Financial Services (Investment and Fiduciary Services)
FINANCIAL SERVICES (CAPITAL ADEQUACY OF INVESTMENT FIRMS) REGULATIONS 2007 markets. Where a risk factor is incorporated into the institution’s pricing model but not into the risk-measurement model, the institution shall be able to justify such an omission to the satisfaction of the competent authority. In addition, the risk-measurement model shall capture nonlinearities for options and other products as well as correlation risk and basis risk. Where proxies for risk factors are used they shall show a good track record for the actual position held. In addition, the following shall apply for individual risk types:
Interest rate risk.
The risk measurement system shall incorporate a set of risk factors corresponding to the interest rates in each currency in which the investment firm has interest rate sensitive on- or off-balance sheet positions. The investment firm shall model the yield curves using one of the generally accepted approaches. For material exposures to interest rate risk in the major currencies and markets, the yield curve shall be divided into a minimum of six maturity segments, to capture the variations of volatility of rates along the yield curve. The risk measurement system must also capture the risk of less than perfectly correlated movements between different yield curves.
The risk measurement system shall incorporate risk factors corresponding to gold and to the individual foreign currencies in which the investment firm’s positions are denominated.
For CIUs the actual foreign exchange positions of the CIU shall be taken into account. Investment firms may rely on third party reporting of the foreign exchange position of the CIU, where the correctness of this report is adequately ensured. If an investment firm is not aware of the foreign exchange positions of a CIU, this position should be carved out and treated in accordance with the fourth paragraph of paragraph 2.1 of Schedule 3.
The risk measurement system shall use a separate risk factor at least for each of the equity markets in which the investment firm holds significant positions.
The risk measurement system shall use a separate risk factor at least for each commodity in which the investment firm holds significant positions. The risk measurement system shall also capture the risk of less than perfectly correlated movements between similar, but not identical, commodities and the exposure to changes in forward prices arising from maturity mismatches.
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Repealed Subsidiary 2007/002