Main Concepts of the Sensitivities-Based Method

Effective from Dec 28 2022 - Dec 27 2022
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7.1	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].