prescriptive standard method or an APRA‑approved internal model (including VaR, stressed VaR and incremental/comprehensive risk charges). APRA approves models and may impose conditions or require a return to the standard method.
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Direct links to the current provisions in Banking (prudential standard) determination No. 6 of 2011 - Prudential Standard APS 116 - Capital Adequacy: Market Risk.
Sourced from the Federal Register of Legislation (legislation.gov.au), CC BY 4.0.
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Banking (prudential standard) determination No. 6 of 2011
Prudential standard APS 116 Capital Adequacy: Market Risk
Banking Act 1959
I, Charles Littrell, delegate of APRA:
under subsection 11AF(3) of the Banking Act 1959 (the Act), REVOKE Prudential Standard APS 116 Capital Adequacy: Market Risk made by Banking (prudential standard) determination No. 9 of 2007; and
under subsection 11AF(1) of the Act, DETERMINE Prudential Standard APS 116 Capital Adequacy: Market Risk (APS 116) in the form set out in the Schedule, which applies to:
all ADIs, with the exception of foreign ADIs and ADIs covered by paragraph 2(b) of APS 116; and
where an ADI to which APS 116 applies is a subsidiary of an authorised NOHC, the authorised NOHC.
This instrument takes effect on 1 January 2012.
Dated: 9 December 2011
[Signed]
Charles Littrell
Executive General Manager
Policy, Research and Statistics Division
Interpretation
In this Determination:
ADI is short for authorised deposit-taking institution which has the meaning given in section 5 of the Act.
APRA means the Australian Prudential Regulation Authority.
authorised NOHC has the meaning given in section 5 of the Act.
foreign ADI has the meaning given in section 5 of the Act.
Note 1 An ADI or authorised NOHC that does not comply with a standard may be issued with directions by APRA under paragraph 11CA(1)(a) of the Act. Non-compliance with a direction is an offence attracting a penalty of up to 250 penalty units for a body corporate (currently $27,500) for each day that the offence continues. Officers of the ADI or authorised NOHC may also be criminally liable (see section 11CG).
Schedule
Prudential Standard APS 116 Capital Adequacy: Market Risk comprises the 60 pages commencing on the following page.
Prudential Standard APS 116
Capital Adequacy: Market Risk
Objective and key requirements of this Prudential Standard
This Prudential Standard aims to ensure that an authorised deposit-taking institution engaging in activities that give rise to risks associated with potential movements in market prices adopts risk management practices and meets regulatory capital that are commensurate with the risks involved.
The key requirements of this Prudential Standard are that an authorised deposit-taking institution must:
have a framework to manage, measure and monitor market risk commensurate with the nature, scale and complexity of the institution’s operations; and
use the standard method or an APRA-approved internal model approach to determine the institution’s capital requirement for market risk.
Table of contents
Prudential Standard
This Prudential Standard applies to all authorised deposit-taking institutions (ADIs), with the exception of:
foreign ADIs within the meaning of subsection 5(1) of the Banking Act; and
ADIs that:
do not conduct trading book activity and do not have any foreign exchange or commodity positions; and
have included a statement to this effect in their description of their risk management systems; and that statement also outlines the arrangements in place to ensure that trading book activity does not take place.
A reference to an ADI in this Prudential Standard shall be taken as a reference to:
an ADI on a Level 1 basis; and
a group of which an ADI is a member on a Level 2 basis.
Level 1 and Level 2 have the meaning in Prudential Standard APS 110 Capital Adequacy (APS 110).
Where an ADI to which this Prudential Standard applies is a subsidiary of an authorised non-operating holding company (authorised NOHC), the authorised NOHC must ensure that the requirements in this Prudential Standard are met on a Level 2 basis, where applicable.
For the purposes of this Prudential Standard, no distinction is drawn, in principle, between risks arising from physical positions and from positions in derivative instruments.
The following definitions are used in this Prudential Standard:
credit-event payment - the amount that is payable by the credit protection provider to the credit protection buyer under the terms of the credit derivative contract following the occurrence of a credit event. The payment can be in the form of physical settlement (payment of par in exchange for physical delivery of a deliverable obligation of the reference entity) or cash settlement (either a payment determined on a par-less-recovery basis, i.e. determined using the par value of the reference obligation less that obligation’s recovery value, or a fixed amount, or a fixed percentage of the par amount);
credit events - events affecting the reference entity that trigger a credit‑event payment under the terms of the credit derivative contract;
deliverable obligation - any obligation of the reference entity that can be delivered, under the terms of the contract, if a credit event occurs. A deliverable obligation is relevant for credit derivatives that are to be physically settled;
general market risk - the risk of loss owing to changes in the general level of market prices or interest rates. It arises from positions in interest rate, equities, foreign exchange and commodities;
market risk - comprises general market risk and specific risk;
marking-to-model - any valuation that has to be benchmarked, extrapolated or otherwise calculated from a market input;
model approval - the written approval from APRA to an ADI to adopt an internal model approach to market risk;
nth-to-default credit derivative - a contract where the payoff is based on the nth asset to default in a basket of underlying reference instruments. Once the nth default occurs the transaction terminates and is settled;
reference entity - the entity or entities whose obligations are used to determine whether a credit event has occurred under the terms of the credit derivative contract;
reference obligation - the obligation used to calculate the amount payable when a credit event occurs under the terms of a credit derivative contract. A reference obligation is relevant for obligations that are to be cash settled (on a par-less-recovery basis);[1] and
specific risk - the risk that the value of a security will change due to issuer-specific factors. It applies to interest rate and equity positions related to a specific issuer;
traded market risk, foreign exchange and commodities capital requirement (TFC capital requirement) - the regulatory capital that an ADI is required to hold against its exposure to market risk in accordance with this Prudential Standard; and
underlying exposure - the exposure that is being protected by the credit derivative.
In each case the ADI may do so regardless of where the positions are booked (refer to paragraph 2 of Attachment B) and, if using the internal model approach, allowing for risk diversification between positions (refer to paragraph 6 of Attachment C).
An ADI may apply for written approval from APRA to use an internal model for capital adequacy purposes.
APRA may, in writing, approve the use of an internal model by an ADI. The model approval may specify how the internal model is to apply in relation to the ADI, including approvals under paragraphs in Attachment C. APRA’s prior written approval is required for any material changes to the market risk internal model. Prior notification to APRA is required for material changes to other components of the market risk management framework. APRA may impose conditions on the model approval.
Once an ADI has obtained model approval, it must continue to employ that internal model on an ongoing basis unless, or except to the extent that, the model approval is revoked or suspended in respect to some or all of the ADI’s market risk exposures. A return, at the ADI’s request, to the standard method to market risk will generally only be permitted in exceptional circumstances.
APRA may, at any time in writing to the ADI, vary or revoke a model approval, or impose additional conditions on the model approval if it determines that:
the ADI does not comply with this Prudential Standard; or
it is appropriate, having regard to the particular circumstances of the ADI, to impose the additional conditions or make the variation or revocation.
Where an ADI’s model approval has been varied or revoked, APRA may, in writing, require the ADI to revert to the standard method to measure market risk for some or all of its market risk exposures, until it meets the conditions specified by APRA for returning to the internal model approach.
An ADI that has received model approval from APRA may rely on its own internal estimate (based on the approved market risk measurement model) of market risk for determining its TFC capital requirement. That estimate must be fundamentally sound and consistent with the scope of market risk defined in paragraph 6(e) of this Prudential Standard.
APRA may, in writing, require an ADI to reduce its market risk or increase its capital if APRA considers that the ADI’s capital for market risk is not commensurate with the ADI’s market risk profile.
This is an opening excerpt, not the complete document.