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29. Equity Investments in Funds: Illustrative Example of the Calculation of RWA Under the Mandate-Based Approach (MBA)
No: 44047144
Date(g): 27/12/2022 | Date(h): 4/6/1444
Status: In-Force
Effective from Jan 01 2023 - Dec 31 2022 To view other versions open the versions tab on the right
29.1
Consider a fund with assets of USD 100, where it is stated in the mandate that the fund replicates an equity index. In addition to being permitted to invest its assets in either cash or listed equities, the mandate allows the fund to take long positions in equity index futures up to a maximum nominal amount equivalent to the size of the fund’s balance sheet (USD 100). This means that the total on balance sheet and off balance sheet exposures of the fund can reach USD 200. Consider also that a maximum financial leverage (fund assets/fund equity) of 1.1 applies according to the mandate. The bank holds 20% of the shares of the fund, which represents an investment of USD 18.18.
29.2
First, the on-balance sheet exposures of USD 100 will be risk weighted according to the risk weights applied to listed equity exposures (RW=250%), ie RWAon-BS = USD 100 * 250% = USD 250.
29.3
Second, we assume that the fund has exhausted its limit on derivative positions, ie USD 100 notional amount. The RWA for the maximum notional amount of underlying the derivatives positions calculated by multiplying the following three amounts: (1) the SA credit conversion factor of 100% that is applicable to forward purchases; (2) the maximum exposure to the notional of USD 100; and (3) the applicable risk weight for listed equities under the SA which is 250%. Thus, RWAunderlying = 100% * USD100 * 250% = USD 250.
If we do not know the replacement cost related to the futures contract, we would approximate it by the maximum notional amount, ie USD 100.
(2)
If we do not know the aggregate add-on for potential future exposure, we would approximate this by 15% of the maximum notional amount (ie 15% of USD 100=USD 15).
(3)
The CCR exposure is calculated by multiplying (i) the sum of the replacement cost and aggregate add-on for potential future exposure; by (ii) 1.4, which is the prescribed value of alpha.
29.5
The counterparty credit risk exposure in this example, assuming the replacement cost and aggregate add-on amounts are unknown, is therefore USD 161 (= 1.4 *(100+15)). Assuming the futures contract is cleared through a qualifying CCP, a risk weight of 2% applies, so that RWACCR = USD 161 * 2% = USD 3.2. There is no CVA charge assessed since the futures contract is cleared through a CCP.
29.6
The RWA of the fund is hence obtained by adding RWAon-BS, RWAunderlying and RWACCR, ie USD 503.2 (=250 + 250 + 3.2).
29.7
The RWA (USD 503.2) will be divided by the total assets of the fund (USD 100) resulting in an average risk-weight of 503.2%. The bank’s total RWA associated with its equity investment is calculated as the product of the average risk weight of the fund, the fund’s maximum leverage and the size of the bank’s equity investment. That is the bank’s total associated RWA are 503.2% * 1.1 * USD 18.18 = USD 100.6.
