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Basel ii Accord
Section 156 to 169 |
Quantitative
criteria
156. In calculating
the haircuts, a 99th percentile,
one-tailed confidence interval is to
be
used.
157.
The minimum holding period will be dependent on
the type of transaction and the
frequency
of remargining or marking to market. The minimum
holding periods for different
types
of transactions are presented in paragraph 167.
Banks may use haircut numbers
calculated
according to shorter holding periods, scaled up
to the appropriate holding
period
by
the square root of time
formula.
158.
Banks must take into account the illiquidity of
lower-quality assets. The
holding
period
should be adjusted upwards in cases where such a
holding period would be
inappropriate
given the liquidity of the collateral. They
should also identify where
historical
data
may understate potential volatility, e.g. a
pegged currency. Such cases must be
dealt
with
by subjecting the data to stress
testing.
159.
The choice of historical observation period
(sample period) for calculating
haircuts
shall
be a minimum of one year. For banks that use a
weighting scheme or other methods for the
historical observation period, the “effective”
observation period must be at least one year
(that is, the weighted average time lag of the
individual observations cannot be less
than
6
months).
160.
Banks should update their data sets no less
frequently than once every
three
months
and should also reassess them whenever market
prices are subject to material
changes.
This implies that haircuts must be computed at
least every three months. The
supervisor
may also require a bank to calculate its
haircuts using a shorter
observation
period
if, in the supervisor's judgement, this is
justified by a significant upsurge in
price
volatility.
161.
No particular type of model is prescribed. So
long as each model used captures
all
the
material risks run by the bank, banks will be
free to use models based on, for
example,
historical
simulations and Monte Carlo
simulations.
Qualitative
criteria
162.
The estimated volatility data (and holding
period) must be used in the
day-to-day
risk
management process of the bank.
163.
Banks should have robust processes in place for
ensuring compliance with a
documented
set of internal policies, controls and
procedures concerning the operation of
the
risk
measurement system.
164.
The risk measurement system should be used in
conjunction with internal
exposure
limits.
165.
An independent review of the risk measurement
system should be carried out
regularly
in the bank’s own internal auditing process. A
review of the overall risk
management
process should take place at regular intervals
(ideally not less than once a
year)
and should specifically address, at a
minimum:
•
the
integration of risk measures into daily risk
management;
•
the
validation of any significant change in the risk
measurement process;
•
the
accuracy and completeness of position
data;
•
the
verification of the consistency, timeliness and
reliability of data sources used
to
run
internal models, including the independence of
such data sources; and
•
the
accuracy and appropriateness of volatility
assumptions.
Adjustment
for different holding periods and non daily
mark-to-market or remargining
166.
For some transactions, depending on the nature
and frequency of the
revaluation
and
remargining provisions, different holding
periods are appropriate. The framework
for
collateral
haircuts distinguishes between repo-style
transactions (i.e. repo/reverse repos
and
securities
lending/borrowing), “other capital-market-driven
transactions” (i.e. OTC derivatives transactions
and margin lending) and secured lending.
In
capital-market-driven transactions and
repo-style transactions, the documentation
contains remargining clauses; in secured lending
transactions, it generally does
not.
167.
The minimum holding period for various products
is summarised in the following
table.
168.
When the frequency of remargining or revaluation
is longer than the minimum, the
minimum
haircut numbers will be scaled up depending on
the actual number of business
days
between remargining or revaluation using the
square root of time formula
below:
When a bank
calculates the volatility on a
TN
day
holding period which is
different
from the specified
minimum holding period
TM, the HM
will
be calculated using the
square
root of time formula:
169.
For example, for banks using the standard
supervisory haircuts, the
10-business
day
haircuts provided in paragraph 151 will be the
basis and this haircut will be scaled up
or
down
depending on the type of transaction and the
frequency of remargining or
revaluation
using
the formula below:
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