Question 1: Are issues rated AA- or better by Supranational issuers qualify for 0% specific risk charge? For such issues, the Country of Risk = SNAT as classification in Bloomberg would be considered as Supranational
No, there is no specification to supranational and thereby low risk charge.

Question 2: Please clarify whether futures or options on ETFs and volatility indices such as VIX are treated as equity index instrument.
Yes, it will be part of equity and reported under equity derivative. Please refer to the Market risk section of the standards for further guidance.

Question 3: Under the treatment of interest rate derivatives for general market risk, in reference to table 3, credit derivatives have not been listed. Kindly advise if these products are excluded from the capital requirement stipulated under general market risk.
Credit derivatives (including CDS and TRS) are subject to the general market risk treatment for interest rate risk if the instrument involves periodic payments of interest. Credit derivatives are subject to specific risk capital as described in paragraphs 26 and 27 of the Market Risk section of the Standards. Note that Table 3 in the text covers only interest rate derivatives, and therefore credit derivatives should not be included. Credit derivatives must be analysed whether they are subject to the general market risk treatment for interest rate risk. For example, Credit Default Swaps are usually not subject to general interest rate risk, whereas Total Return Swaps and credit linked notes are usually subject to general market risk. Please note, that the analysis to which risk types a specific instrument type is exposed, must be provided to the Central Bank upon request.

Question 4: Clarity is needed on what constitutes trading book. For example, Investment Grade bonds classified as AFS, however with no active trading and a holding period of almost till maturity (e.g. callable, decision to sell closer to maturity) does this need to be banking book? Similarly, HTM under this description can be either trading or banking book.
The Market Risk Standard as published does not change the definition of trading book. The requirements of BCBS 128 paragraphs 685 to 689 have been applied in the text of the Standards. Please refer to the Market Risk Regulation under Notice 3018/2018 for the full definition of trading book.

Question 5: For Qualifying category, if the issuer of the security is a rated corporate by any one of rated agencies i.e. Moody's, S&P, Fitch with investment grade. Should it be included under Qualifying Category?
Yes, this will fall under qualifying category as long as it rated investment grade by at least two credit rating agencies.

Question 6: Should general criteria for all investment grade securities other than Government Issuers be taken under the category of Qualifying?
Yes, these instruments will be classified as qualifying provided in paragraphs 16-19.

Question 7: As per the Standards, "the separate legs of cross-currency swaps or forward foreign exchange deals are to be treated as notional positions in the relevant instruments and included in the appropriate calculation for each currency". Under which method these are required to be included in MR-3 i.e Maturity method or Duration method.
General risk can be computed using Maturity and Duration approach. Paragraph 41 on "Allowable offsetting of matched positions" of the market risk standard applies to both approaches and depends on what approach the bank uses for reporting.

Question 8: If the options are hedged, do we need to input the numbers in the template.
If it is fully micro hedged, then Net Forward Purchase (Sales) & Delta weighted positions for Options will be zero. Refer to VII Appendix: Prudent Valuation Guidance as part of Market risk standard.

Question 9: Banks have the possibility to include the repo transactions in the trading book for regulatory capital calculation even though they are accounted in the banking book?
Term trading-related repo-style transactions that meet the requirements for trading-book treatment may be included in the bank’s trading book for regulatory capital purposes even if a bank accounts for those transactions in the banking book. If the bank does so, all such repo-style transactions must be included in the trading book, and both legs of such transactions, either cash or securities, must be included in the trading book. Regardless of where they are booked, all repo-style transactions are subject to a credit risk capital requirement under the Central Bank’s Standards for Credit Risk Capital. The secured part of the exposure is risk weighted based on the credit rating/type of the issuer the security serving as collateral, and the unsecured part is risk weighted based on the credit rating/type (bank-sovereign-corporate) of the counterparty. In addition, how/where the reporting should be under which risk type (e.g. interest rate risk (Specific and/or General), FX, Equity, etc.) depends on the nature of the cash placement (one ‘leg’) and that of the security/collateral (other ‘leg’). The two legs are reportable to the relevant market risk type. For example, if the cash placement is floating rate and denominated in foreign currency it would be reported under FX. In regards to position risk (interest rate and equity risk types), it would be under General risk.

Question 10: How do we treat the capital charge when an exposure in the Banking book is hedged via a derivative in the trading book?
As long as the position got an open leg under one of the two books (i.e. Banking or trading), applicable capital charge should be taken in place. When a bank hedges a banking book credit risk exposure using a credit derivative booked in its trading book (i.e. using an internal hedge), the banking book exposure is not deemed to be hedged for capital purposes unless the bank purchases from an eligible third party protection provider a credit derivative meeting the requirements in the Central Bank’s Standards for Credit Risk. Where such third party protection is purchased and is recognised as a hedge of a banking book exposure for regulatory capital purposes, neither the internal nor external credit derivative hedge would be included in the trading book for regulatory capital purposes.

Question 11: BCBS standards provides banks two options to include large swap books in the maturity or duration ladder (Convert the payments into their present values or to calculate the sensitivity of the net present value). It would be useful to clarify which methods are acceptable.
Currently both methods are acceptable but to move forward with sensitivity or NPV approach, the bank shall seek Central Bank approval by providing all relevant documents.

Question 12: How to treat Multilateral Development Banks (MDBs), PSEs and GREs that qualify 0% risk weight as per Credit Risk Section of the Standards for the “Qualifying” criteria of Specific Risk?
All MDBs are considered “qualifying” for this purpose and will receive a RW of 0%.

PSE that meets the conditions to be treated like a sovereign for credit risk can be considered “government" for specific risk.

Commercial GREs that are treated as corporates for credit risk should also be treated as corporates for market risk, for consistency.

Question 13: Can the securities issued by local government be reported under government? If yes, what capital charge will be applied?
Only if they qualify for treatment as “sovereign” under the credit risk framework, a 0% can be applied.

Question 14: What is meant by 'broadly' in paragraphs 23 and 24 of the Market Risk Standard. Any threshold for the size of the movement e.g. a negative correlation of more than 0.6?
No, there is no specific threshold. "Broadly" in this context means "with close approximation," to allow for minor deviations from perfect correlation. The bank should have a sensible policy to ensure that objective, which should be subject to supervisory review.

Question 15: What is meant by "long term participation"? What is included in it?
Long-term participations could take a number of forms, but a typical example would be investments accounted at historical cost (and in this context, denominated in a foreign currency). Paragraph 65 edited for clear understanding.

Question 16: Do the banks have to meet certain criteria to apply duration or maturity approach or is the choice of method fully within the bank's discretion?
Maturity approach shall be the initial approach to be used. In case the bank requires to apply Duration approach, then banks will have to seek Central Bank consent to switch between the approaches.

Question 17: Under Specific interest rate risk, what will be the treatment for the debt securities that are denominated and funded in domestic currency or foreign currency?
The preferential treatment/national discretion will be applicable to GCC sovereign’s papers denominated and funded in local currency. In addition, exposures to the Federal Government and Emirates Government receive 0% risk weight, if such exposures are denominated and funded in AED or USD for a transition period of 7 years from the date of implementation of this Standard. After the transition period, 0% risk weights are only applied to exposures that are denominated and funded in AED. Elsewise (if denominated and funded in foreign currency and if the debt security is not GCC sovereign paper) rating and residual maturity shall be applied.

Question 18: Interest Rate Risk: How are derivatives treated from a market risk and credit risk perspective that a foreign branch has with its head office and other branches of the group? Are all the derivative transactions under the umbrella of the group, can such derivatives be excluded from the capital charge?

1. •Exemption is not eligible; all derivatives are to be included under credit and market risk.
2. •If the branch and the head office both have the same ISDA contract, netting and collateral will not be eligible. However, if the ISDA contract contains only the deals from the branch, then netting and collateral would be eligible.
3. •From Market risk perspective, if the bank's transactions are fully hedged, i.e. certain derivatives with UAE customers are fully hedged back to back with the head office, then the bank can offset for example the general and specific interest rate risks (based on paragraphs 41 to 45). However, counterparty credit risk is still to be considered.

Question 19: Treatment of Options: Do banks have to meet certain criteria to apply the simplified approach or the delta plus method? Or is the choice of method fully within bank's discretion?
As per Para 82 (Standard), two alternative approaches apply to options. Banks that only purchase options (rather than written options) can choose to use a simplified approach. Unless all written option positions (under the simplified approach) are hedged by perfectly matched long positions in exactly the same options, in which case no capital charge for market risk is required. Banks with more complex option positions that also write options must use the delta-plus approach rather than the simplified approach.

Question 20: Specific Interest Rate Risk: When the securities are not externally credit rated, does the Central Bank have a list of specific treatment for issuers/ issues that are unrated?
The Central Bank does not have a discretionary list of customers that do receive a special treatment if an external rating is not available.

1. •The standard is exhaustive for all special treatments. For example: UAE and GCC sovereign exposure that are funded and denominated in the domestic currency receive 0% RW (independent of the external rating of that sovereign)
2. •Exposures to the Federal Government and Emirates Government receive 0% risk weight, if such exposures are denominated and funded in AED or USD for a transition period of 7 years from the date of implementation of this Standard. After the transition period, 0% risk weights are only applied to exposures that are denominated and funded in AED.

Question 21: If a bank has exposure in equity investments in the trading book, how will this exposure be treated under Market risk?
Risk-weighted assets for equity exposures arising from bank investments in funds that are held in the trading book are subject to the market risk capital rules. Equity investments in funds will be allocated to the trading book if the bank is able to “look through” to the fund’s underlying assets (i.e. determine capital requirements based on the underlying positions held by the fund), or where the bank has access both to daily price quotes and to the information contained in the mandate of the fund. The reporting is based on the underlying positions held by the fund; it could be covered under different areas of the market risk (e.g. FX, IRR and equity risk).

Question 22: As per paragraph 21 of the Market Risk Standard, it is mentioned that a securitisation exposure subject to a risk weight of 1250% under the Central Bank requirements (and therefore to a 100% specific risk charge under this Standard) may be excluded from the calculation of capital for general market risk. Should the cap for the UAE be 1250% or 952% as mentioned in paragraph 5 of the Introduction of the standards?
Yes, the RW has to be capped at 952% as mentioned in the introduction of the standards.