| 14.53 | This section sets out the simplified standardised approach for measuring the risk of holding or taking positions in foreign currencies, including gold.70
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| 14.54 | Two processes are needed to calculate the capital requirement for FX risk.
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| | (1) | The first is to measure the exposure in a single currency position as set out in [14.55] to [14.58].
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| | (2) | The second is to measure the risks inherent in a bank’s mix of long and short positions in different currencies as set out in [14.59] to [14.62].
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Measuring the exposure in a single currency
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| 14.55 | The bank’s net open position in each currency should be calculated by summing:
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| | (1) | the net spot position (ie all asset items less all liability items, including accrued interest, denominated in the currency in question);
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| | (2) | the net forward position (ie all amounts to be received less all amounts to be paid under forward FX transactions, including currency futures and the principal on currency swaps not included in the spot position);
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| | (3) | guarantees (and similar instruments) that are certain to be called and are likely to be irrecoverable;
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| | (4) | net future income/expenses not yet accrued but already fully hedged (at the discretion of the reporting bank);
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| | (5) | any other item representing a profit or loss in foreign currencies (depending on particular accounting conventions in different countries); and
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| | (6) | the net delta-based equivalent of the total book of foreign currency options.71
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| 14.56 | Positions in composite currencies need to be separately reported but, for measuring banks’ open positions, may be either treated as a currency in their own right or split into their component parts on a consistent basis. Positions in gold should be measured in the same manner as described in [14.68].72
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| 14.57 | Interest, other income and expenses should be treated as follows. Interest accrued (ie earned but not yet received) should be included as a position. Accrued expenses should also be included. Unearned but expected future interest and anticipated expenses may be excluded unless the amounts are certain and banks have taken the opportunity to hedge them. If banks include future income/expenses they should do so on a consistent basis, and not be permitted to select only those expected future flows which reduce their position.
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| 14.58 | Forward currency and gold positions should be measured as follows: Forward currency and gold positions will normally be valued at current spot market exchange rates. Using forward exchange rates would be inappropriate since it would result in the measured positions reflecting current interest rate differentials to some extent. However, banks that base their normal management accounting on net present values are expected to use the net present values of each position, discounted using current interest rates and valued at current spot rates, for measuring their forward currency and gold positions.
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Measuring the foreign exchange risk in a portfolio of foreign currency positions and gold
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| 14.59 | For measuring the FX risk in a portfolio of foreign currency positions and gold as set out in [14.54](2), a bank that is not approved to use internal models by SAMA must use a shorthand method which treats all currencies equally.
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| 14.60 | Under the shorthand method, the nominal amount (or net present value) of the net position in each foreign currency and in gold is converted at spot rates into the reporting currency.73 The overall net open position is measured by aggregating:
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| | (1) | the sum of the net short positions or the sum of the net long positions, whichever is the greater;74 plus
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| | (2) | the net position (short or long) in gold, regardless of sign.
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| 14.61 | The capital requirement will be 8% of the overall net open position (see example in Table 9). In particular, the capital requirement would be 8% of the higher of either the net long currency positions or the net short currency positions (ie 300) and of the net position in gold (35) = 335 x 8% = 26.8.
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| Example of the shorthand measure of FX risk | Table 9 | | | JPY | EUR | GBP | CAD | USD | Gold | | Net position per currency | +50 | + 100 | + 150 | -20 | -180 | -35 | | Net open position | +300 | -200 | 35 |
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14.62 |
A bank of which business in foreign currency is insignificant and which does not take FX positions for its own account may, at the discretion of SAMA, be exempted from capital requirements on these positions provided that:
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| | (1) | its foreign currency business, defined as the greater of the sum of its gross long positions and the sum of its gross short positions in all foreign currencies, does not exceed 100% of eligible capital as defined in Regulatory Capital for Basel III in Finalized Guidance Document Concerning the Implementation of Basel III issued by SAMA in 19 December 2012 and any subsequent regulatory adjustments; and
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| | (2) | its overall net open position as defined in [14.60] above does not exceed 2% of its eligible capital as defined in Regulatory Capital for Basel III in Finalized Guidance Document Concerning the Implementation of Basel III issued by SAMA in 19 December 2012 and any subsequent regulatory adjustments .
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70 Gold is to be dealt with as an FX position rather than a commodity because its volatility is more in line with foreign currencies and banks manage it in a similar manner to foreign currencies.
71 Subject to a separately calculated capital requirement for gamma and vega as described in [14.77] to [14.80]; alternatively, options and their associated underlyings are subject to one of the other methods described in [14.74] to [14.86].
72 Where gold is part of a forward contract (quantity of gold to be received or to be delivered), any interest rate or foreign currency exposure from the other leg of the contract should be reported as set out in [14.3] to [14.40] and 14.55] above.
73 Where the bank is assessing its FX risk on a consolidated basis, it may be technically impractical in the case of some marginal operations to include the currency positions of a foreign branch or subsidiary of the bank. In such cases, the internal limit in each currency may be used as a proxy for the positions. Provided there is adequate ex post monitoring of actual positions against such limits, the limits should be added, without regard to sign, to the net open position in each currency.
74 An alternative calculation, which produces an identical result, is to include the reporting currency as a residual and to take the sum of all the short (or long) positions.
