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Banking (prudential standard) determination No. 7 of 2024

Prudential Standard APS 116 Capital Adequacy: Market Risk

Banking Act 1959

I, Sean Carmody, a delegate of APRA:

    (a) under subsection 11AF(3) of the Banking Act 1959 (the Act) REVOKE Banking (prudential standard) determination No. 9 of 2022 including Prudential Standard APS 116 Capital Adequacy: Market Risk made under that determination; and

    (b) under subsection 11AF(1) of the Act DETERMINE Prudential Standard APS 116 Capital Adequacy: Market Risk in the form set out in the schedule, which applies to all ADIs and authorised NOHCs to the extent provided in paragraphs 2 to 4 of the prudential standard.

This instrument commences on 1 January 2025.

Dated: 27 November 2024

Sean Carmody
Executive Director
Policy and Advice Division
Interpretation
In this instrument:

APRA means the Australian Prudential Regulation Authority.

ADI and authorised NOHC have their respective meanings given in section 5 of the Act.

Schedule

Prudential Standard APS 116 Capital Adequacy: Market Risk comprises the document commencing on the following page.

Prudential Standard APS 116

Capital Adequacy: Market Risk

Objective and key requirements of this Prudential Standard

This Prudential Standard requires an authorised deposit-taking institution engaging in activities that give rise to risks associated with potential movements in market prices to adopt risk management practices and hold regulatory capital that is commensurate with the risks involved.

The key requirements of this Prudential Standard are that an authorised deposit-taking institution must:

                    have a framework to manage, measure and monitor market risk commensurate with the nature, scale and complexity of the institution's operations; and

                    use the standard method or an APRA-approved internal model approach to determine the institution's capital requirement for market risk.

Table of contents

Authority...........................................................3
Application.........................................................3
Interpretation.......................................................3
Scope..............................................................3
Definitions..........................................................4
Key principles.......................................................5
The TFC capital requirement..........................................5
The standard method................................................6
The internal model approach..........................................6
Combination of the internal model approach and the standard method......7

Attachments

Attachment A - Governance and the trading book policy statement and prudent valuation practices......9
Board and senior management responsibilities..........................9
The trading book....................................................9
Measuring currency exposure........................................12

Attachment B - The standard method.................................14
Interest rate risk....................................................15
Equity position risk..................................................28
Foreign exchange risk...............................................31
Commodities risk...................................................33
Treatment of options................................................35

Attachment C - The internal model approach...........................40
Key requirements...................................................40
General criteria.....................................................42
Qualitative standards...............................................42
Specification of market risk factors....................................44
Quantitative standards..............................................45
Stress testing......................................................46
Model review......................................................47
Treatment of specific risk............................................48
Framework for the use of back-testing.................................55

Attachment D - Treatment of credit derivatives in the trading book.........57
Application........................................................57
General principles - General market risk...............................57
General principles - Specific risk......................................58
Credit-default swaps................................................58
Total-rate-of-return swaps...........................................58
Cash-funded credit linked notes......................................59
Nth-to-default basket credit derivatives................................59
Specific risk offsetting...............................................60

Authority
     1.              This Prudential Standard is made under section 11AF of the Banking Act 1959 (Banking Act).

Application
     1.              This Prudential Standard