The Mandate-Based Approach
Effective from Dec 28 2022 - Dec 31 2022
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| 24.6 | The second approach, the MBA, provides a method for calculating regulatory capital that can be used when the conditions for applying the LTA are not met. | |
| 24.7 | Under the MBA, banks may use the information contained in a fund's mandate or in the national regulations governing such investment funds.118 To ensure that all underlying risks are taken into account (including CCR) and that the MBA renders capital requirements no less than the LTA, the risk- weighted assets for the fund's exposures are calculated as the sum of the following three items : | |
| (1) | Balance sheet exposures (i.e. the funds' assets) are risk weighted assuming the underlying portfolios are invested to the maximum extent allowed under the fund's mandate in those assets attracting the highest capital requirements, and then progressively in those other assets implying lower capital requirements. If more than one risk weight can be applied to a given exposure, the maximum risk weight applicable must be used.119 | |
| (2) | Whenever the underlying risk of a derivative exposure or an off-balance-sheet item receives a risk weighting treatment under the risk-based capital requirements standards, the notional amount of the derivative position or of the off-balance sheet exposure is risk weighted accordingly.120 121 | |
| (3) | The CCR associated with the fund's derivative exposures is calculated using the standardized approach to counterparty credit risk (SA-CCR, see standardized approach for counterparty credit risk). SA-CCR calculates the counterparty credit risk exposure of a netting set of derivatives by multiplying (i) the sum of the replacement cost and potential future exposure; by (ii) an alpha factor set at 1.4. Whenever the replacement cost is unknown, the exposure measure for CCR will be calculated in a conservative manner by using the sum of the notional amounts of the derivatives in the netting set as a proxy for the replacement cost, and the multiplier used in the calculation of the potential future exposure will be equal to 1. Whenever the potential future exposure is unknown, it will be calculated as 15% of the sum of the notional values of the derivatives in the netting set.122 The risk weight associated with the counterparty is applied to the counterparty credit risk exposure. Instead of determining a CVA charge associated with the fund's derivative exposures in accordance with the Minimum Capital Requirements for CVA, banks must multiply the CCR exposure by a factor of 1.5 before applying the risk weight associated with the counterparty.123 | |
118 Information used for this purpose is not strictly limited to a fund’s mandate or national regulations governing like funds. It may also be drawn from other disclosures of the fund.
119 For instance, for investments in corporate bonds with no ratings restrictions, a risk weight of 150% must be applied.
120 If the underlying is unknown, the full notional amount of derivative positions must be used for the calculation.
121 If the notional amount of derivatives mentioned in Error! Reference source not found. is unknown, it will be estimated conservatively using the maximum notional amount of derivatives allowed under the mandate.
122 For instance, if both the replacement cost and add-on components are unknown, the CCR exposure will be calculated as: 1.4 * (sum of notionals in netting set +0.15*sum of notionals in netting set).
123 A bank is only required to apply the 1.5 factor for transactions that are within the scope of the Minimum Capital Requirements for CVA.