| 8.3 | The following step-by-step approach must be followed for each risk class subject to default risk. The specific definition of gross JTD risk, net JTD risk, bucket, risk weight and the method for aggregation of DRC requirement across buckets are separately set out per each risk class in subsections in [8.9] to [8.26].
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| | (1) | The gross JTD risk of each exposure is computed separately.
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| | (2) | With respect to the same obligator, the JTD amounts of long and short exposures are offset (where permissible) to produce net long and/or net short exposure amounts per distinct obligor.
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| | (3) | Net JTD risk positions are then allocated to buckets.
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| | (4) | Within a bucket, a hedge benefit ratio is calculated using net long and short JTD risk positions. This acts as a discount factor that reduces the amount of net short positions to be netted against net long positions within a bucket. A prescribed risk weight is applied to the net positions which are then aggregated.
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| | (5) | Bucket level DRC requirements are aggregated as a simple sum across buckets to give the overall DRC requirement.
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| 8.4 | No diversification benefit is recognised between the DRC requirements for:
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| | (1) | non-securitisations;
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| | (2) | securitisations (non-CTP) ; and
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| | (3) | securitisations (CTP).
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| 8.5 | For traded non-securitisation credit and equity derivatives, JTD risk positions by individual constituent issuer legal entity should be determined by applying a look- through approach.
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The JTD equivalent is defined as the difference between the value of the security or product assuming that each single name referenced by the security or product, separately from the others, defaults (with zero recovery) and the value of the security or product assuming that none of the names referenced by the security or product default.
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| 8.6 | For the CTP, the capital requirement calculation includes the default risk for non securitisation hedges. These hedges must be removed from the calculation of default risk non-securitisation.
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| 8.7 | Claims on sovereigns, public sector entities and multilateral development banks would be subject to a zero default risk weight in line with paragraphs 7.1 through 7.11 in the SAMA Minimum Capital Requirements for Credit Risk framework. SAMA apply a non-zero risk weight to securities issued by certain foreign governments, including to securities denominated in a currency other than that of the issuing government.
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| 8.8 | For claims on an equity investment in a fund that is subject to the treatment specified in [7.36](3) (ie treated as an unrated “other sector” equity), the equity investment in the fund shall be treated as an unrated equity instrument. Where the mandate of that fund allows the fund to invest in primarily high-yield or distressed names, banks shall apply the maximum risk weight per Table 2 in [8.24] that is achievable under the fund’s mandate (by calculating the effective average risk weight of the fund when assuming that the fund invests first in defaulted instruments to the maximum possible extent allowed under its mandate, and then in CCC-rated names to the maximum possible extent, and then B-rated, and then BB-rated). Neither offsetting nor diversification between these generated exposures and other exposures is allowed.
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