RBI Circular Addresses Measurement of Capital Charge for Market Risk
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
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
RBI Announces Additional Regulatory Policy Measures Amid PandemicRelated Articles
APRA Publishes Results of Climate Risk Self-Assessment Survey
The Australian Prudential Regulation Authority (APRA) has published the findings of its latest climate risk self-assessment survey conducted across the banking, insurance, and superannuation industries.
ACPR Publishes Updates Related to CRD IV and Covered Bonds
The French Prudential Supervisory Authority (ACPR) published a notice related to the methods for calculating and publishing prudential ratios under the Capital Requirements Directive (CRD IV) and the minimum requirement for own funds and eligible liabilities (MREL).
BIS Paper Contributes to Debate on Regulating NBFIs and Big Techs
The Financial Stability Institute (FSI) of the Bank for International Settlements recently published a paper proposing a framework for classifying financial stability regulation as either entity-based or activity-based.
EIOPA Publishes Guidance on Climate Change Scenarios in ORSA
The European Insurance and Occupational Pension Authority (EIOPA) published the risk dashboard based on Solvency II data and the final version of the application guidance on climate change materiality assessments and climate change scenarios in the Own Risk and Solvency Assessment (ORSA).
EBA and ECB Respond to Proposals on Sustainability Disclosures
The European Banking Authority (EBA) and the European Central Bank (ECB) published their responses to the consultations of the International Sustainability Standards Board (ISSB) and the European Financial Reporting Advisory Group (EFRAG) on sustainability-related disclosure standards.
BIS Report Notes Existing Gaps in Climate Risk Data at Central Banks
A Consultative Group on Risk Management (CGRM) at the Bank for International Settlements (BIS) published a report that examines incorporation of climate risks into the international reserve management framework.
EBA Publishes Multiple Regulatory Updates for Regulated Entities
The European Banking Authority (EBA) published the final guidelines on liquidity requirements exemption for investment firms, updated version of its 5.2 filing rules document for supervisory reporting, and Single Rulebook Question and Answer (Q&A) updates in July 2022.
EIOPA Issues SII Taxonomy and Guide on Sustainability Preferences
The European Insurance and Occupational Pensions Authority (EIOPA) published Version 2.8.0 of the Solvency II data point model (DPM) and XBRL taxonomy.
EESC Opines on Proposals on CRR and European Single Access Point
The European Union published, in the Official Journal of the European Union, an opinion from the European Economic and Social Committee (EESC); the opinion is on the proposal for a regulation to amend the Capital Requirements Regulation (CRR).
HM Treasury Publishes Multiple Regulatory Updates in July 2022
HM Treasury published a draft statutory instrument titled “The Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022,” along with the related explanatory memorandum and impact assessment.
