13.Under the MBA, banks may use the information contained in a fund’s mandate, or in the rules or regulations governing such investment funds in the relevant jurisdiction. Information used for this purpose is not strictly limited to a fund’s mandate or to national regulations or other requirements that govern such funds. For example, a bank could obtain information from the fund’s prospectus or from other disclosures of the fund.

14.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 Standards requires that risk-weighted assets for funds’ exposures be calculated as the sum of three items:

1. •On-balance-sheet exposures;
2. •Off-balance-sheet exposures including notional value of derivatives exposures; and
3. •CCR exposure for derivatives.

15.As with the LTA, for purposes of the MBA the RWA and assets of investment funds should, to the extent possible, be evaluated using the same accounting standards the bank would apply if the assets were held directly. However, where this is not possible due to constraints on available information, the evaluation can be based on the accounting standards applied by the investment fund, provided the treatment of the numerator (RWA) and the denominator (total unweighted assets) is consistent.

16.In general, the MBA aims to take a conservative approach by calculating the highest risk-weighted assets the fund could achieve under the terms of its mandate or governing laws and regulations. Under the MBA, the bank should assume that the fund’s assets are first invested to the maximum extent allowable in assets that would attract the highest risk weight, and then to the maximum extent allowable in the next riskiest type of asset, and so on until all of the fund’s balance sheet assets have been assigned to a risk-weight category. If more than one risk weight could be applied to a given exposure, the bank must use the maximum applicable risk weight. For example, if the mandate does not place restrictions on the rating quality of the fund’s investments in corporate bonds, the bank should apply a risk weight of 150% to the fund’s corporate bond positions.

17.For derivatives, when the replacement cost is unknown, the Standards takes a conservative approach by setting replacement cost equal to the notional amount of the derivatives contracts. When the notional amount of a fund’s derivative exposure is unknown, the approach again is conservative: the bank should use the maximum notional amount of derivatives allowed under the fund’s mandate. When the PFE for derivatives is unknown, the PFE add-on should be set at 15% of the notional value. Thus, if the replacement cost and PFE add-on both are unknown, a total multiplication factor of 1.15 must be applied to the notional amount to reflect the CCR exposure.

18.Instead of determining a CVA charge associated with the fund’s derivative exposures, the Standards allows banks to multiply the CCR exposure by a factor of 1.5 before applying the risk weight associated with the counterparty. However, a bank is not required to apply the 1.5 factor for situations in which the CVA capital charge would not otherwise be applicable. Notably, this includes derivative transactions for which the direct counterparty is a qualifying central counterparty.