# Entire Section

## PIB A5.2 PIB A5.2 Interest Rate Risk Capital Requirement

## PIB A5.2 Guidance

PIB section A5.2 presents the method for the calculation of

Specific Risk andGeneral Market Risk in respect of theInterest Rate Risk Capital Requirement as referred to in PIB Rule 5.4.1(b).Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.1

An

Authorised Firm which calculates itsInterest Rate Risk Capital Requirement in accordance with PIB Rule 5.4.1(b) must apply the Rules in this section.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.2

An

Authorised Firm must calculate itsInterest Rate Risk Capital Requirement as the sum of the two following separate charges:(a)Specific Risk of each net position as calculated in accordance with PIB Rule A5.2.13; and(b)General Market Risk calculated in accordance with PIB Rule A5.2.15.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.3 PIB A5.2.3

An

Authorised Firm must calculate itsInterest Rate Risk Capital Requirement inTrading Book positions in all fixed-rate and floating-rate debtSecurities and instruments which behave like them, including:(a) non-convertible preference shares;(b) futures or forwards on a debt security or on interest rates;(c) swaps (or contracts for differences) whose value is based on interest rates;(d) the cash leg of a repurchase or a reverse repurchase agreement;(e) forward foreign exchange contracts or currency futures;(f) interest rate legs of equity swaps;(g) interest rate legs of equity futures or forwards; and(h) interest rate legs of equity based options treated under internal models in PIB section 5.3.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.3 Guidance

Where these positions will require the derivation of notional positions before they can be included in the calculation of

Specific Risk andGeneral Market Risk requirements, anAuthorised Firm must derive the notional positions in accordance with Rules PIB A5.2.5 to PIB A5.2.12.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.4

(1) AnAuthorised Firm may net, by value, long and short positions in the same debt instrument in itsTrading Book to generate the individual net position in that instrument.(2)Instruments are considered to be the same for the purposes of (1) where:(a) the issuer is the same;(b) the instruments have equivalent standing in liquidation; and(c) the currency, coupon and maturity are the same.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## Derivation of Notional Positions for Certain Instruments (Including Interest Rate Derivatives)

## PIB A5.2.5

(1) The interest rate risk measurement must include all interest rate derivatives and off-balance sheet instruments in theTrading Book that react to changes in interest rates, including forward rate agreements other forward contracts, futures, interest rate and cross-currency swaps and forward foreign exchange positions.(2)Derivatives must be converted into positions in the relevant underlying instruments and are subject to Specific andGeneral Market Risk requirements set out in Rules PIB A5.2.13 and PIB A5.2.15. The amounts used in the calculation must be the market values of the principal amount of the underlying instrument or of the notional underlying instrument.(3) The manner in which anAuthorised Firm must derive a notional position (in the currency concerned) for certain instruments (including interest rate derivatives) is set out in Rules PIB A5.2.6 to PIB A5.2.12.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## Futures on Interest Rates and Forward Rate Agreements

## PIB A5.2.6

A future on an interest rate and a forward rate agreement must be treated as two notional zero coupon government

Securities as follows:(a) where anAuthorised Firm sells an interest rate future or buys a forward rate agreement:(i) the notional short position has a maturity equal to the time to expiry of the future (or the settlement date of the forward rate agreements) plus the maturity of the borrowing period; and(ii) the notional long position has a maturity equal to the time to expiry of the future (or the settlement date of the forward rate agreement); and(b) where anAuthorised Firm buys an interest rate future or sells a forward rate agreement:(i) the notional short position has a maturity equal to the time to expiry of the future (or the settlement date of the forward rate agreement); and(ii) the notional long position has a maturity equal to the time to expiry of the future (or the settlement date of the forward rate agreement) plus the maturity of the deposit period.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## Futures and Forwards on a Single Debt Security

## PIB A5.2.7

A future and a forward on a single debt

Security must be treated as a notional debtSecurity and a notional zero coupon governmentSecurity as follows:(a) where anAuthorised Firm has bought the future or forward:(i) a notional long position in the underlyingSecurity with a maturity:(A) in the case of a fixed rate bond, equal to the underlyingSecurity ; and(B) in the case of a floating rate bond, at the time to the next reset; and(ii) a notional short position in a zero coupon governmentSecurity with a maturity equal to the time to expiry of the futures contract; and(b) where anAuthorised Firm has sold the future or forward:(i) a notional short position in the underlyingSecurity with a maturity:(A) in the case of a fixed rate bond, equal to the underlyingSecurity ; and(B) in the case of a floating rate bond, at the time to the next reset; and(ii) a notional long position in a zero coupon governmentSecurity with a maturity equal to the time to expiry of the futures contract.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## Future or Forward on a Basket of Debt Securities

## PIB A5.2.8

A future and a forward on a basket of debt

Securities must be treated as a set of notional positions in the constituent debtSecurities .Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## Interest Rate and Currency Swaps

## PIB A5.2.9 PIB A5.2.9

An interest rate and a currency swap must be treated as two notional government

Securities as follows:(a) where theAuthorised Firm is receiving fixed rate interest and paying floating rate interest:(i) a notional long position with a maturity equal to the length of the swap; and(ii) a notional short position with a maturity equal to the period remaining to the next interest rate reset date;(b) where theAuthorised Firm is paying fixed rate interest and receiving floating rate interest:(i) a notional short position with a maturity equal to the length of the swap; and(ii) a notional long position with a maturity equal to the period remaining to the next interest rate reset date;(c) where theAuthorised Firm is receiving fixed rate interest and paying fixed rate interest:(i) a notional long position with a maturity equal to the length of the swap; and(ii) a notional short position with a maturity equal to the length of the swap.(d) where theAuthorised Firm is receiving floating rate interest and paying floating rate interest:(i) a notional long position with a maturity equal to the period remaining to the next interest date reset date; and(ii) a notional short position with a maturity equal to the period remaining to the next interest rate reset date; and(e) the two notional governmentSecurities must have a coupon equal to the rate of interest payable or receivable on the leg.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.9 Guidance

A currency swap is also subject to a

Foreign Exchange Risk Capital Requirement (see PIB section 5.6).Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## Dual Currency Bonds

## PIB A5.2.10

A dual currency bond must be treated as two positions as follows:

(a) a debtSecurity denominated in the currency in which the dual currency bond is issued; and(b) a foreign exchange forward for the purchase of the redemption currency (see PIB section 5.6).Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## Cash Legs of Repos

## PIB A5.2.11 PIB A5.2.11

The forward cash leg of a repo must be treated as a notional short position in a government

Security with a maturity equal to that of the repo and coupon equal to the repo rate.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.11 Guidance

If a

Security is repo'd, theAuthorised Firm continues to calculate anInterest Rate Risk Capital Requirement on theSecurity because, although legal ownership transfers to theCounterparty , the economic benefit or loss remains with theAuthorised Firm .Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## Cash Legs of Reverse Repos

## PIB A5.2.12 PIB A5.2.12

(1) The forward cash leg of a reverse repo must be treated as a notional long position in a government security with a maturity equal to that of the reverse repo and coupon equal to the repo rate.(2) AnAuthorised Firm may exclude from the interest rate maturity framework (for both Specific andGeneral Market Risk ) long and short positions (both actual and notional) in identical derivative instruments with exactly the same issuer, coupon, currency and maturity. A fully-matched position in a future or forward and its corresponding underlying instrument may also be fully offset, and thus excluded from the calculation.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.12 Guidance

If a

Security is reverse repo'd, theAuthorised Firm does not calculate anInterest Rate Risk Capital Requirement on theSecurity because, although the firm obtains the legal title, the economic benefit or loss remains with the original holder.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## Specific Risk

## Specific Risk Guidance

In respect of interest rate risk, a capital charge for

Specific Risk is designed to protect against an adverse movement in the price of an individualSecurity owing to factors related to the individual issuer.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.13 PIB A5.2.13

(1) AnAuthorised Firm must calculate itsSpecific Risk as the sum of the market values of the individual net positions (whether they are long or short) multiplied by the appropriate risk percentage in (3).(2) AnAuthorised Firm must not offset between different issues.(3) AnAuthorised Firm must determine the appropriate risk percentage by reference to the following table:

Issuer Credit Quality Grades Residual Term to Maturity Risk Percentage Sovereign Debt

This category includes —(a) all forms of government debt, including bonds, treasury bills and other short-term instruments; and(b) securities issued by PSEs which qualify for a 0% risk weight forCredit Risk .AnExposure to any debtSecurity issued by-(i) the central government or monetary authority; or(ii) other central governments with aCredit Quality Grade of 3 or better as set out in PIB chapter 4,which is denominated in the domestic currency and funded in the same currency must be assigned a 0%Specific Risk charge.TheDFSA may, at its discretion, assign a higher risk charge other than the above toSecurities issued by certain governments, especially in cases where theSecurities are denominated in a currency other than that of the issuing government.1 Any 0.00% 2 or 3 6 months or less 0.25% More than 6 and up to 24 months 1.00% More than 24 months 1.60% 4 or 5 Any 8.00% 6 Any 12.00% Unrated Any 8.00% Qualifying Debt

This category includes —(a) anySecurity that is issued by an MDB;(b) anySecurity (including one issued by a PSE) which has aCredit Quality Grade of 3 or better as set out in PIB chapter 4; and(c) any unratedSecurity issued by a PSE which belongs to a country with aCredit Quality Grade of 1 as set out in PIB chapter 4.6 months or less 0.25% More than 6 and up to 24 months 1.00% More than 24 months 1.60% Other

For securities which have a high yield to redemption relative to government debt securities issued in the same country, theDFSA will require theAuthorised Firm :(a) to apply a higherSpecific Risk charge to such instruments; or(b) to disallow offsetting for the purpose of defining the extent ofGeneral Market Risk between such instruments and any other debt instruments.4 Any 8% or such other percentage as the DFSA may direct.5 or 6 Any 12% or such other percentage as the DFSA may direct.Unrated Any 8% or such other percentage as the DFSA may direct.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.13 Guidance

1. Offsetting is not permitted since differences in coupon rates, liquidity, and call features, for example, signify that prices may diverge in the short run.2. The "Other" category will receive the sameSpecific Risk requirement as a private-sector borrower under theCRCOM , 8%. However, since this may, in certain cases, considerably underestimate theSpecific Risk for debtSecurities which have a high yield to redemption relative to government debtSecurities , theDFSA has the right to apply to suchSecurities aSpecific Risk percentage higher than 8%.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.14

[Not currently in use]

Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## General Market Risk

## PIB A5.2.15

(1) AnAuthorised Firm must calculate itsGeneral Market Risk on a currency by currency basis, irrespective of where the individual instruments are physically traded or listed. The calculations for each currency must then be added together to determine the amount of theAuthorised Firm's General Market Risk requirement.(2) AnAuthorised Firm must calculate itsGeneral Market Risk requirement for each currency by applying either:(a) the simplified framework set out in PIB Rule A5.2.16;(b) theMaturity Method set out in PIB Rule A5.2.17; orDerived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## Simplified Framework

## PIB A5.2.16 PIB A5.2.16

In applying the simplified framework, an

Authorised Firm must calculate itsGeneral Market Risk requirement for each currency by taking the following steps:(a) allocating the individual net positions to one of the time bands in the table below, as follows:(i) fixed-rate instruments are allotted their time bands based upon the residual time to maturity; and(ii) floating-rate instruments are allocated to time bands based upon the time remaining to the re-determination of the coupon;(b) adding the market values of the individual net positions within each band irrespective of whether they are long or short positions to produce a gross position figure;(c) multiplying the amount in (b) by the risk percentage for the relevant maturity band in the table below; and(d) adding the calculations in (c) to arrive at theGeneral Market Risk requirement.

Zone Time band Risk percentage Coupon of 3% or more Coupon of less than 3% A 0≤1month 0≤1month 0.00% > 1 ≤3months > 1 ≤3months 0.20% > 3 ≤6 months > 3 ≤6 months 0.40% > 6 ≤12 months > 6≤12 months 0.70% B > 1 ≤2 years > 1.0 ≤1.9 years 1.25% > 2 ≤3 years > 1.9 ≤2.8 years 1.75% > 3 ≤4 years > 2.8 ≤3.6 years 2.25% C > 4 ≤5 years > 3.6 ≤4.3 years 2.75% > 5 ≤7 years > 4.3 ≤ 5.7 years 3.25% > 7≤10 years > 5.7 ≤ 7.3 years 3.75% > 10 ≤15 years > 7.3 ≤9.3 years 4.50% > 15 ≤20 years > 9.3 ≤ 10.6 years 5.25% > 20 years > 10.6 ≤12.0 years 6.00% > 12.0 ≤20.0 years 8.00% > 20 years 12.50% Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.16 Guidance

The risk percentages in the table above are designed to reflect the price sensitivity of the positions to changes in the interest rate.

Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## Maturity Method

## PIB A5.2.17

Under the

Maturity Method , the following steps must be carried out:(a) the maturity weighted position for each instrument must be calculated by multiplying the market value of each individual long or short net position by the appropriate risk percentage per the table in PIB Rule A5.2.16;(b) the sum of the weighted long and the sum of the weighted short positions in each maturity band must be calculated;(c) these weighted long and short positions must be matched within a maturity band to give the total matched weighted position in the maturity band and the total unmatched weighted position which will be long or short in the maturity band;(d) the matched weighted positions in all maturity bands must be summed;(e) the unmatched weighted positions in all the maturity bands must then be matched within a zone leaving an unmatched position for the zone (which will either be short or long); and(f) the unmatched positions in each zone must be matched with the unmatched positions in other zones leaving the residual unmatched weighted position.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.18 PIB A5.2.18

The

General Market Risk requirement for each currency must be calculated as the sum of the following:(a) 10% of the matched weighted positions in each maturity band;(b) 40% of the matched weighted position in zone A;(c) 30% of the matched weighted position in zones B and C;(d) 40% of the matched weighted position between zones A and B, and between zones B and C;(e) 100% of the matched weighted position between zones A and C; and(f) 100% of the residual unmatched weighted positions.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.18 Guidance

A worked example under the

Maturity Method of theGeneral Market Risk requirement calculation is as follows:Zone Maturity Band Individual Net PositionsRisk percentages Weighted Individual Net PositionsBy Maturity Band By Zone Between Zones Coupon ≥3% Coupon <3% Long Short Long Short Matched Unmatched Matched Unmatched Matched Unmatched A ≤ 1 month ≤ 1 month $100 -$50 0.00% $0.00 $0.00 $0.00 $0.00 1–3 months 1–3 months $200 -$100 0.20% $0.40 -$0.20 $0.20 $0.20 $0.00 $1.30 3–6 months 3–6 months $300 -$200 0.40% $1.20 -$0.80 $0.80 $0.40 6–12 months 6–12 months $400 -$300 0.70% $2.80 -$2.10 $2.10 $0.70 B 1–2 years 1–1.9 years $100 -$200 1.25% $1.25 -$2.50 $1.25 -$1.25 Zone 1 &22–3 years 1.9–2.8 years $200 -$300 1.75% $3.50 -$5.25 $3.50 -$1.75 $0.00 -$5.25 $1.30 3–4 years 2.8–3.6 years $300 -$400 2.25% $6.75 -$9.00 $6.75 -$2.25 Zones 1&3 $0.00 C 4–5 years 3.6–4.3 years $100 -$100 2.75% $2.75 -$2.75 $2.75 $0.00 Zone 2 &35–7 years 4.3–5.7 years $200 -$200 3.25% $6.50 -$6.50 $6.50 $0.00 $3.95 7–10 years 5.7–7.3 years $300 -$100 3.75% $11.25 -$3.75 $3.75 $7.50 10–15 years 7.3–9.3 years $100 -$200 4.50% $4.50 -$9.00 $4.50 -$4.50 $4.50 $8.25 15–20 years 9.3–10.6 years $200 -$100 5.25% $10.50 $5.25 $5.25 $5.25 > 20 years 10.6–12 years $300 -$300 6.00% $18.00 -$18.00 $18.00 $0.00 12–20 years 8.00% > 20 years 12.50% $55.35 $4.30 Total

General Market Risk requirement = 10% ($55.35) + 40% ($0.00) + 30% ($0.00 + $4.50) + 40% ($1.30 + $3.95) + 100% ($4.30) + 100% ($0.00) = $13.29Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## Duration Method

## PIB A5.2.19

An

Authorised Firm with the necessary capability may, with the written consent of theDFSA , use theDuration Method , which produces a more accurate measure forGeneral Market Risk than theMaturity Method . AnAuthorised Firm must elect and use theDuration Method on a continuous basis and will be subject to supervisory monitoring of the systems used.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.20

Under the

Duration Method , the following steps must be carried out:(a) the duration weighted position for each instrument must be calculated by multiplying the market value of each individual long or short net position by theModified Duration in years and the assumed interest rate change in the table below;(b) the sum of the weighted long and the sum of the weighted short positions in each time band must be calculated;(c) these weighted long and short positions must be matched within a maturity band to give the total matched weighted position in the maturity band and the total unmatched weighted position which will be long or short in the maturity band;(d) the matched weighted positions in all maturity bands must be summed;(e) the unmatched weighted positions in all the maturity bands must then be matched within a zone leaving an unmatched position for the zone (which will either be short or long); and(f) the unmatched positions in each zone must be matched with the unmatched positions in other zones leaving the residual unmatched weighted position.

Zone Modified Duration Assumed move in interest rates (percentage points) A 0 ≤1 month 1.00 > 1 ≤3 months 1.00 > 3 ≤6 months 1.00 > 6≤12 months 1.00 B > 1.0 ≤1.9 years 0.90 > 1.9 ≤2.8 years 0.80 > 2.8 ≤3.6 years 0.75 C > 3.6 ≤4.3 years 0.75 > 4.3 ≤5.7 years 0.70 > 5.7 ≤7.3 years 0.65 > 7.3 ≤ 9.3 years 0.60 > 9.3 ≤10.6 years 0.60 > 10.6 ≤12.0 years 0.60 > 12.0 ≤20.0 years 0.60 > 20 years 0.60 Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.21

For the purposes of this section

Modified Duration is calculated as follows:Modified Duration = duration (D) / (1 + r)where:

r = yield to maturity

C

_{t}= cash payment in time tm = total maturity

Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.22 PIB A5.2.22

The

General Market Risk requirement for each currency must be calculated as the sum of the following:(a) 5% of the matched weighted positions in each time band;(b) 40% of the matched weighted position in zone A;(c) 30% of the matched weighted position in zones B and C;(d) 40% of the matched weighted position between zones A and B, and between zones B and C;(e) 100% of the matched weighted position between zones A and C; and(f) 100% of the residual unmatched weighted positions.Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]## PIB A5.2.22 Guidance

A worked example of the

General Market Risk requirement calculation under theDuration Method is as follows:Zone Modified Duration Individual Net PositionsAssumed move in Modified Duration Weighted Individual Net PositionsBy Timeband By Zone Between Zones (years) Long Short (%p.a) (years) Long Short Matched Unmatched Matched Unmatched Matched Matched A < 1 month $100.00 -$50.00 1.00% 0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $1.30 1 to 3 months $200.00 -$100.00 1.00% 0.20 $0.40 -$0.20 $0.20 $0.20 3 to 6 months $300.00 -$200.00 1.00% 0.40 $1.20 -$0.80 $0.80 $0.40 6 to 12 months $400.00 -$300.00 1.00% 0.70 $2.80 -$2.10 $2.10 $0.70 B 1 to 1.9 years $100.00 -$200.00 0.90% 1.40 $1.26 -$2.52 $1.26 -$1.26 $0.00 -$5.27 Zone 1&2 1.9 to 2.8 years $200.00 -$300.00 0.80% 2.20 $3.52 -$5.28 $3.52 -$1.76 $1.30 2.8 to 3.6 years $300.00 -$400.00 0.75% 3.00 $6.75 -$9.00 $6.75 -$2.25 Zones 1&3 $0.00 C 3.6 to 4.3 years $100.00 -$100.00 0.75% 3.65 $2.74 -$2.74 $2.74 $0.00 $4.50 $8.89 Zone 2&3 4.3 to 5.7 years $200.00 -$200.00 0.70% 4.65 $6.51 -$6.51 $6.51 $0.00 $3.97 5.7 to 7.3 years $300.00 -$100.00 0.65% 5.80 $11.3 1 -$3.77 $3.77 $7.54 7.3 to 9.3 years $100.00 -$200.00 0.60% 7.50 $4.50 -$9.00 $4.50 -$4.50 9.3 to 10.6 years $200.00 -$100 0.60% 9.75 $11.7 0 -$5.85 $5.85 $5.85 10.6 to 12 years $0.00 $0.00 0.60% 11.00 $0.00 $0.00 $0.00 $0.00 12 to 20 years $300.00 -$300.00 0.60% 14.50 $26.1 0 -$26.10 $26.10 $0.00 Over 20 years $0.00 $0.00 0.60% 22.00 $0.00 $0.00 $0.00 $0.00 $64.10 $4.92 Total

General Market Risk requirement =5% ($64.10) + 40% ($0) + 30% ($4.50) + 40% ($5.27) + 100% ($0) + 100% ($4.92) = $11.58

Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]