Equity position riskEquity position risk

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.