RBI issued a circular that addresses the treatment of debt mutual funds/exchange-traded funds (ETFs) while computing capital charge for market risk under the Basel III capital regulations. According to Para 8.4.1 of the Master Circular on Basel III capital regulations, capital charge for equities is applicable to units of mutual funds. This recent circular details the RBI decision on computation of capital charge for market risk for the banks investing in a debt mutual fund/ETF with underlying comprising the Central, State, and Foreign Central Governments’ bonds; bank bonds; and corporate bonds (other than bank bonds).
Under the Basel III capital rules in the Master Circular, the minimum capital requirement is expressed in terms of two separately calculated charges. One is the "specific risk" charge for each security, which is designed to protect against an adverse movement in the price of an individual security owing to factors related to the individual issuer, both for short (short position is not allowed in India except in derivatives and Central Government Securities) and long positions. The other is the "general market risk" charge toward interest rate risk in the portfolio, where long and short positions (which is not allowed in India except in derivatives and Central Government Securities) in different securities or instruments can be offset. The circular covers the following points with respect to the computation of capital charge for market risk:
- Investment in debt mutual fund/ETF, for which full constituent debt details are available, shall attract general market risk charge of 9%, as hitherto. Additionally, the Annex to this recent circular details the application of specific risk capital charge for exposures to securities issued by Indian and foreign sovereigns, bonds issued by banks, and corporate bonds (other than bank bonds).
- In case of debt mutual fund/ETF, which contains a mix of the debt instruments, the specific risk capital charge shall be computed based on the lowest rated debt instrument or instrument attracting the highest specific risk capital charge in the fund.
- Debt mutual fund/ETF, for which constituent debt details are not available, at least as of each month-end, shall continue to be treated on par with equity for computation of capital charge for market risk, as prescribed in Para 8.4.1 of the Master Circular on Basel III capital regulations.
Keywords: Asia Pacific, India, Banking, Basel, Regulatory Capital, Market Risk, Mutual Funds, ETF, RBI
Previous ArticleRBI Announces Additional Regulatory Policy Measures Amid Pandemic
PRA published the policy statement PS8/21, which contains the final supervisory statement SS3/21 on the PRA approach to supervision of the new and growing non-systemic banks in UK.
EBA published a report that sets out the final draft regulatory technical standards specifying the conditions according to which consolidation shall be carried out in line with Article 18 of the Capital Requirements Regulation (CRR).
EBA updated the list of other systemically important institutions (O-SIIs) in EU.
BCBS published two reports that discuss transmission channels of climate-related risks to the banking system and the measurement methodologies of climate-related financial risks.
UK Authorities (FCA and PRA) welcomed the findings of FSB peer review on the implementation of financial sector remuneration reforms in the UK.
PRA and FCA jointly issued a letter that highlights risks associated with the increasing volumes of deposits that are placed with banks and building societies via deposit aggregators and how to mitigate these risks.
MFSA announced that amendments to the Banking Act, Subsidiary Legislation, and Banking Rules will be issued in the coming months, to transpose the Capital Requirements Directive (CRD5) into the national regulatory framework.
EC finalized the Delegated Regulation 2021/598 that supplements the Capital Requirements Regulation (CRR or 575/2013) and lays out the regulatory technical standards for assigning risk-weights to specialized lending exposures.
OSFI launched a consultation to explore ways to enhance the OSFI assurance over capital, leverage, and liquidity returns for banks and insurers, given the increasing complexity arising from the evolving regulatory reporting framework due to IFRS 17 (Insurance Contracts) standard and Basel III reforms.
ECB published results of the benchmarking analysis of the recovery plan cycle for 2019.