Banking (prudential standard) determination No. 7 of 2024

Authority

1. This Prudential Standard is made under section 11AF of the Banking Act 1959 (Banking Act).

Application

1. This Prudential Standard applies to all authorised deposit-taking institutions (ADIs), with the exception of:

   1. foreign ADIs;
   2. purchased payment facility providers; and
   3. ADIs that:

2. do not conduct trading book activity and do not have any foreign exchange or commodity positions; and

3. have included a statement to this effect in the risk management strategy required by Prudential Standard CPS 220 Risk Management (CPS 220); and that statement also outlines the arrangements in place to ensure that trading book activity does not take place.

4. A reference to an ADI in this Prudential Standard shall be taken as a reference to:

   1. an ADI on a Level 1 basis; and
   2. a group of which an ADI is a member on a Level 2 basis.

5. If an ADI to which the Prudential Standard applies is:

   1. the holding company for a group of bodies corporate, the ADI must ensure that the requirements in this Prudential Standard are met on a Level 2 basis, where applicable; or
   2. 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.

Interpretation

1. Terms that are defined in Prudential Standard CPS 001 Defined terms appear in bold the first time they are used in this Prudential Standard.
2. In this Prudential Standard, unless the contrary intention appears, a reference to an Act, Regulations, Prudential Standard or Reporting Standard is a reference to the Act, Regulations, Prudential Standard or Reporting Standard as in force from time to time.

Scope

1. This Prudential Standard applies to all:
   1. trading book positions; and
   2. banking and trading book positions that give rise to foreign exchange or commodity risks.

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.

1. The treatment of counterparty credit risk capital requirements is excluded from this Prudential Standard and must be determined in accordance with Prudential Standards APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112) or APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk (APS 113), as appropriate.

Definitions

1. The following definitions are used in this Prudential Standard:

2. 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);

3. credit events - events affecting the reference entity that trigger a credit‑event payment under the terms of the credit derivative contract;

4. 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;

5. 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;

6. market risk - comprises general market risk and specific risk;

7. marking-to-model - any valuation that has to be benchmarked, extrapolated or otherwise calculated from a market input;

8. 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;

9. 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;

10. 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]

11. 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;

12. 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

13. underlying exposure - the exposure that is being protected by the credit derivative.

Key principles

1. An ADI that wishes to operate a trading book must, in accordance with Attachment A, submit for APRA’s approval a trading book policy statement that specifies those activities that belong in the trading book.
2. An ADI must allocate positions in financial instruments to its trading book if they are held with trading intent or in order to hedge other elements of the trading book. In allocating positions, an ADI must be guided by its trading book policy statement.
3. An ADI must maintain a framework for prudent valuation practices for trading book positions.
4. An ADI operating in the foreign exchange, commodities, interest rate or equities markets must ensure that appropriately robust risk measurement and management systems are in place.
5. An ADI must hold capital against:
   1. market risks arising from positions allocated to the trading book; and
   2. all foreign exchange and commodity risks.

The TFC capital requirement

1. An ADI must calculate the TFC capital requirement using one of the following methods:
   1. the standard method described in Attachment B, under which the TFC capital requirement is the sum of the market risk charges calculated in accordance with that method;
   2. the internal model approach described in Attachment C, under which the TFC capital requirement is the measure of market risk derived from applying that approach; or
   3. a combination of the standard method and the internal model approach, in which case the TFC capital requirement is the sum of the market risk capital requirements determined under the two methodologies.
2. Unless required to do otherwise by APRA (and subject to the conditions in paragraph 2 of Attachment B and paragraph 6 of Attachment C being satisfied):
   1. an ADI that has market-related activities in Australia and offshore branches (offshore Level 1 sites) and manages those market-related activities centrally may calculate its Level 1 TFC capital requirement allowing for netting and offsetting of short and long positions in exactly the same instrument that have been taken within the ADI, whether in Australia or an offshore Level 1 site; and
   2. an ADI that has market-related activities in Australia and either offshore branches or offshore subsidiaries (offshore Level 2 sites), and manages those market-related activities centrally may calculate its Level 2 TFC capital requirement allowing for netting and offsetting of short and long positions in exactly the same instrument that have been taken within the group, comprising the entities in Australia and the offshore Level 2 sites.

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).

The standard method

1. An ADI that does not have model approval must calculate its TFC capital requirement using the standard method as set out in Attachment B and, in relation to credit derivative instruments held in the trading book, Attachment D[2].

The internal model approach

1. An ADI may apply for model approval from APRA in relation to market risk.

2. An ADI’s model approval may specify how the internal model is to apply, including approvals under 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.

3. 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.

4. 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.

5. 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.

6. 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 8(e) of this Prudential Standard.

7. 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.

Combination of the internal model approach and the standard method

1. An ADI may, subject to APRA’s written approval, use a combination of the internal model approach and the standard method. In doing so, the ADI must comply with the requirements detailed in Attachment C.
2. An ADI must not use a combination of the two methodologies within a particular risk category (e.g. interest rates, foreign exchange, equities and commodities) and within the same regional centre without prior written approval from APRA.
3. APRA may require an ADI that has model approval that does not cover all risk categories to extend the internal model to cover other market risk categories.

Previous exercise of discretion

1. An ADI must contact APRA if it seeks to place reliance, for the purposes of complying with this Prudential Standard, on a previous exemption or other exercise of discretion by APRA under a previous version of this Prudential Standard.

Attachment A

Governance and the trading book policy statement and prudent valuation practices

Board and senior management responsibilities

1. An ADI’s Board of directors (Board) is responsible for approving strategies and policies with respect to market risk and ensuring that senior management takes the steps necessary to monitor and control these risks.
2. In particular, the Board, or a Board committee, must ensure that the ADI has in place adequate systems to identify, measure and manage market risk, including identifying responsibilities, providing adequate separation of duties and avoiding conflicts of interest. An ADI must inform APRA of all significant changes in these systems and in its market risk profile and must ensure that market risk capital requirements are met on a continuous basis and that intra-day exposures are not excessive.

The trading book

1. An ADI must allocate to the trading book positions in financial instruments, including derivative products and other off-balance sheet instruments, that are held either with trading intent or to hedge other elements of the trading book. Positions held with trading intent are those which:

   1. are held for short-term resale; or
   2. are taken on by the ADI with the intention of benefiting in the short‑term from actual and/or expected differences between their buying and selling prices, or from other price or interest rate variations; or
   3. arise from broking and market-making.

2. For a position to be eligible to receive trading book capital treatment, an ADI must have:

3. a clearly documented trading strategy for the position/instrument or portfolios that has been approved by senior management (which must include the expected holding horizon); and

4. clearly defined policies and procedures for the active management of positions such that:

5. positions are managed on a trading desk;

6. position limits are set and monitored for appropriateness;

7. dealers have the autonomy to enter into and manage positions within agreed limits and according to the agreed strategy;

8. positions are marked-to-market daily and when marking-to-model the parameters are assessed on a daily basis;

9. positions are reported to senior management as an integral part of the institution’s risk management process; and

10. positions are actively monitored with reference to market information sources and assessments are made of the market liquidity or the ability to hedge positions or the portfolio risk profile; this includes assessments of the quality and availability of market inputs to the valuation process, level of market turnover and sizes of positions traded in the market.

11. To obtain an accurate and fair measure of market risk, an ADI may, subject to prior written approval from APRA, include within its market risk measure certain non-trading instruments which hedge trading activities. Such instruments will be subject to the credit risk capital requirements (refer to APS 112 or APS 113 as appropriate) but not to specific risk capital charges.

12. An ADI that raises funds by the issue of instruments may only include these positions in the trading book if the instrument meets the trading book definition.

13. A banking book exposure hedged using a credit derivative booked in the trading book cannot be treated as hedged for regulatory capital purposes unless an ADI purchases a credit derivative that meets the requirements for recognition for credit risk mitigation purposes from an eligible third-party credit protection seller (refer to Attachment J to APS 112 or Attachment B of APS 113 as appropriate). Where third-party protection is recognised as hedging a banking book exposure for regulatory capital purposes, neither the internal nor external credit derivative hedge can be included in the trading book for regulatory capital purposes.

14. An ADI may only include term trading-related repo-style transactions that it accounts for in its banking book as part of its trading book for regulatory capital purposes if all such repo-style transactions are included. For this purpose, trading-related repo-style transactions are limited to those that meet the requirements of paragraphs 3 and 4 in this Attachment and both legs are in the form of either cash or securities that can be included in the trading book. All repo-style transactions are subject to a banking book counterparty credit risk charge regardless of where they are booked.

15. For transactions dealt internally within an ADI, the ADI:

16. must either:

    1. eliminate all internal transactions between portfolios within the trading book before measuring positions exposed to market risk; or
    2. include any or all internal deals in their position measurement provided this is done on a consistent basis; and

17. must include internal transactions dealt between the trading book and the banking book in the measurement of trading book positions.

18. An ADI must ensure that a clear audit trail is created at the time transactions are entered into, to facilitate monitoring of compliance with the criteria by which items are allocated to the trading or banking book.

The trading book policy statement

1. An ADI’s trading book policy statement must detail:

2. whether the ADI intends to operate a trading book and whether it has relevant positions in interest rates, equities, foreign exchange or commodities;

3. who can approve or modify the trading book policy statement;

4. the activities the ADI considers to be trading and as constituting part of the trading book for the purposes of calculating capital;

5. the valuation methodology to be adopted for trading book exposures, including:

6. the extent to which an exposure can be marked-to-market daily by reference to an active, liquid two-way market;

7. for exposures that are marked-to-model, the extent to which the ADI can:

   1. identify the material risks of the exposure;
   2. hedge the material risks of the exposure with instruments for which there is an active, liquid two-way market; and
   3. derive reliable estimates for the key assumptions and parameters used in the model; and

8. the extent to which the ADI can and is required to generate valuations for the exposure that can be validated externally in a consistent manner;

9. whether there are any structural foreign exchange positions. Where appropriate, the operational definition of positions to be excluded from the calculation of an ADI’s foreign exchange exposure must be outlined (refer to paragraphs 14 to 17 of this Attachment). A description of the policies covering the identification and management of structural foreign exchange positions, to ensure that trading activities are not classified as structural, must also be included;

10. when and how the statement will be subject to regular review;

11. the extent to which legal restrictions or other operational requirements would impede the ADI’s ability to effect an immediate liquidation or hedge of an exposure in the trading book; and

12. the extent to which the ADI is required to, and can, actively risk manage an exposure within its trading operations.

13. An ADI must immediately notify APRA of any material changes to its trading book policy statement.

14. The trading book policy statement must be incorporated in the ADI’s risk management strategy required by CPS 220.

Measuring currency exposure

1. For the purpose of calculating its TFC capital requirement, an ADI must include in its measurement of exposure to each currency the following:

2. the net spot position, i.e. all asset items less all liability items, including accrued interest and other accrued income and accrued expenses, denominated in the currency in question;

3. the net forward position, i.e. all amounts to be received less all amounts to be paid under forward foreign exchange transactions, including currency futures, the principal on currency swaps not included in the spot position, and interest rate transactions such as futures and swaps denominated in a foreign currency;

4. guarantees (and similar instruments) that are certain to be called and likely to be irrecoverable; and

5. any other item representing a profit or loss in foreign currencies.

6. An ADI may also include in its measurement of currency exposure unearned but expected future interest and anticipated expenses if the amounts are certain and the ADI has hedged them. If an ADI includes future income/expenses, it must not select only expected future flows which reduce its position but must treat all on a consistent basis.

7. If an ADI has deliberately taken a position to either partially or totally hedge against the adverse effect of the exchange rate on its capital ratio, it may exclude the position from the measurement of exposure if:

8. the position is of a ‘structural’ (refer to paragraph 17 of this Attachment) or non-trading nature;

9. the ‘structural’ position does no more than protect the ADI’s capital adequacy ratio;

10. the position cannot be manipulated for speculative or profit-driven purposes; and

11. any exclusion of the position is applied consistently, with the treatment of the hedge remaining the same for the life of the assets or other items.

12. A structural position includes:

13. any position arising from an instrument which qualifies as capital of the ADI under Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111); or

14. any position entered into in relation to the net investment in a self‑sustaining subsidiary, the accounting consequence of which is to reduce or eliminate what would otherwise be a movement in the foreign currency translation reserve; or

15. investments in overseas subsidiaries or associates that are fully deducted from an institution’s capital for capital adequacy purposes under APS 111.

Attachment A

Governance and the trading book policy statement and prudent valuation practices

Board and senior management responsibilities

1. An ADI’s Board of directors (Board) is responsible for approving strategies and policies with respect to market risk and ensuring that senior management takes the steps necessary to monitor and control these risks.
2. In particular, the Board, or a Board committee, must ensure that the ADI has in place adequate systems to identify, measure and manage market risk, including identifying responsibilities, providing adequate separation of duties and avoiding conflicts of interest. An ADI must inform APRA of all significant changes in these systems and in its market risk profile and must ensure that market risk capital requirements are met on a continuous basis and that intra-day exposures are not excessive.

The trading book

1. An ADI must allocate to the trading book positions in financial instruments, including derivative products and other off-balance sheet instruments, that are held either with trading intent or to hedge other elements of the trading book. Positions held with trading intent are those which:

   1. are held for short-term resale; or
   2. are taken on by the ADI with the intention of benefiting in the short‑term from actual and/or expected differences between their buying and selling prices, or from other price or interest rate variations; or
   3. arise from broking and market-making.

2. For a position to be eligible to receive trading book capital treatment, an ADI must have:

3. a clearly documented trading strategy for the position/instrument or portfolios that has been approved by senior management (which must include the expected holding horizon); and

4. clearly defined policies and procedures for the active management of positions such that:

5. positions are managed on a trading desk;

6. position limits are set and monitored for appropriateness;

7. dealers have the autonomy to enter into and manage positions within agreed limits and according to the agreed strategy;

8. positions are marked-to-market daily and when marking-to-model the parameters are assessed on a daily basis;

9. positions are reported to senior management as an integral part of the institution’s risk management process; and

10. positions are actively monitored with reference to market information sources and assessments are made of the market liquidity or the ability to hedge positions or the portfolio risk profile; this includes assessments of the quality and availability of market inputs to the valuation process, level of market turnover and sizes of positions traded in the market.

11. To obtain an accurate and fair measure of market risk, an ADI may, subject to prior written approval from APRA, include within its market risk measure certain non-trading instruments which hedge trading activities. Such instruments will be subject to the credit risk capital requirements (refer to APS 112 or APS 113 as appropriate) but not to specific risk capital charges.

12. An ADI that raises funds by the issue of instruments may only include these positions in the trading book if the instrument meets the trading book definition.

13. A banking book exposure hedged using a credit derivative booked in the trading book cannot be treated as hedged for regulatory capital purposes unless an ADI purchases a credit derivative that meets the requirements for recognition for credit risk mitigation purposes from an eligible third-party credit protection seller (refer to Attachment J to APS 112 or Attachment B of APS 113 as appropriate). Where third-party protection is recognised as hedging a banking book exposure for regulatory capital purposes, neither the internal nor external credit derivative hedge can be included in the trading book for regulatory capital purposes.

14. An ADI may only include term trading-related repo-style transactions that it accounts for in its banking book as part of its trading book for regulatory capital purposes if all such repo-style transactions are included. For this purpose, trading-related repo-style transactions are limited to those that meet the requirements of paragraphs 3 and 4 in this Attachment and both legs are in the form of either cash or securities that can be included in the trading book. All repo-style transactions are subject to a banking book counterparty credit risk charge regardless of where they are booked.

15. For transactions dealt internally within an ADI, the ADI:

16. must either:

    1. eliminate all internal transactions between portfolios within the trading book before measuring positions exposed to market risk; or
    2. include any or all internal deals in their position measurement provided this is done on a consistent basis; and

17. must include internal transactions dealt between the trading book and the banking book in the measurement of trading book positions.

18. An ADI must ensure that a clear audit trail is created at the time transactions are entered into, to facilitate monitoring of compliance with the criteria by which items are allocated to the trading or banking book.

The trading book policy statement

1. An ADI’s trading book policy statement must detail:

2. whether the ADI intends to operate a trading book and whether it has relevant positions in interest rates, equities, foreign exchange or commodities;

3. who can approve or modify the trading book policy statement;

4. the activities the ADI considers to be trading and as constituting part of the trading book for the purposes of calculating capital;

5. the valuation methodology to be adopted for trading book exposures, including:

6. the extent to which an exposure can be marked-to-market daily by reference to an active, liquid two-way market;

7. for exposures that are marked-to-model, the extent to which the ADI can:

   1. identify the material risks of the exposure;
   2. hedge the material risks of the exposure with instruments for which there is an active, liquid two-way market; and
   3. derive reliable estimates for the key assumptions and parameters used in the model; and

8. the extent to which the ADI can and is required to generate valuations for the exposure that can be validated externally in a consistent manner;

9. whether there are any structural foreign exchange positions. Where appropriate, the operational definition of positions to be excluded from the calculation of an ADI’s foreign exchange exposure must be outlined (refer to paragraphs 14 to 17 of this Attachment). A description of the policies covering the identification and management of structural foreign exchange positions, to ensure that trading activities are not classified as structural, must also be included;

10. when and how the statement will be subject to regular review;

11. the extent to which legal restrictions or other operational requirements would impede the ADI’s ability to effect an immediate liquidation or hedge of an exposure in the trading book; and

12. the extent to which the ADI is required to, and can, actively risk manage an exposure within its trading operations.

13. An ADI must immediately notify APRA of any material changes to its trading book policy statement.

14. The trading book policy statement must be incorporated in the ADI’s risk management strategy required by CPS 220.

Measuring currency exposure

1. For the purpose of calculating its TFC capital requirement, an ADI must include in its measurement of exposure to each currency the following:

2. the net spot position, i.e. all asset items less all liability items, including accrued interest and other accrued income and accrued expenses, denominated in the currency in question;

3. the net forward position, i.e. all amounts to be received less all amounts to be paid under forward foreign exchange transactions, including currency futures, the principal on currency swaps not included in the spot position, and interest rate transactions such as futures and swaps denominated in a foreign currency;

4. guarantees (and similar instruments) that are certain to be called and likely to be irrecoverable; and

5. any other item representing a profit or loss in foreign currencies.

6. An ADI may also include in its measurement of currency exposure unearned but expected future interest and anticipated expenses if the amounts are certain and the ADI has hedged them. If an ADI includes future income/expenses, it must not select only expected future flows which reduce its position but must treat all on a consistent basis.

7. If an ADI has deliberately taken a position to either partially or totally hedge against the adverse effect of the exchange rate on its capital ratio, it may exclude the position from the measurement of exposure if:

8. the position is of a ‘structural’ (refer to paragraph 17 of this Attachment) or non-trading nature;

9. the ‘structural’ position does no more than protect the ADI’s capital adequacy ratio;

10. the position cannot be manipulated for speculative or profit-driven purposes; and

11. any exclusion of the position is applied consistently, with the treatment of the hedge remaining the same for the life of the assets or other items.

12. A structural position includes:

13. any position arising from an instrument which qualifies as capital of the ADI under Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111); or

14. any position entered into in relation to the net investment in a self‑sustaining subsidiary, the accounting consequence of which is to reduce or eliminate what would otherwise be a movement in the foreign currency translation reserve; or

15. investments in overseas subsidiaries or associates that are fully deducted from an institution’s capital for capital adequacy purposes under APS 111.

Board and senior management responsibilities

1. An ADI’s Board of directors (Board) is responsible for approving strategies and policies with respect to market risk and ensuring that senior management takes the steps necessary to monitor and control these risks.
2. In particular, the Board, or a Board committee, must ensure that the ADI has in place adequate systems to identify, measure and manage market risk, including identifying responsibilities, providing adequate separation of duties and avoiding conflicts of interest. An ADI must inform APRA of all significant changes in these systems and in its market risk profile and must ensure that market risk capital requirements are met on a continuous basis and that intra-day exposures are not excessive.

The trading book

1. An ADI must allocate to the trading book positions in financial instruments, including derivative products and other off-balance sheet instruments, that are held either with trading intent or to hedge other elements of the trading book. Positions held with trading intent are those which:

   1. are held for short-term resale; or
   2. are taken on by the ADI with the intention of benefiting in the short‑term from actual and/or expected differences between their buying and selling prices, or from other price or interest rate variations; or
   3. arise from broking and market-making.

2. For a position to be eligible to receive trading book capital treatment, an ADI must have:

3. a clearly documented trading strategy for the position/instrument or portfolios that has been approved by senior management (which must include the expected holding horizon); and

4. clearly defined policies and procedures for the active management of positions such that:

5. positions are managed on a trading desk;

6. position limits are set and monitored for appropriateness;

7. dealers have the autonomy to enter into and manage positions within agreed limits and according to the agreed strategy;

8. positions are marked-to-market daily and when marking-to-model the parameters are assessed on a daily basis;

9. positions are reported to senior management as an integral part of the institution’s risk management process; and

10. positions are actively monitored with reference to market information sources and assessments are made of the market liquidity or the ability to hedge positions or the portfolio risk profile; this includes assessments of the quality and availability of market inputs to the valuation process, level of market turnover and sizes of positions traded in the market.

11. To obtain an accurate and fair measure of market risk, an ADI may, subject to prior written approval from APRA, include within its market risk measure certain non-trading instruments which hedge trading activities. Such instruments will be subject to the credit risk capital requirements (refer to APS 112 or APS 113 as appropriate) but not to specific risk capital charges.

12. An ADI that raises funds by the issue of instruments may only include these positions in the trading book if the instrument meets the trading book definition.

13. A banking book exposure hedged using a credit derivative booked in the trading book cannot be treated as hedged for regulatory capital purposes unless an ADI purchases a credit derivative that meets the requirements for recognition for credit risk mitigation purposes from an eligible third-party credit protection seller (refer to Attachment J to APS 112 or Attachment B of APS 113 as appropriate). Where third-party protection is recognised as hedging a banking book exposure for regulatory capital purposes, neither the internal nor external credit derivative hedge can be included in the trading book for regulatory capital purposes.

14. An ADI may only include term trading-related repo-style transactions that it accounts for in its banking book as part of its trading book for regulatory capital purposes if all such repo-style transactions are included. For this purpose, trading-related repo-style transactions are limited to those that meet the requirements of paragraphs 3 and 4 in this Attachment and both legs are in the form of either cash or securities that can be included in the trading book. All repo-style transactions are subject to a banking book counterparty credit risk charge regardless of where they are booked.

15. For transactions dealt internally within an ADI, the ADI:

16. must either:

    1. eliminate all internal transactions between portfolios within the trading book before measuring positions exposed to market risk; or
    2. include any or all internal deals in their position measurement provided this is done on a consistent basis; and

17. must include internal transactions dealt between the trading book and the banking book in the measurement of trading book positions.

18. An ADI must ensure that a clear audit trail is created at the time transactions are entered into, to facilitate monitoring of compliance with the criteria by which items are allocated to the trading or banking book.

The trading book policy statement

1. An ADI’s trading book policy statement must detail:

2. whether the ADI intends to operate a trading book and whether it has relevant positions in interest rates, equities, foreign exchange or commodities;

3. who can approve or modify the trading book policy statement;

4. the activities the ADI considers to be trading and as constituting part of the trading book for the purposes of calculating capital;

5. the valuation methodology to be adopted for trading book exposures, including:

6. the extent to which an exposure can be marked-to-market daily by reference to an active, liquid two-way market;

7. for exposures that are marked-to-model, the extent to which the ADI can:

   1. identify the material risks of the exposure;
   2. hedge the material risks of the exposure with instruments for which there is an active, liquid two-way market; and
   3. derive reliable estimates for the key assumptions and parameters used in the model; and

8. the extent to which the ADI can and is required to generate valuations for the exposure that can be validated externally in a consistent manner;

9. whether there are any structural foreign exchange positions. Where appropriate, the operational definition of positions to be excluded from the calculation of an ADI’s foreign exchange exposure must be outlined (refer to paragraphs 14 to 17 of this Attachment). A description of the policies covering the identification and management of structural foreign exchange positions, to ensure that trading activities are not classified as structural, must also be included;

10. when and how the statement will be subject to regular review;

11. the extent to which legal restrictions or other operational requirements would impede the ADI’s ability to effect an immediate liquidation or hedge of an exposure in the trading book; and

12. the extent to which the ADI is required to, and can, actively risk manage an exposure within its trading operations.

13. An ADI must immediately notify APRA of any material changes to its trading book policy statement.

14. The trading book policy statement must be incorporated in the ADI’s risk management strategy required by CPS 220.

Measuring currency exposure

1. For the purpose of calculating its TFC capital requirement, an ADI must include in its measurement of exposure to each currency the following:

2. the net spot position, i.e. all asset items less all liability items, including accrued interest and other accrued income and accrued expenses, denominated in the currency in question;

3. the net forward position, i.e. all amounts to be received less all amounts to be paid under forward foreign exchange transactions, including currency futures, the principal on currency swaps not included in the spot position, and interest rate transactions such as futures and swaps denominated in a foreign currency;

4. guarantees (and similar instruments) that are certain to be called and likely to be irrecoverable; and

5. any other item representing a profit or loss in foreign currencies.

6. An ADI may also include in its measurement of currency exposure unearned but expected future interest and anticipated expenses if the amounts are certain and the ADI has hedged them. If an ADI includes future income/expenses, it must not select only expected future flows which reduce its position but must treat all on a consistent basis.

7. If an ADI has deliberately taken a position to either partially or totally hedge against the adverse effect of the exchange rate on its capital ratio, it may exclude the position from the measurement of exposure if:

8. the position is of a ‘structural’ (refer to paragraph 17 of this Attachment) or non-trading nature;

9. the ‘structural’ position does no more than protect the ADI’s capital adequacy ratio;

10. the position cannot be manipulated for speculative or profit-driven purposes; and

11. any exclusion of the position is applied consistently, with the treatment of the hedge remaining the same for the life of the assets or other items.

12. A structural position includes:

13. any position arising from an instrument which qualifies as capital of the ADI under Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111); or

14. any position entered into in relation to the net investment in a self‑sustaining subsidiary, the accounting consequence of which is to reduce or eliminate what would otherwise be a movement in the foreign currency translation reserve; or

15. investments in overseas subsidiaries or associates that are fully deducted from an institution’s capital for capital adequacy purposes under APS 111.

Attachment B

The standard method

1. The standard method comprises a range of alternative methodologies an ADI may use to calculate the market risks arising from its trading activities. The capital requirement under the standard method is the sum of the capital charges calculated in accordance with this Attachment and, for credit derivatives, Attachment D.
2. Unless required to do otherwise by APRA:
   1. an ADI that has market-related activities in Australia and offshore branches (offshore Level 1 sites) and manages those market-related activities centrally may, for the purposes of calculating its Level 1 TFC capital requirement, report short and long positions in exactly the same instrument within any of those sites on a net basis, regardless of where they are booked; and
   2. an ADI that has market-related activities in Australia and offshore Level 2 sites (offshore branches or offshore subsidiaries) and manages those market-related activities centrally may, for the purposes of calculating its Level 2 TFC capital requirement, report short and long positions in exactly the same instrument within any of those sites on a net basis, regardless of where they are booked;

subject to the following conditions:

1. positions taken in an offshore site may only be netted or offset against positions taken in Australia or in other offshore sites if the position-taking of that offshore site is monitored by the ADI’s Australian office on a daily basis;
2. positions taken in an offshore site must not be netted or offset against positions taken in Australia or in other offshore sites where there are obstacles to the quick repatriation of profits from that offshore site or from offshore transactions taken by the ADI itself; and
3. positions taken in an offshore site must not be netted or offset against positions taken in Australia or in other offshore sites where there are legal and procedural difficulties in carrying out the timely management of risks on a consolidated basis.

Where the conditions (c) to (e) do not allow for positions in an offshore site to be netted or offset, an ADI must calculate the market risk charge for that offshore site separately. The ADI must calculate the total market risk charge as the sum of the charge calculated for positions which may be netted according to conditions (c) to (e) and the charges calculated for each of the offshore sites for which the conditions (c) to (e) do not allow netting.

Interest rate risk

1. The standard method for measuring the risk of holding or taking positions in debt securities and other interest-rate-related instruments in the trading book covers all fixed-rate and floating-rate debt securities and instruments that behave like them, including non-convertible preference shares.[3] An ADI must also include interest rate exposures arising from forward foreign exchange transactions and forward sales and purchases of equities and commodities. An ADI may include the interest rate exposure (exposure to a change in the value of an option due to a change in the interest rate) on foreign exchange, equity and commodity options. Convertible bonds must be treated as debt securities if they trade like debt securities, and as equities if they trade like equities.
2. In determining the capital charge for interest rate risk, an ADI must separately calculate the charges applying to the specific risk of each instrument, irrespective of whether it is a short or a long position, and to the interest rate risk in the portfolio (general market risk) where long and short positions in different securities or instruments can be offset.

Specific risk

1. The capital charges for specific risk are outlined in Tables 1 to 5 and paragraphs 6 to 19 of this Attachment. An ADI must not offset between different issues even if the issuer is the same, but may offset matched long and short positions in an identical issue (including positions in derivatives).

Table 1: Specific risk capital charges

<table cellspacing="0" cellpadding="0" style="width:390.6pt; margin-left:33.75pt; border:0.75pt solid #000000; border-collapse:collapse"><thead><tr><td style="width:60.05pt; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Category</span></p></td><td style="width:88.45pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">External credit assessment</span><a id="_ftnref4"></a><a href="#_ftn4" style="text-decoration:none"><span class="FootnoteReference" style="font-size:8pt; font-weight:bold; color:#000000">[4]</span></a></p></td><td style="width:135.65pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Residual term to maturity</span></p></td><td style="width:62.5pt; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Specific risk capital charge (%)</span></p></td></tr></thead><tbody><tr style="height:14.45pt"><td rowspan="6" style="width:60.05pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>Government</span></p></td><td style="width:88.45pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>AAA to AA-</span></p></td><td style="width:135.65pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span></span></p></td><td style="width:62.5pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>0.00</span></p></td></tr><tr><td style="width:88.45pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>A+ to BBB-</span></p></td><td style="width:135.65pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>6 months or less</span></p></td><td style="width:62.5pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>0.25</span></p></td></tr><tr><td style="width:88.45pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span></span></p></td><td style="width:135.65pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>Greater than 6 months and up to and including 24 months</span></p></td><td style="width:62.5pt; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>1.00</span></p></td></tr><tr><td style="width:88.45pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span></span></p></td><td style="width:135.65pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>Exceeding 24 months</span></p></td><td style="width:62.5pt; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>1.60</span></p></td></tr><tr style="height:4pt"><td style="width:88.45pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>BB+ to B- or unrated</span></p></td><td style="width:135.65pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span></span></p></td><td style="width:62.5pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>8.00</span></p></td></tr><tr style="height:4pt"><td style="width:88.45pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>Below B-</span></p></td><td style="width:135.65pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span></span></p></td><td style="width:62.5pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>12.00</span></p><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span></span></p></td></tr><tr style="height:4pt"><td rowspan="3" style="width:60.05pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>Qualifying</span></p></td><td rowspan="3" style="width:88.45pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span></span></p><p style="margin-top:3pt; margin-bottom:3pt"><span></span></p><p style="margin-top:3pt; margin-bottom:3pt"><span></span></p><p style="margin-top:3pt; margin-bottom:3pt"><span></span></p></td><td style="width:135.65pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>6 months or less</span></p></td><td style="width:62.5pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>0.25</span></p></td></tr><tr style="height:4pt"><td style="width:135.65pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>Greater than 6 months and up to and including 24 months</span></p></td><td style="width:62.5pt; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>1.00</span></p></td></tr><tr style="height:4pt"><td style="width:135.65pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>Exceeding 24 months</span></p></td><td style="width:62.5pt; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>1.60</span></p></td></tr><tr style="height:4pt"><td rowspan="2" style="width:60.05pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>Other</span></p></td><td style="width:88.45pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>BB+ to BB- or unrated</span></p></td><td style="width:135.65pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span></span></p></td><td style="width:62.5pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>8.00</span></p></td></tr><tr style="height:14.75pt"><td style="width:88.45pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>Below BB-</span></p></td><td style="width:135.65pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span></span></p></td><td style="width:62.5pt; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>12.00</span></p></td></tr></tbody></table>

1. In Table 1, the ‘government’ category includes all forms of government paper including bonds, Treasury notes and other short‑term instruments. These debt instruments may be given a zero specific risk charge if:

2. they are issued, fully guaranteed or fully collateralised[5] by securities issued by the Australian Commonwealth, State or Territory governments or the Reserve Bank of Australia; or

3. they are issued, fully guaranteed or fully collateralised by securities issued by central governments or central banks within the Organisation for Economic Co-operation and Development (OECD); or

4. they are issued or fully guaranteed by non-OECD country central governments and central banks and have a residual maturity of one year or less and are denominated in local currency and the ADI’s holdings of such paper are funded by liabilities in the same currency.

5. The ‘qualifying’ category includes securities that are:

6. rated investment grade by at least two external credit assessment institutions (ECAIs) within the meaning of APS 112 for the purpose of risk-weighting claims on rated counterparties and exposures; or

7. rated investment grade by one ECAI or unrated, but deemed, subject to APRA’s written approval, to be of comparable investment quality by the ADI and the issuer has its equity included in a recognised market index (refer to Table 8). An ADI must apply to APRA for approval of a policy statement outlining securities the ADI considers to be of comparable investment quality.

8. In addition, debt securities may be treated as qualifying if they are:

9. issued or guaranteed by Australian local governments or Australian public sector entities (except those that have corporate status and operate on a commercial basis);[6]

10. issued or fully guaranteed by non-OECD country central governments or central banks and have a residual maturity of over one year and are denominated in local currency and the ADI’s holdings of such paper are funded by liabilities in the same currency;

11. issued or fully collateralised by claims on an international agency or regional development bank, including the International Monetary Fund, the International Bank for Reconstruction and Development, the Bank for International Settlements and the Asian Development Bank;

12. issued, guaranteed, endorsed[7] or accepted by an Australian ADI or a bank incorporated in another OECD[8] country, provided such instruments do not qualify as capital of the issuing institution;[9]

13. issued, guaranteed, endorsed or accepted by a non-OECD bank and have a residual maturity of one year or less, provided such instruments do not qualify as capital of the issuing institution;

14. issued or guaranteed by OECD state and regional governments or OECD public sector entities;

15. issued or guaranteed by an entity that is subject to an equivalent capital adequacy regime (covering both credit and market risk), as determined by APRA;[10] or

16. issued by institutions that are deemed, in writing, by APRA to be equivalent to investment grade quality and subject to comparable supervisory and regulatory arrangements.

17. An ADI using the internal ratings-based (IRB) approach for credit risk (refer to APS 113) for a portfolio may treat debt securities in that portfolio as qualifying if:

18. the securities are rated equivalent[11] to investment grade under the reporting ADI’s internal rating system, and APRA has confirmed the rating system complies with the requirements for an IRB approach; and

19. the issuer has securities listed on a recognised stock exchange within the meaning of APS 112.

20. Fund-raising instruments issued, guaranteed or accepted by an ADI and included in the trading book only attract capital charges for general market risk, not specific risk.[12]

Specific risk for securitisation exposures[13] and resecuritisation exposures

1. An ADI must apply a risk-weight of 1250 per cent (i.e. a 100 per cent risk capital charge) to a securitisation or resecuritisation exposure, unless it performs the due diligence specified below. This due diligence requires an ADI to:

2. on an ongoing basis, have a comprehensive understanding of the risk characteristics of its individual securitisation exposures, whether on-balance sheet or off-balance sheet, as well as the pools underlying its securitisation exposures;

3. have access to and periodically review performance information on the underlying pools in a timely manner;

4. for resecuritisations, have access to, and periodically review, information not only on the underlying securitisation tranches but also on the risk characteristics and performance of the pools underlying the securitisation tranches; and

5. have a comprehensive understanding of all structural features of a securitisation transaction that may have a material impact on the ADI’s exposures to the transaction.

6. An ADI using either the standardised approach for credit risk or the standardised approach for market risk must calculate specific risk for securitisation exposures and resecuritisation exposures according to Tables 2 and 3 below. An ADI must apply a risk-weight of 1250 per cent i.e. a 100 per cent risk capital charge to the value of positions with long-term ratings of B+ and below and short-term ratings other than A-1/P-1, A-2/P-2, A-3/P-3. An ADI must also apply a risk-weight of 1250 per cent i.e. a 100 per cent risk capital charge, to the value of unrated positions, other than in the circumstances described in paragraph 6 of Attachment C to APS 120. The operational requirements for the recognition of external credit assessments outlined in Attachment B to APS 120 apply.

Table 2: Specific risk capital charges for securitisation exposures and resecuritisation exposures (long term ratings)

Table 3: Specific risk capital charges for securitisation exposures and resecuritisation exposures (short term ratings)

1. An ADI which has approval to use both the IRB approach for credit risk and the internal models approach for market risk must calculate the specific risk capital charges for rated securitisation and resecuritisation exposures positions according to Tables 4 and 5, depending on whether or not the positions are granular and/or senior[14]. The operational requirements for the recognition of external credit assessments outlined in Attachment B to APS 120 apply.

Table 4: Specific risk capital charges based on external credit assessments (long term ratings)

<table cellspacing="0" cellpadding="0" style="width:405.75pt; margin-left:32.4pt; border:0.75pt solid #000000; border-collapse:collapse"><thead><tr style="height:36.9pt"><td rowspan="2" style="width:73.25pt; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">External credit assessment</span></p></td><td colspan="3" style="width:174.1pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Securitisation exposures</span></p></td><td colspan="2" style="width:125.25pt; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Resecuritisation exposures</span></p></td></tr><tr style="height:25.4pt"><td style="width:45.35pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Senior, granular</span></p></td><td style="width:61.3pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Non-senior, granular</span></p></td><td style="width:45.85pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Non-granular</span></p></td><td style="width:57.4pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Senior</span></p></td><td style="width:57.05pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Non-senior</span></p></td></tr></thead><tbody><tr style="height:13.35pt"><td style="width:73.25pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>AAA</span></p></td><td style="width:45.35pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>0.56%</span></p></td><td style="width:61.3pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>0.96%</span></p></td><td style="width:45.85pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>1.60%</span></p></td><td style="width:57.4pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>1.60%</span></p></td><td style="width:57.05pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>2.40%</span></p></td></tr><tr style="height:13.35pt"><td style="width:73.25pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>AA</span></p></td><td style="width:45.35pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>0.64%</span></p></td><td style="width:61.3pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>1.20%</span></p></td><td style="width:45.85pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>2.00%</span></p></td><td style="width:57.4pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>2.00%</span></p></td><td style="width:57.05pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>3.20%</span></p></td></tr><tr style="height:13.35pt"><td style="width:73.25pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>A+</span></p></td><td style="width:45.35pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>0.80%</span></p></td><td style="width:61.3pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>1.44%</span></p></td><td rowspan="3" style="width:45.85pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>2.80%</span></p></td><td style="width:57.4pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>2.80%</span></p></td><td style="width:57.05pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>4.00%</span></p></td></tr><tr style="height:13.35pt"><td style="width:73.25pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>A</span></p></td><td style="width:45.35pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>0.96%</span></p></td><td style="width:61.3pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>1.60%</span></p></td><td style="width:57.4pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>3.20%</span></p></td><td style="width:57.05pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>5.20%</span></p></td></tr><tr style="height:13.35pt"><td style="width:73.25pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>A-</span></p></td><td style="width:45.35pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>1.60%</span></p></td><td style="width:61.3pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>2.80%</span></p></td><td style="width:57.4pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>4.80%</span></p></td><td style="width:57.05pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>8.00%</span></p></td></tr><tr style="height:13.35pt"><td style="width:73.25pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>BBB+</span></p></td><td style="width:45.35pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>2.80%</span></p></td><td colspan="2" style="width:117.95pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>4.00%</span></p></td><td style="width:57.4pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>8.00%</span></p></td><td style="width:57.05pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>12.00%</span></p></td></tr><tr style="height:13.35pt"><td style="width:73.25pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>BBB</span></p></td><td style="width:45.35pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>4.80%</span></p></td><td colspan="2" style="width:117.95pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>6.00%</span></p></td><td style="width:57.4pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>12.00%</span></p></td><td style="width:57.05pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>18.00%</span></p></td></tr><tr style="height:13.35pt"><td style="width:73.25pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>BBB-</span></p></td><td colspan="3" style="width:174.1pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>8.00%</span></p></td><td style="width:57.4pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>16.00%</span></p></td><td style="width:57.05pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>28.00%</span></p></td></tr><tr style="height:13.35pt"><td style="width:73.25pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>BB+</span></p></td><td colspan="3" style="width:174.1pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>20.00%</span></p></td><td style="width:57.4pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>24.00%</span></p></td><td style="width:57.05pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>40.00%</span></p></td></tr><tr style="height:13.35pt"><td style="width:73.25pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>BB</span></p></td><td colspan="3" style="width:174.1pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>34.00%</span></p></td><td style="width:57.4pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>40.00%</span></p></td><td style="width:57.05pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>52.00%</span></p></td></tr><tr style="height:13.35pt"><td style="width:73.25pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>BB-</span></p></td><td colspan="3" style="width:174.1pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>52.00%</span></p></td><td style="width:57.4pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>60.00%</span></p></td><td style="width:57.05pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>68.00%</span></p></td></tr><tr style="height:24.8pt"><td style="width:73.25pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>Below BB- and unrated</span></p></td><td colspan="5" style="width:310.15pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>100.00%</span></p></td></tr></tbody></table>

Table 5: Specific risk capital charges based on external credit assessments (short term ratings)

<table cellspacing="0" cellpadding="0" style="width:391.95pt; margin-left:32.4pt; border:0.75pt solid #000000; border-collapse:collapse"><thead><tr style="height:36.9pt"><td rowspan="2" style="width:75.6pt; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">External credit assessment</span></p></td><td colspan="3" style="width:174.3pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Securitisation exposures</span></p></td><td colspan="2" style="width:108.9pt; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Resecuritisation exposures</span></p></td></tr><tr style="height:25.4pt"><td style="width:46.6pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Senior, granular</span></p></td><td style="width:60.3pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Non-senior, granular</span></p></td><td style="width:45.8pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Non-granular</span></p></td><td style="width:56.1pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Senior</span></p></td><td style="width:42pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span style="font-weight:bold">Non-senior</span></p></td></tr></thead><tbody><tr style="height:13.35pt"><td style="width:75.6pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>A-1/P-1</span></p></td><td style="width:46.6pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>0.56%</span></p></td><td style="width:60.3pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>0.96%</span></p></td><td style="width:45.8pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>1.60%</span></p></td><td style="width:56.1pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>1.60%</span></p></td><td style="width:42pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>2.40%</span></p></td></tr><tr style="height:13.35pt"><td style="width:75.6pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>A-2/P-2</span></p></td><td style="width:46.6pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>0.96%</span></p></td><td style="width:60.3pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>1.60%</span></p></td><td style="width:45.8pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>2.80%</span></p></td><td style="width:56.1pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>3.20%</span></p></td><td style="width:42pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>5.20%</span></p></td></tr><tr style="height:13.35pt"><td style="width:75.6pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>A-3/P-3</span></p></td><td style="width:46.6pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>4.80%</span></p></td><td style="width:60.3pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>6.00%</span></p></td><td style="width:45.8pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>6.00%</span></p></td><td style="width:56.1pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>12.00%</span></p></td><td style="width:42pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>18.00%</span></p></td></tr><tr style="height:24.8pt"><td style="width:75.6pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt"><span>Below A-3/P-3</span></p></td><td colspan="5" style="width:294pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center"><span>100.00%</span></p></td></tr></tbody></table>

1. An ADI may, if APRA approves, calculate the specific risk capital charges for unrated securitisation and resecuritisation positions as follows.

2. An ADI with approval for the IRB approach for the asset classes which include the underlying exposures may apply the supervisory formula approach (refer to paragraphs 18 to 38 of Attachment D to APS 120). When estimating PDs and LGDs for calculating KIRB, the ADI must meet the minimum requirements for the IRB approach.

3. An ADI which has approval for using a value-at-risk measure for specific market risk (refer to paragraph 43 of Attachment C) for products or asset classes which include the underlying exposures may apply the supervisory formula approach (refer to paragraphs 18 to 38 of Attachment D to APS 120). When estimating PDs and LGDs for calculating KIRB, the ADI must meet the same standards as for calculating the incremental risk capital charge according to paragraphs 55 and 56 of Attachment C.

4. In all other cases an ADI must calculate the capital charge as eight per cent of the weighted-average risk weight that would be applied to the securitised exposures under the standardised approach, multiplied by a concentration ratio. This concentration ratio is equal to the sum of the nominal amounts of all the tranches divided by the sum of the nominal amounts of the tranches junior to or pari passu with the tranche in which the position is held, including that tranche itself.

The resulting specific risk capital charge must not be lower than any specific risk capital charge applicable to a rated more senior tranche. If an ADI is unable to determine the specific risk capital charge as described above or prefers not to apply the treatment described above to a position, it must apply a risk-weight of 1250 per cent i.e. a 100 per cent risk capital charge to that position.

Specific risk offsetting for the correlation portfolio

1. An ADI’s correlation trading portfolio includes securitisation exposures and nth-to-default credit derivatives that meet all of the following criteria:

2. the positions are neither resecuritisation positions, nor derivatives of securitisation exposures that do not provide a pro-rata share in the proceeds of a securitisation tranche (this criterion therefore excludes options on a securitisation tranche, or a synthetically leveraged super-senior tranche);

3. all reference entities are single-name products, including single-name credit derivatives, for which a liquid two-way market exists[15];

4. the positions do not reference underlying exposures that would be treated as a retail exposure or a property exposure under the standardised approach to credit risk (refer to APS 112); and

5. the positions do not reference a claim on a special purpose entity.

6. An ADI may also include in the correlation trading portfolio positions that hedge the positions described above and which are neither securitisation exposures nor nth-to-default credit derivatives and where a liquid two-way market (as described in footnote 15) exists for the instrument or its underlying exposures.

7. APRA may allow an ADI to determine the capital charge for specific interest rate risk for the correlation trading portfolio as the larger of:

8. the total specific risk capital charges that would apply just to the net long positions from the net long correlation trading exposures combined; and

9. the total specific risk capital charges that would apply just to the net short positions from the net short correlation trading exposures combined.

Transitional provisions for securitisation positions

1. Until 31 December 2013, APRA may allow an ADI to determine the capital charge for specific interest rate risk for the securitisation instruments that are not included in the correlation trading portfolio as the larger of:

2. the total specific risk capital charges that would apply just to the net long positions in securitisation instruments in the trading book; and

3. the total specific risk capital charges that would apply just to the net short positions in securitisation instruments in the trading book.

This calculation must be undertaken separately from the calculation for the correlation trading portfolio as described in paragraph 17 of this Attachment.

Limitation of specific risk capital charge to maximum possible loss

1. An ADI may limit the capital charge for an individual position in a credit derivative or securitisation instrument to the maximum possible loss. For a short risk position, an ADI may calculate this limit as a change in value due to the underlying names immediately becoming default risk-free. For a long position, the maximum possible loss may be calculated as the change in value in the event that all the underlying names were to default with zero recoveries.

General market risk

1. The capital charges for general market risk capture the risk of loss arising from changes in market interest rates. An ADI using the standard method may either use the maturity method or may apply to APRA for written approval to use the duration method of measuring general market risk. An ADI that has approval to use the duration method must do so on a continuing basis, unless a change in method is approved, in writing, by APRA. In each method, positions are allocated across a maturity ladder and the capital charge is calculated as the sum of four components:

2. the net short or long weighted position across the whole trading book;

3. a small proportion of the matched positions in each time band (the ‘vertical disallowance’);

4. a larger proportion of the matched positions across different time bands (the ‘horizontal disallowance’); and

5. a net charge for positions in options, where appropriate.

6. An ADI must use separate maturity ladders for positions in each currency, with capital charges calculated separately for each currency and then summed, with no offsetting between positions of different currencies. Where business in one or more currencies is insignificant (residual currencies), the ADI may construct a single maturity ladder for those currencies and record, within each appropriate time band, the net long or short position in each currency, rather than having to use separate maturity ladders for each currency. The ADI must sum the absolute value of the individual net positions within each time band, irrespective of whether they are long or short positions, to produce a gross position figure.

7. In the maturity method, long or short positions in debt securities and other sources of interest rate exposures, including derivative instruments, are entered into a maturity ladder comprising thirteen time bands (or 15 time bands in the case of low-coupon instruments) (refer to Table 6). An ADI must allocate fixed-rate instruments according to the residual term to maturity and floating-rate instruments according to the residual term to the next repricing date. Zero-coupon bonds and bonds with a coupon of less than three per cent must be entered according to the time bands set out in the second column of Table 6. An ADI may omit from the interest rate maturity framework opposite positions of the same amount in the same issue (but not different issues by the same issuer) and closely matched swaps, forwards, futures and forward rate agreements (FRAs) that comply with paragraphs 38 to 40 of this Attachment.

8. To calculate the general market risk capital charge using the maturity method, an ADI must:

9. weight the positions in each time band by the risk-weight corresponding to the position’s time band (refer to Table 6); then

10. offset the weighted longs and shorts within each time band, where weighted positions arising from low-coupon instruments are combined with other weighted positions across corresponding time bands; then

11. offset the weighted longs and shorts within each zone (refer to Table 7), using only positions that have not been already been offset under (b); then

12. offset the weighted longs and shorts between zones using positions that have not already been offset under (b) and (c).

The net amount remaining is the net position.

1. An ADI must then calculate the vertical disallowances for each time band as 10 per cent of the smaller of the offsetting positions determined according to paragraph 23(b) of this Attachment, whether long or short.

2. An ADI must then calculate the horizontal disallowances as the sum of:

3. 40 per cent of the smaller of the offsetting weighted positions within zone 1 determined according to paragraph 23(c) of this Attachment;

4. 30 per cent of the smaller of the offsetting weighted positions within zones 2 and 3 determined according to paragraph 23(d) of this Attachment; and

5. 40 per cent of the smaller of the offsetting weighted positions between zones 1 and 2, and between zones 2 and 3 determined according to paragraph 23(d) of this Attachment.

6. An ADI must calculate the general market risk capital charge under the maturity method as the sum of the net position and the vertical and horizontal disallowances.

7. Under the duration method, an ADI must:

8. calculate the price sensitivity of each instrument in terms of a change in interest rates of between 0.6 and 1.0 percentage points depending on the modified duration of the instrument (refer to Table 6);

9. enter the resulting sensitivity measures into a duration-based ladder in the fifteen time bands set out in the second column of Table 6;

10. subject long and short positions in each time band to a five per cent vertical disallowance to capture basis risk; and

11. carry forward the net positions in each time band for horizontal offsetting subject to the disallowances (refer to Table 7).

12. An ADI must subject the gross positions in each time band for residual currencies to either the risk weightings in Table 6 if positions are reported using the maturity method, or the assumed changes in yield in Table 6, if positions are reported using the duration method, with no further offsets.

Interest rate derivatives

1. An ADI’s measurement system must include all interest rate derivatives and off-balance sheet instruments in the trading book that react to changes in interest rates. Options must be treated in accordance with the methods outlined in paragraphs 77 to 95 of this Attachment.
2. An ADI must convert derivatives into positions in the relevant underlying to become subject to specific and general market risk charges. To determine the capital charge, the amounts reported must be the market value of the principal amount of the underlying or of the notional underlying.
3. An ADI must treat futures and forward contracts (including FRAs) as a combination of a long and a short position in a notional government security or, in the case of futures or forwards on bank or corporate debt, as a combination of a long and a short position in the underlying debt security. The maturity of a future or an FRA is the period until delivery or exercise of the contract, plus the life of the underlying or notional underlying instrument. The long and short positions must be reported at the market value of the underlying or notional underlying security or portfolio of securities. Where a range of deliverable instruments may be delivered to fulfil the contract, the ADI may elect which deliverable security goes into the maturity or duration ladder but must take account of any conversion factor defined by the exchange.[16]
4. An ADI must treat swaps as two notional positions in government securities with relevant maturities. Both legs of the swap must be reported at their market values. For swaps that pay or receive a fixed or floating interest rate against some other reference price, e.g. a stock index, the ADI must enter the interest rate component into the appropriate repricing maturity category, with the equity component being included in the equity framework. The separate legs of cross-currency swaps must be reported in the relevant maturity ladders for the currencies concerned and the capital for any foreign exchange risk calculated in accordance with the methods outlined in paragraphs 56 to 64 of this Attachment.

Pre-processing techniques

1. An ADI may use alternative methods to calculate the positions to be included in the maturity or duration ladder, subject to APRA determining in writing that it is satisfied as to the accuracy of the systems being used. Such formulae may be applied to all interest-rate-sensitive positions, arising from both physical and derivative instruments, including swaps, FRAs, option delta-equivalents[17] and forward foreign exchange. An ADI may only use an alternative treatment if:

2. the positions calculated fully reflect the sensitivity of the cash flows to interest rate changes and are entered into the appropriate time bands; and

3. the positions allocated to a single maturity ladder are denominated in the same currency.

4. An ADI may combine positions calculated using a pre-processing method with any weighted positions calculated using the duration method but must not offset such positions against weighted positions calculated using the maturity method.

Calculation of capital charge for derivatives under the standard method

1. Interest rate and cross-currency swaps, FRAs, forward foreign exchange contracts, interest rate futures and futures on an interest rate index are not subject to a specific risk charge. Where the underlying is a specific debt security or an index representing a basket of debt securities, a specific risk charge must be calculated in accordance with paragraphs 5 to 19 of this Attachment.[18]

2. Bank bill futures contracts traded on the Australian Securities Exchange are exempt from a specific risk charge. For other futures or forwards comprising a range of deliverable instruments with different issuers, a specific risk charge applies to long positions in the future or forward, but not short positions.

3. Positions in all derivative products are subject to a general market risk capital charge in the same manner as for cash positions, except for fully or very closely matched positions in identical instruments in compliance with paragraph 41 of this Attachment. These positions must be entered into the maturity ladder and treated according to paragraphs 20 to 28 of this Attachment.

4. An ADI may exclude long and short positions (both actual and notional) in identical instruments with exactly the same issuer, coupon, currency and maturity from the interest rate maturity framework. An ADI may also fully offset, and exclude from the calculation, a matched position in a future or forward and its corresponding underlying may also be fully offset. The leg representing the time to expiry of the future (i.e. the net exposure from the combination of the future and the underlying) must, however, be reported.

5. An ADI may only offset positions in a future or forward comprising a range of deliverable instruments and the corresponding underlying where there is a readily identifiable underlying security that is most profitable for the ADI with a short position to deliver. The price of this security, sometimes called the ‘cheapest‑to‑deliver’, and the price of the future or forward contract must move in close alignment.

6. An ADI must not offset between positions in different currencies. It must treat separate legs of cross-currency swaps or forward foreign exchange deals as notional positions in the relevant instruments and include them in the appropriate calculation for each currency.

7. An ADI may fully offset opposite positions within and across product groups, including (if using the delta-plus method for options)[19] the delta-equivalent value of options (including the delta-equivalent value of legs arising out of the treatment of caps and floors as set out in paragraph 81 of this Attachment), subject to meeting the following conditions:

8. the positions must relate to the same underlying instruments, be of the same nominal value and be denominated in the same currency;[20]

9. for futures, offsetting positions in the notional or underlying instruments to which the futures contract relates must be for identical products and mature within seven days of each other; and

10. for swaps, FRAs and forwards,[21] the reference rate (for floating‑rate positions) must be identical and the coupons must differ by no more than 15 basis points. Also, the next interest fixing date or, for fixed coupon positions or forwards, the residual maturity, must correspond within the following limits:

    1. if either instrument has an interest fixing date or residual maturity up to and including one month, the dates or residual maturities must be the same for both instruments; or
    2. if either instrument has an interest fixing date or residual maturity greater than one month and up to and including one year, the dates or residual maturities must be within seven days of each other; or
    3. if either instrument has an interest fixing date or residual maturity over one year, the dates or residual maturities must be within thirty days of each other.

Table 6: Time bands and risk weights

Table 7: Horizontal disallowances

<table cellspacing="0" cellpadding="0" style="width:390.6pt; margin-left:33.75pt; border:0.75pt solid #000000; border-collapse:collapse"><thead><tr><td style="width:45.9pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; page-break-inside:avoid; page-break-after:avoid"><span style="font-weight:bold">Zones</span><a id="_ftnref22"></a><a href="#_ftn22" style="text-decoration:none"><span class="FootnoteReference" style="font-size:8pt; font-weight:bold; color:#000000">[22]</span></a></p></td><td style="width:67.2pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; page-break-inside:avoid; page-break-after:avoid"><span style="font-weight:bold">Time band</span></p></td><td style="width:81.3pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; page-break-inside:avoid; page-break-after:avoid"><span style="font-weight:bold">Within the zone</span></p></td><td style="width:81.35pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; page-break-inside:avoid; page-break-after:avoid"><span style="font-weight:bold">Between adjacent zones</span></p></td><td style="width:60.1pt; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; page-break-inside:avoid; page-break-after:avoid"><span style="font-weight:bold">Between zones 1 and 3</span></p></td></tr></thead><tbody><tr style="height:9.45pt"><td rowspan="4" style="width:45.9pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt"><p style="margin-top:3pt; margin-bottom:3pt; page-break-inside:avoid; page-break-after:avoid"><span>Zone 1</span></p></td><td style="width:67.2pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; page-break-inside:avoid; page-break-after:avoid"><span>0 – 1 month</span></p></td><td rowspan="4" style="width:81.3pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; page-break-inside:avoid; page-break-after:avoid"><span>40%</span></p></td><td style="width:81.35pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; page-break-inside:avoid; page-break-after:avoid"><span></span></p></td><td style="width:60.1pt; border-top:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; page-break-inside:avoid; page-break-after:avoid"><span></span></p></td></tr><tr style="height:13.35pt"><td style="width:67.2pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; widows:0; orphans:0"><span>1 – 3 months</span></p></td><td style="width:81.35pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td><td style="width:60.1pt; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td></tr><tr style="height:17.25pt"><td style="width:67.2pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; widows:0; orphans:0"><span>3 – 6 months</span></p></td><td style="width:81.35pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td><td style="width:60.1pt; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td></tr><tr style="height:7.25pt"><td style="width:67.2pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; widows:0; orphans:0"><span>6 – 12 months</span></p></td><td rowspan="2" style="width:81.35pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span>40%</span></p></td><td rowspan="2" style="width:60.1pt; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span>100%</span></p></td></tr><tr style="height:3.25pt"><td rowspan="3" style="width:45.9pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt"><p style="margin-top:3pt; margin-bottom:3pt; widows:0; orphans:0"><span>Zone 2</span></p></td><td style="width:67.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; widows:0; orphans:0"><span>1 – 2 years</span></p></td><td rowspan="3" style="width:81.3pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span>30%</span></p></td></tr><tr style="height:7.65pt"><td style="width:67.2pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; widows:0; orphans:0"><span>2 – 3 years</span></p></td><td style="width:81.35pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td><td style="width:60.1pt; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td></tr><tr style="height:7.85pt"><td style="width:67.2pt; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; widows:0; orphans:0"><span>3 – 4 years</span></p></td><td rowspan="2" style="width:81.35pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td><td style="width:60.1pt; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td></tr><tr style="height:3.25pt"><td rowspan="6" style="width:45.9pt; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt"><p style="margin-top:3pt; margin-bottom:3pt; widows:0; orphans:0"><span>Zone 3</span></p></td><td style="width:67.2pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; widows:0; orphans:0"><span>4 – 5 years</span></p></td><td rowspan="6" style="width:81.3pt; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span>30%</span></p></td><td style="width:60.1pt; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td></tr><tr style="height:7.55pt"><td style="width:67.2pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; widows:0; orphans:0"><span>5 – 7 years</span></p></td><td style="width:81.35pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td><td style="width:60.1pt; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td></tr><tr style="height:4pt"><td style="width:67.2pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; widows:0; orphans:0"><span>7 – 10 years</span></p></td><td style="width:81.35pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td><td style="width:60.1pt; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td></tr><tr style="height:4pt"><td style="width:67.2pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; widows:0; orphans:0"><span>10 – 15 years</span></p></td><td style="width:81.35pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td><td style="width:60.1pt; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td></tr><tr style="height:4pt"><td style="width:67.2pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; widows:0; orphans:0"><span>15 – 20 years</span></p></td><td style="width:81.35pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span>40%</span></p></td><td style="width:60.1pt; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span>100%</span></p></td></tr><tr style="height:4pt"><td style="width:67.2pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; widows:0; orphans:0"><span>Over 20 years</span></p></td><td style="width:81.35pt; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td><td style="width:60.1pt; padding-right:5.03pt; padding-left:5.4pt"><p style="margin-top:3pt; margin-bottom:3pt; text-align:center; widows:0; orphans:0"><span></span></p></td></tr></tbody></table>

Equity position risk

1. The standard method for measuring the risk of equity positions in the trading book applies to long and short positions in all instruments that exhibit market behaviour similar to equities. The method covers ordinary shares, whether voting or non‑voting, convertible securities that behave like equities, and commitments to buy or sell equity securities. An ADI may report long and short positions in instruments relating to the same issuer on a net basis.
2. An ADI must calculate the long or short position in the market on a market-by-market basis and must undertake a separate capital calculation for each national market in which the ADI holds equities.

Specific and general market risks

1. The capital charge for specific risk must be calculated as eight per cent of the sum of the absolute value of all long equity positions and of all short equity positions.[23]
2. The capital charge for general market risk is eight per cent of the net position (sum of all long equity positions and short equity positions) in an equity market.

Equity derivatives

1. An ADI must include equity derivatives and off-balance sheet positions that are affected by changes in equity prices in its risk measurement system. Where equities form one leg of a forward or futures contract (the quantity of equities to be received or to be delivered), any interest rate or foreign currency exposure from the other leg of the contract must be reported as set out in paragraphs 3 to 41 and paragraphs 56 to 64 of this Attachment.

2. The treatment of equity options is set out in paragraphs 77 to 95 of this Attachment. To calculate the relevant charges for equity position risk for other equity derivatives and other off-balance positions that are affected by changes in equity prices, an ADI must convert positions into notional equity positions, where:

3. futures and forward contracts relating to individual equities are reported at current market prices;

4. futures relating to stock indices are reported as the mark-to-market value of the notional underlying equity portfolio; and

5. equity swaps are treated as two notional positions.

6. If an ADI takes a position in depository receipts against an opposite position in the underlying equity or the same equity listed in a different country, it may only offset the position if any costs on conversion are fully taken into account.

7. An ADI may fully offset matched positions in each identical equity or stock index in each market, resulting in a single net short or long position to which the specific and general market risk charges will apply. For this purpose, a future in a given equity may be offset against an opposite physical position in the same equity.

8. An ADI must apply a specific risk capital charge of two per cent to the net long or short position in any index contract listed in Table 8.

9. If a position is not listed in Table 8, the ADI must either decompose it into its component shares or treat it as a single position based on the sum of current market values of the underlying instruments; if treated as a single position, the specific risk charge is the highest specific risk charge that would apply to any of the index’s constituent shares.

10. If an ADI employs a futures-related arbitrage strategy where it:

11. takes an opposite position in exactly the same index at different dates or in different market centres; or

12. has an opposite position in contracts at the same date in different but similar indices, and subject to APRA’s written agreement that the two indices contain sufficient common components to justify offsetting,

the ADI may apply the additional two per cent capital specific risk capital charge (referred to in paragraph 50 of this Attachment) to only one index with the opposite position exempt from a capital charge for both specific risk and general market risk.

1. Where an ADI engages in a deliberate arbitrage strategy, in which a futures contract on a broadly-based index matches a basket of shares, the ADI may decompose the index position into notional positions in each of the constituent stocks and include these notional positions and the disaggregated physical basket in the country portfolio, netting the physical positions against the index-equivalent positions in each stock. The ADI may only apply the capital charge set out in paragraph 54 of this Attachment if:

2. the trade has been deliberately entered into and separately controlled; and

3. the composition of the basket of shares represents at least 90 per cent[24] of the index when broken down into its notional components, or a minimum correlation between the basket of shares and the index of 0.9 can be clearly established over a minimum period of one year. An ADI wishing to rely on the correlation based criteria will need to satisfy APRA of the accuracy of the method chosen.

Where these conditions are not met, the ADI must use the approach in paragraph 55 of this Attachment to deal with the arbitrage.

1. If the values of the physical and futures positions are matched, an ADI must assess the capital charge as two per cent of the gross value of the positions on each side, giving a total of four per cent. The ADI must treat any excess value of the shares comprising the basket over the value of the futures contract, or excess value of the futures contract over the value of the basket, as an open long or short position and use the approach in paragraph 55 of this Attachment.
2. Where an arbitrage does not comply with paragraph 53 of this Attachment, the ADI must treat the index position using the approach in either paragraph 50 or 51 of this Attachment as appropriate. The ADI must then disaggregate the physical basket of shares into individual positions and include them in the country portfolio for calculation of the capital charge.

Table 8: Market indices

Foreign exchange risk

1. The standard method also covers the risk of holding or taking positions in foreign currencies and gold.[25] Where, however, an ADI is exposed to interest rate exposure on such positions, the ADI must include the relevant interest rate positions in the calculation of interest rate risk.
2. The capital charge for foreign exchange risk is eight per cent of the foreign exchange net open position plus eight per cent of the net position in gold.

Measuring the exposure in a single currency

1. An ADI must include in its net open position in each currency:

2. the measurement of currency exposure in accordance with paragraphs 14 to 17 of Attachment A; and

3. the net delta-equivalent of the total book of foreign currency options, subject to separately calculated capital charges for gamma risk and vega risk as described in paragraphs 77 to 95 of this Attachment. Alternatively, options and their associated underlying assets may be subject to one of the other methods described in paragraphs 77 to 95 of this Attachment.

4. An ADI must separately report positions in composite currencies but, for measuring its open positions, may treat them as either a currency in their own right or as split, on a consistent basis, into their component parts.

5. An ADI may treat currency pairs subject to a binding inter-governmental agreement linking the two currencies as the one currency.

6. An ADI must measure positions in gold in accordance with paragraph 70 of this Attachment.[26] An ADI may double-count gold in Australian dollar equivalent amounts, first as a gold exposure and secondly as a US dollar exposure, allowing the US dollar exposure to then be netted against US dollar exposures arising from other activities.

7. An ADI must value forward currency and gold positions at current spot market exchange rates. An ADI that bases its normal management accounting on net present values must use the net present values of each forward position, discounted using current interest rates and translated at current spot rates, for measuring its forward currency and gold positions.

Measuring foreign exchange risk in a portfolio of foreign currency positions and gold

1. Under the standard method, an ADI must convert at spot rates the nominal amount (or net present value) of the net position in each foreign currency and in gold into the reporting currency.[27] The overall net open position must be measured by aggregating:

2. the sum of the net short positions or the sum of the net long positions, whichever is the greater; plus

3. the net position (short or long) in gold, regardless of whether positive or negative.

4. An ADI must calculate the capital charge as eight per cent of the overall net open position.

Commodities risk

1. The standard method also covers the risk of holding positions in commodities, including precious metals (excluding gold), where a commodity is defined as a tradeable physical or energy product, e.g. agricultural products, minerals (including oil), electricity and precious and base metals.

2. If an ADI is exposed to interest rate or foreign exchange risk from funding commodities positions, the relevant positions must be included in the calculation of interest rate and foreign exchange risk.[28]

3. An ADI using the standard method may measure commodities risk using either the maturity ladder approach or the simplified approach.

4. Under these approaches, the ADI may report long and short positions in each commodity on a net basis for the purposes of calculating open positions. Positions in different commodities must not be offset unless they:

5. are deliverable against each other; or

6. are close substitutes for each other and a minimum correlation between price movements of 0.9 can be clearly established over a minimum period of one year. An ADI wishing to use correlation-based offsetting must seek APRA’s written approval.

7. Subject to prior written approval from APRA, an ADI may double-count foreign currency denominated commodities as both a commodity exposure and as a foreign currency exposure.

8. An ADI must first express each commodity position (spot plus forward) in terms of the standard unit of measurement (barrels, kilos, grams, etc). The net position in each commodity is then converted at current rates into Australian dollars.

9. An ADI must include all commodity derivatives and off-balance sheet positions that are affected by changes in commodity prices in the measurement framework. These include commodity futures, commodity swaps and options where the delta-plus method is used.[29] In order to calculate the risk, an ADI must convert commodity derivatives into notional commodities positions and assign them to maturities such that:

10. futures and forward contracts relating to individual commodities are incorporated in the measurement system as notional amounts in terms of the standard units of measurement multiplied by the spot price of the commodity, and are assigned a maturity based on the contract's expiry date;

11. commodity swaps where one leg is a fixed price and the other leg is the current market price are incorporated as a series of positions equal to the notional amount of the contract, with one position corresponding to each payment on the swap and entered into the maturity ladder accordingly. The positions are long positions if the ADI is paying fixed and receiving floating, and short positions if the ADI is receiving fixed and paying floating;[30] and

12. commodity swaps where the legs are in different commodities are incorporated in the relevant maturity ladder. An ADI must not offset positions except as allowed by paragraph 68 of this Attachment.

Maturity ladder approach

1. An ADI using the maturity ladder approach must enter positions in each separate commodity (expressed in Australian dollar terms) into a maturity band (refer to Table 9 of this Attachment). Physical stocks must be allocated to the first time band. Separate maturity ladders must be used for each commodity except where netting is allowed by paragraph 68 of this Attachment.[31]
2. Within each time band, an ADI must apply a capital charge for spread risk of three per cent of the matched position (the smaller of the absolute value of the short and long positions within a time band).
3. An ADI may then carry forward residual net positions from nearer time bands to offset exposures in time bands that are further out. A capital charge equal to 0.6 per cent of the net position carried forward is to be applied each time a position is carried forward to the next time band. The capital charge for each matched amount created by carrying net positions forward is three per cent of that matched position.
4. An ADI must apply a capital charge of 15 per cent of the net open position in the commodity.

Simplified approach

1. An ADI using the simplified approach must apply a capital charge equal to 15 per cent of the overall net position, long or short, in each commodity, plus three per cent of the ADI’s gross positions (the absolute value of all long positions plus the absolute value of all short positions regardless of maturity) in each commodity. In valuing the gross positions in commodity derivatives for this purpose, an ADI must use the current spot price.

Table 9: Commodity time bands

Treatment of options

1. An ADI must obtain prior approval from APRA to use an approach to the treatment of options. An ADI:

2. that uses solely purchased options[32] may use the simplified approach to the treatment of options; or

3. that also writes options must use either the delta-plus method, contingent loss method or the internal model approach (refer to Attachment C), depending on the significance of its trading.[33]

4. An ADI must, for the delta-plus method and the contingent loss approach, calculate the specific risk capital charges separately by multiplying the delta-equivalent amount of each option by the specific risk weights set out in paragraphs 3 to 55 of this Attachment.

Simplified approach

1. An ADI using the simplified approach may use the capital charges outlined in Table 10. In this approach, the positions for the options and the associated underlying assets, cash or forward, are not subject to the standard methodology but rather are ‘carved-out’ and subject to separately calculated capital charges that incorporate both general market risk and specific risk. The risk numbers thus generated are then added to the capital charges for the relevant category, i.e. interest rate related instruments, equities, foreign exchange and commodities.

Table 10: Simplified approach: Capital charges

Delta‑plus method

1. An ADI that writes options may be allowed to include delta‑weighted options positions within the standard method. The ADI must report such options as a position equal to the sum of the market values of the underlying multiplied by the sum of the absolute values of the deltas. As delta does not cover all risks associated with options positions, the ADI must measure gamma (which measures the rate of change of delta) and vega (which measures the sensitivity of the value of an option with respect to a change in volatility) in order to calculate the total capital charge. These sensitivities must be calculated using an approved Exchange model[38] or a proprietary options pricing model approved, in writing, by APRA.
2. When calculating general market risk using the delta-plus method, an ADI must place delta-weighted positions with debt securities or interest rates as the underlying into the interest rate time bands by using a two-legged approach, where there is one entry at the time the underlying contract takes effect and a second at the time the underlying contract matures.[39] An ADI using the delta-plus method must treat caps and floors as a series of European-style options.
3. For options with debt securities as the underlying, an ADI must apply a specific risk charge to the delta-weighted position on the basis of the issuer of the underlying security according to the approach in paragraphs 5 to 19 of this Attachment.
4. The capital charge for options with equities as the underlying must also be based on the delta-weighted positions that will be incorporated in the measure of market risk (both specific and general market risk) described in paragraphs 42 to 55 of this Attachment. An ADI must calculate the capital charge for options on foreign exchange and gold positions according to the method in paragraphs 56 to 64 of this Attachment. For delta risk, the net delta‑based equivalent of the foreign currency and gold options must be incorporated into the measurement of the exposure for the respective currency (or gold) position. The capital charge for options on commodities must be based on the incorporation of delta-weighted positions into either the maturity ladder (refer to paragraphs 72 to 75 of this Attachment) or the simplified approach (refer to paragraph 76 of this Attachment).
5. An ADI using the delta-plus method must calculate the gamma and vega capital charges for each option position separately.
6. The capital charges for ‘gamma risk’ must be calculated as:

Gamma impact = ½  gamma  (VU)2

where VU denotes the variation in the price of the underlying of the option. VU must be calculated as follows:

1. for interest rate options, if the underlying is a bond, the market value of the underlying must be multiplied by the risk weights outlined in Table 6 of this Attachment. An equivalent calculation, based on the assumed changes in yield in Table 6, must be carried out where the underlying is an interest rate;

2. for options on equities and equity indices, the market value of the underlying must be multiplied by eight per cent;

3. for options on foreign exchange and gold, the market value of the underlying must be multiplied by eight per cent; and

4. for options on commodities, the market value of the underlying must be multiplied by 15 per cent.

5. When calculating the gamma impact, an ADI must treat as the same underlying:

6. for interest rates,[40] each time band outlined in Table 6 for an ADI using the maturity method. An ADI using the duration method must use the time bands as set out in the second column of Table 6;

7. for equities and stock indices, each national market;

8. for foreign currencies and gold, each currency pair and gold; and

9. for commodities, each individual commodity as defined in paragraph 68 of this Attachment.

10. Each option on the same underlying will have a gamma impact that is either positive or negative. An ADI must sum these individual gamma impacts, resulting in a net gamma impact for each underlying that is either positive or negative. Only those gamma impacts that are negative are included in the capital calculation. The total gamma capital charge is the sum of the absolute value of the net gamma impacts.

11. To calculate vega risk, an ADI must multiply the vega for each option by a 25 per cent proportional shift in the option's current volatility. The results must then be summed across each underlying. The total capital charge for vega risk is calculated as the sum of the absolute value of vega across each underlying.

Contingent loss approach

1. An ADI may also base the market risk capital charge for options portfolios and associated hedging positions on contingent loss matrix analysis. This requires the ADI to specify a fixed range of changes in the option portfolio’s risk factors (i.e. underlying price and volatility) and calculate changes in the value of the option portfolio at various points along this matrix. For the purpose of calculating the capital charge, the ADI must revalue the option portfolio using matrices for simultaneous changes in the option’s underlying rate or price and in the volatility of that rate or price. A different matrix must be set up for each individual underlying as defined in paragraph 86 of this Attachment. As an alternative, an ADI that is a significant trader in options may, for interest rate options, base the calculation on a minimum of six sets of time bands if not more than three of the time bands (as defined in column 1 of Table 6) are combined into any one set.
2. An ADI must evaluate the options and related hedging positions over a specified range above and below the current value of the underlying to define the first dimension of the matrix. The range for interest rates is consistent with the assumed changes in yield in Table 6. An ADI using the contingent loss approach for interest rate options must use, for each set of time bands, the highest of the assumed changes in yield applicable to the group to which the time bands belong.[41] The other ranges are ± eight per cent for equities, ± eight per cent for foreign exchange and gold, and ±15 per cent for commodities. For all risk categories, at least seven price shifts (including the current observation) must be used to divide the range into equally spaced intervals.
3. The second dimension of the matrix entails a change in the volatility of the underlying rate or price. While a single change in the volatility of the underlying rate or price equal to a proportional shift in volatility of ±25 per cent may be sufficient in most cases, APRA may require that a different change in volatility be used and/or that intermediate points on the matrix be calculated.
4. After calculating the matrix, each cell will contain the net profit or loss of the option and the underlying hedge instrument. The capital charge for each underlying must then be calculated as the largest loss contained in the matrix.
5. An ADI using the contingent loss approach must calculate the specific risk charge using the same approach as for the delta-plus method (refer to paragraphs 82 and 83 of this Attachment).
6. An ADI using the contingent loss approach must comply with the qualitative standards set out in Attachment C that are appropriate to the nature of the ADI’s business.
7. An ADI undertaking significant options business must, at a minimum, closely monitor any other risks associated with options, e.g. rho (rate of change of the value of the option with respect to the interest rate). The ADI may incorporate rho into its capital calculations for interest rate risk.