Bank of Russia clarifies market risk calculation procedure for credit institutions

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The Bank of Russia Ordinance is aimed at minimising the dependence on external ratings in banking regulation, improving the implementation of certain Basel II and Basel 2.5 provisions, and reflecting changes made to other Bank of Russia regulations. The ordinance has been registered by the Russian Ministry of Justice and is coming into force on 24 March 2019.

The document clarifies the procedure for calculating special interest rate risk by bringing the classification of debt securities (excluding securitisation and re-securitisation instruments) in line with the approach to the calculation of credit risk employed by Bank of Russia Instruction No. 180-I, dated 28 June 2017, ‘On Banks’ Required Ratios’, thereby decreasing the dependence on external ratings in banking regulation.

To the extent the derivatives risk assessment is concerned, the Ordinance establishes the possibility to net vega risk values for options with the same underlying asset (vega reflects the risk related to the changes in option price due to changes in volatility of the price of the underlying asset). The appendix to the document contains a list of the so-called ‘well diversified indices’ (instead of a reference to a more narrow list of principal stock indices provided in Appendix 6 to Instruction 180-I). Derivatives where the underlying assets are the MOEX index, the RTS index or the above indices are assessed with the risk-weighted ratio of 2% instead of 8%, which is the case with derivatives with other indices as underlying assets. Furthermore, the ordinance clarifies the procedure for establishing positions and including them into the calculation with respect to certain types of credit derivatives (credit notes, total return swaps with equity securities as the underlying asset).

The document establishes a new procedure to determine the value of commodities accepted as collateral that is included in commodity risk assessment (as far as it does not exceed the prudential estimated provision for losses on balance sheet claims and off-balance-sheet liabilities to secure which such commodities were received).

Due to changes to the procedure for the accounting of spot transactions entering into force, the Ordinance establishes the requirement to recognise claims (liabilities) related to the delivery of securities purchased (sold) under respective transactions when determining securities positions included in market risk assessment.

The Ordinance excludes from market risk assessment (until the price determination or settlement date) such agreements where settlements are to be performed at a price determined on a specified date and/or where no settlement date is set.

Furthermore, the document eliminates double coverage of risks on securitisation and re-securitisation instruments included in market risk assessment to the extent secured by other risk positions arising under a securitisation transaction.

13 March 2019

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