Module 4 Market Risk Guidance

Summary

This is guidance from the Guernsey Financial Services Commission explaining how Guernsey banks should complete Module 4 of the BSL/2 return, which covers market risk. It sets out the reporting and capital calculation methodology for foreign exchange, gold and commodities risk, and clarifies the treatment of trading book risk.

• Scope of market risk: Covers interest rate and equity risk in the trading book, plus foreign exchange, gold and commodities risk across the whole bank.
• Trading book approach: The Commission's Trading Book Survey has found Guernsey banks do not run material trading books; any bank that develops a material trading book must inform the Commission, and any resulting capital charge is addressed through Pillar 2 ICAAP/SREP rather than this form.
• FX and gold capital charge: Uses the Basel II shorthand method; capital charge is 8% of the aggregate net open position (currencies plus absolute gold position).
• Commodities capital charge: Uses the Basel II Simplified Approach; capital charge is 15% of the net position in each commodity plus 3% of gross long and short positions in that commodity.
• Reporting mechanics: Reporting currency positions are left blank (system calculates a balancing item); major currencies (GBP, USD, EUR, CHF, CAD, JPY, AUD) are reported individually, with other currencies grouped as long or short.
• Risk weighted asset equivalent: Both FX/gold and commodities capital charges are multiplied by 12.5 to derive the Risk Weighted Asset Equivalent figure.

Subsidiaries with a material trading book must contact the Commission to discuss treatment under Pillar 2, and all subsidiaries must adhere to the 8% minimum risk asset ratio and minimum capital requirements at all times, calculating these daily where material positions are permitted.

Key obligations

• Banks must calculate and report foreign exchange, gold and commodities market risk using the methodology set out in Module 4 of form BSL/2
• Banks must adhere to the 8% minimum risk asset ratio and minimum capital requirements at all times, calculating these daily where material positions are permitted
• Banks that develop a material trading book must inform the Commission and address related capital charges via the Pillar 2 SREP/ICAAP process
• Subsidiaries with a material trading book must contact the Commission to discuss treatment of related risks under their ICAAP

Applies to

banks, Guernsey incorporated deposit takers, subsidiaries of banks