21.Consider a fund that aims to replicate an equity index using a strategy based on forward contracts. Assume the fund holds short-term forward contracts for this purpose with a notional amount of 100 that are cleared through a qualifying central counterparty. Further, assume that the fund’s financial position can be represented by the following T-account balance sheet:

Finally, assume that the bank’s equity investment in the fund comprises 20% of the shares of the fund, and therefore is 20% × 95 = 19.

Using the LTA, the fund’s balance sheet exposures of 100 are risk weighted according to the risk weights that would be applied to these assets by the bank. For cash, the risk weight is 0%; for the government bonds, the risk weight is also 0%. The margin receivable is an exposure to a qualifying CCP, which has 2% risk weight. The underlying risk weight for equity exposures (100%) is applied to the notional amount of the forward contracts.

Assume that the bank is able to determine that the amount of the CCR exposure to the CCP is 10, which then receives the 2% risk weight for exposures to a qualifying CCP. Note that there is no CVA charge because the forward contracts are cleared through the qualifying CCP.

The total RWA for the fund is:

20×0% + 30×0% + 50×2% + 100×100% + 10×2% = 101.2
 

Given the total assets of the fund of 100, the average risk-weight for the fund is:

Avg RW_fund = 101.2 / 100 = 101.2%
 

With fund assets of 100 and fund equity of 95, leverage is calculated as the assets-to-equity ratio, or 100/95≈1.05. Therefore, the risk-weight for the bank’s equity investment in the fund is:

Risk Weight = 101.2% × (100/95) = 106.5%
 

Applying this risk weight to the bank’s equity investment in the fund of 19, the bank’s RWA on the position for the purpose of calculating minimum required capital is 106.5% × 19 = 20.24.