Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p23
Version: federal_register_of_legislation:F2024L01519
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Character Range: 64969–67831

paragraphs 3 to 41 and paragraphs 56 to 64 of this Attachment.

     2.          The treatment of equity options is set out in paragraphs 77 to 95 of this Attachment. To calculate the relevant charges for equity position risk for other equity derivatives and other off-balance positions that are affected by changes in equity prices, an ADI must convert positions into notional equity positions, where:

        1.           futures and forward contracts relating to individual equities are reported at current market prices;

        2.           futures relating to stock indices are reported as the mark-to-market value of the notional underlying equity portfolio; and

        3.           equity swaps are treated as two notional positions.

     1.          If an ADI takes a position in depository receipts against an opposite position in the underlying equity or the same equity listed in a different country, it may only offset the position if any costs on conversion are fully taken into account.

     2.          An ADI may fully offset matched positions in each identical equity or stock index in each market, resulting in a single net short or long position to which the specific and general market risk charges will apply. For this purpose, a future in a given equity may be offset against an opposite physical position in the same equity.

     3.          An ADI must apply a specific risk capital charge of two per cent to the net long or short position in any index contract listed in Table 8.

     4.          If a position is not listed in Table 8, the ADI must either decompose it into its component shares or treat it as a single position based on the sum of current market values of the underlying instruments; if treated as a single position, the specific risk charge is the highest specific risk charge that would apply to any of the index's constituent shares.

     5.          If an ADI employs a futures-related arbitrage strategy where it:

        1.           takes an opposite position in exactly the same index at different dates or in different market centres; or

        2.           has an opposite position in contracts at the same date in different but similar indices, and subject to APRA's written agreement that the two indices contain sufficient common components to justify offsetting,

    the ADI may apply the additional two per cent capital specific risk capital charge (referred to in paragraph 50 of this Attachment) to only one index with the opposite position exempt from a capital charge for both specific risk and general market risk.

     1.          Where an ADI engages in a deliberate arbitrage strategy, in which a futures contract on a broadly-based index matches a basket of shares, the ADI may decompose the index position into notional positions in each of the constituent stocks and