PIB A5.3 PIB A5.3 Equity Risk Capital Requirement
PIB A5.3 Guidance
Authorised Firmwhich calculates its Equity Risk Capital Requirementin accordance with PIB Rule 5.5.1(b) must apply the Rulesin this section.
PIB A5.3.2 PIB A5.3.2
Authorised Firmmust calculate its Equity Risk Capital Requirementby:(a) identifying all applicable positions within the scope of the requirement, including notional positions derived from certain instruments;(b) Nettingpositions where they meet the conditions for Nettingset in PIB Rule A5.3.19;(c) calculating an Equity Risk Capital Requirementfor each individual position using the standard method in accordance with PIB Rule A5.3.23 or the simplified method in accordance with PIB Rule A5.3.31;(d) in the case of a forward, future, option or company issued warrant on an equity, basket of equities or equity index, adding an Interest Rate Risk Capital Requirement; and(e) summing the Capital Requirementscalculated in accordance with (c) and (d).
PIB A5.3.3 PIB A5.3.3(1) For the purposes of PIB Rule A5.3.2(a) an
Authorised Firmmust calculate an Equity Risk Capital Requirementfor long and short Trading Bookpositions in equities and instruments which exhibit behaviour similar to equities including but not limited to:(a) depository receipts;(b) futures or forwards on an equity, baskets of equities or equity indices;(c) net underwriting commitments; and(d) investments in unleveraged Collective Investment Funds.(2) An Authorised Firmshould calculate either an Equity Risk Capital Requirementor an Option Risk Capital Requirementfor a Trading Bookposition in:(a) an equity hedging an option;(b) an equity hedging a company-issued warrant;(c) an option on an equity, basket of equities, equity index or equity future provided it is in the money by at least the risk percentage stipulated in PIB A5.3.31; and(d) a company issued warrant which relates to an equity, basket of equities or equity index provided it is in the money by at least the risk percentage stipulated in PIB A5.3.31.
PIB A5.3.3 Guidance1. If an
Authorised Firmhas an investment in a leveraged Collective Investment Fund, it should seek guidance from the DFSAin respect of the appropriate prudential treatment.2. In respect of options that are out of the money, an Authorised Firmmust apply the requirements of PIB section 5.8.
Authorised Firmmust calculate either an Equity Risk Capital Requirementor an Option Risk Capital Requirementfor a Trading Bookposition in the equity leg of an equity swap in accordance with PIB Rule A5.3.12.
Authorised Firmmust calculate either an Equity Risk Capital Requirementor Interest Rate Risk Capital Requirementfor a Trading Bookposition in a Convertiblein accordance with Rules PIB A5.3.6 and PIB A5.3.7.
Authorised Firmmust treat a Convertibleas the underlying equity into which it converts, where:(a) the first date at which conversion can take place is less than three months ahead, or the next such date (where the first has passed) is less than a year ahead; and(b) the Convertibleis trading at a premium of less than 10% to the underlying equity.
Authorised Firmwhich treats a Convertibleas an equity must make an adjustment to the capital component as follows:(a) an addition equal to any loss on conversion; or(b) a deduction equal to any profit on conversion (subject to a maximum reduction to zero).
Authorised Firmmust not calculate an Equity Risk Capital Requirementfor a Trading Bookposition in:(a) material holdings deducted under PIB chapter 3 for the purposes of calculating an Authorised Firm's Capital Resources;(b) the interest rate leg of an equity swap, equity future or forward, or equity based option; or(c) a non- Convertiblepreference security.
Derivation of Notional Positions
Authorised Firmmust, before Netting, derive a notional position for a depository receipt, a swap, a future, a forward, an option and a company issued warrant in the calculation of its Equity Risk Capital Requirement.
Authorised Firmmust treat a depository receipt as a notional position in the underlying equity.
A position in a depository receipt must only be netted against a position in the underlying equity if the equity is deliverable against the depository receipt.
Authorised Firmmust treat an equity swap as two notional positions: an interest rate leg and an equity leg, as follows:(a) the interest rate leg must be included in the Interest Rate RiskCalculation and treated as a notional government Securityin accordance with the provisions for interest rate swaps in PIB section 5.4; and.(b) the equity leg must be treated as a long or short position in:(i) where the payout or receipt of funds is based on, respectively, the appreciation or depreciation in price of the underlying equities, a future; or(ii) where the payout is the appreciation in price of the underlying equities, an option, in which case the Authorised Firmmust calculate an Option Risk Capital Requirementin accordance with PIB section 5.8.
Equity Futures and Forwards
Authorised Firmmust treat a future or forward on a single equity as a notional position in the underlying equity. In addition, an interest rate leg must be included in the interest rate risk calculation in PIB section 5.4 as a notional government security.
Authorised Firmmust treat a future or forward on a single country equity index as either:(a) notional positions in the constituent equities; or(b) a single notional position.
Where PIB Rule A5.3.14(b) applies, an
Authorised Firmmust apply the highest risk percentage to the single notional position that would apply to any one of its constituents.
Authorised Firmmust treat a future or forward on a multiple country equity index as either:(a) notional positions in the constituent equities; or(b) a number of notional positions being one for each of the countries which is represented in the index, in the proportion of that country's representation in the index.
Where PIB Rule A5.3.16(b) applies, an
Authorised Firmmust apply the highest risk percentage to each notional position that would apply to any one of its constituents.
Equity Options and Company Issued Warrants
Authorised Firmmust treat an option or company issued warrant on an equity, basket of equities or equity index that is eligible to be included in the equity method as a notional position in the underlying equity or equities as follows:(a) a purchased call option and a written put option must be treated as a long position; and(b) a purchased put option and a written call option must be treated as a short position.
Netting Guidance1. Before calculating the
Equity Risk Capital Requirement, positions may be netted in order to produce the individual net position.2. Since the Nettingof positions for Equity Risk Capital Requirementpurposes does not involve legal or contractual issues, this material appears here rather than in the Nettingsection of the Credit Riskchapter.
PIB A5.3.19(1) An
Authorised Firmmay only net equity positions when:(a) long and short (including notional) positions are in the same tranche of the same equity; and(b) long and short (including notional) positions are in different tranches of the same equity where the tranches enjoy the same rights in all respects and become fungible within one hundred and eighty days, and thereafter the equity of one tranche can be delivered in settlement of the equity of the other tranche.(2) For the purposes of (1)(a), an equity is the same as another, only if they enjoy the same rights in all respects and are fungible with each other.
Calculation of the Equity Risk Capital Requirement
Calculation of the Equity Risk Capital Requirement Guidance
There are two methods for calculating the
Equity Risk Capital Requirement: the standard method and the simplified method. The standard method requires two separate calculations. The first is Specific Riskand the second is General Market Risk. The simplified method is easier to calculate but usually results in a higher Capital Requirementthan the standard method. In addition, Authorised Firmsmust calculate an Interest Rate Risk Capital Requirementfor a forward, a future, an option or a company issued warrant.
PIB A5.3.20(1) An
Authorised Firmmust allocate an equity position or notional position to the country in which the equity is listed.(2) An equity listed in more than one country must be allocated to one of the countries in which it is listed.
Authorised Firmmust allocate an unlisted equity to the country in which it is issued.
The Concentration Test
PIB A5.3.22 PIB A5.3.22
Authorised Firmmust apply either the standard method or simplified method to an equity position, except that where an individual net position exceeds 20% of the sum of the long and short positions (ignoring the sign) of its country portfolio, the simplified method must be applied to the excess.
PIB A5.3.22 Guidance
The part of the individual net position that does not exceed 20% may be treated under the simplified or standard method.
Under the standard method, the total
Equity Risk Capital Requirementis the sum of the Specific Riskrequirements for all individual net equity positions and the General Market Riskrequirements calculated separately for each country.
Specific Riskmust be calculated for each net position in an individual equity.
Specific Riskof each individual net equity position is its market value (ignoring the sign) multiplied by 8%.
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Authorised Firmmust calculate General Market Riskon a country-by-country basis.
Authorised Firmmust calculate the General Market Riskfor each country in the following way:(a) all individual net positions are multiplied by 8%;(b) long and short positions in each country portfolio are netted; and(c) if the net equity position is negative, the sign must be reversed.
Equity Risk Capital Requirementfor each country is the sum of the market value of all individual net positions (ignoring the sign) multiplied by the appropriate risk percentage in the table below: Percentage risk Single equities 16% Broad-based indices (not broken down into constituent equities) 8% All other indices (not broken down into constituent equities) 16%
For the purposes of PIB Rule A5.3.31, a broad-based index means an index specified in the table under (c) or an index that satisfies the following criteria:(a) the index contains at least 20 shares;(b) the weighting of the largest company is not greater than 20% of the total index; and(c) the weighting of the largest five companies is not greater than 60% of the total index.
Australia All Ordinaries Austria Austrian Traded Index Belgium BEL 20 Canada TSE 35, TSE 100, TSE 300 France CAC 40, SBF 250 Germany DAX European Dow Jones Stoxx 50 Index, FTSE Eurotop 300, MSCI Euro Index Hong Kong Hang Seng Italy MIB 30 Japan Nikkei 225, Nikkei 300, TOPIX Korea Kospi Netherlands AEX Singapore Straits Times Index Spain IBEX 35 Sweden OMX Switzerland SMI UK FTSE 100, FTSE Mid 250, FTSE All Share US S&P 500, Dow Jones Industrial Average, NASDAQ Composite, Russell 2000