The sensitivities of financial instruments to a prescribed list of risk factors are used to calculate the delta, vega and curvature risk capital requirements. These sensitivities are risk-weighted and then aggregated, first within risk buckets (risk factors with common characteristics) and then across buckets within the same risk class as set out in [7.8] to [7.14]. The following terminology is used in the sensitivities-based method:
(1)
Risk class: seven risk classes are defined (in [7.39] to [7.89]).
(a)
General interest rate risk (GIRR)
(b)
Credit spread risk (CSR): non-securitisations
(c)
CSR: securitisations (non-correlation trading portfolio, or non-CTP)
(d)
CSR: securitisations (correlation trading portfolio, or CTP)
(e)
Equity risk
(f)
Commodity risk
(g)
Foreign exchange (FX) risk
(2)
Risk factor: variables (eg an equity price or a tenor of an interest rate curve) that affect the value of an instrument as defined in [7.8] to [7.14]
(3)
Bucket: a set of risk factors that are grouped together by common characteristics (eg all tenors of interest rate curves for the same currency), as defined in [7.39] to [7.89].
(4)
Risk position: the portion of the risk of an instrument that relates to a risk factor. Methodologies to calculate risk positions for delta, vega and curvature risks are set out in [7.3] to [7.5] and [7.15] to [7.26].
(a)
For delta and vega risks, the risk position is a sensitivity to a risk factor.
(b)
For curvature risk, the risk position is based on losses from two stress scenarios.
(5)
Risk capital requirement: the amount of capital that a bank should hold as a consequence of the risks it takes; it is computed as an aggregation of risk positions first at the bucket level, and then across buckets within a risk class defined for the sensitivities-based method as set out in [7.3] to [7.7].
