Guidance Note on Prudential Reporting of Market Risk under the Standardised Approach to Market Risk (December 2018)

Summary

This guidance note explains how Jersey incorporated registered deposit takers (JIBs) must complete the market risk sections of their Prudential Return under the Standardised Approach to Market Risk. It covers foreign exchange and gold exposures, commodities positions, and settlement risk arising from failed or free delivery transactions, setting out the calculation methodology for each.

• FX and Gold (Sheet 5.1): JIBs must report net foreign currency positions (excluding their own reporting currency) by major currency and grouped 'other' long/short currencies, plus gold positions, to derive an aggregate net long open position and risk weighted asset equivalent.
• Commodities (Sheet 5.2): JIBs must report gross long/short positions for precious metals (excluding gold), base metals, energy contracts and other contracts, calculate a Simplified Approach capital charge (15% of net position plus 3% of gross positions), and identify the top five commodities by charge.
• Settlement risk - free deliveries (Sheet 5.3): For free delivery transactions four working days or less past settlement, JIBs must calculate risk weighted assets as the counterparty claim multiplied by the counterparty risk weight.
• Settlement risk - capital (Sheet 5.4): For failed DvP trades and non-DvP trades more than four business days past the due settlement date, JIBs must apply an escalating capital factor (8% for 5-15 days, 50% for 16-30 days, 75% for 31-45 days, 100% for 46+ days) to any potential loss, and 100% for failed non-DvP trades past four days.
• Ongoing calculation duty: JIBs must ensure they adhere to their minimum risk asset ratio requirement at all times, calculate related capital requirements daily where material positions are permitted under their risk limit structure, and calculate settlement risk daily where failed trades may occur.

The note is technical completion guidance for specific Prudential Return data entry sheets rather than a standalone rule; it applies the same treatment to banking book and trading book transactions for settlement risk purposes.

Key obligations

• JIBs must complete Prudential Return sheets 5.1 (FX and Gold), 5.2 (Commodities), 5.3 (Settlement Risk - Credit Risk) and 5.4 (Settlement Risk - Capital) as applicable to their positions.
• JIBs must calculate and report net foreign currency and gold positions, excluding their own reporting currency, using gross input figures.
• JIBs must calculate a Simplified Approach capital charge for commodity positions (15% of net position plus 3% of gross long plus gross short) and report their top five commodities by charge unless below 1% of capital.
• JIBs must apply the counterparty risk weight to free delivery transactions four working days or less past settlement date.
• JIBs must apply the prescribed capital factor (8%, 50%, 75% or 100% depending on days elapsed) to failed DvP trades and non-DvP trades more than four business days past the due settlement date, and report non-DvP trades attracting capital treatment on Sheet 5.4.
• JIBs must adhere to their minimum risk asset ratio requirement at all times.
• JIBs must calculate related capital requirements daily where material positions are permitted by their risk limit structure.
• JIBs with failed trades must calculate settlement risk daily.

Applies to

Jersey incorporated registered deposit takers (JIBs)

Deadlines

• daily: Capital requirements for material FX/commodity positions must be calculated daily where permitted by the JIB's risk limit structure.
• daily: Settlement risk must be calculated daily for all JIBs that may have failed trades.
• 4 working days or less past settlement date: Free delivery transactions within this window are risk weighted using the counterparty risk weight (Sheet 5.3).
• more than 4 business days past due settlement date: Failed DvP and non-DvP trades beyond this point must be reported and capitalised on Sheet 5.4 using the escalating factor table.