Federal Register of Legislation - Australian Government

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APS 113 Standards/Prudential (Banking & Insurance) as made
This instrument determines Prudential Standard APS 113 to ensure that all ADIs engaged in activities giving rise to market risk adopt certain management practices and meet certain capital requirements.
Administered by: Treasury
General Comments: Prudential Standard APS 113 - Capital Adequacy: Market Risk (08/09/2000) was revoked by Banking (prudential standard) determination No. 9 of 2007 - Prudential Standard APS 116 - Capital Adequacy: Market Risk with effect from 01/01/2008.
Registered 18 Sep 2006
Gazetted 20 Sep 2000
Date of repeal 09 Aug 2013
Repealed by Treasury (Spent and Redundant Instruments) Repeal Regulation 2013


Prudential Standard

APS 113 - Capital Adequacy: Market Risk


This standard aims to ensure that all ADIs engaged in activities that give rise to risks associated with potential movements in market prices adopt management practices and meet capital requirements that are commensurate with the risks involved.

This standard forms part of a comprehensive set of prudential standards dealing with capital adequacy. It should be read in conjunction with APS 110 – Capital Adequacy; APS 111 – Capital Adequacy: Measurement of Capital; and APS 112 – Capital Adequacy: Credit Risk.




1.             Market risk is defined as the risk of losses in positions arising from movements in market prices.  ADIs operating in the foreign exchange, commodities, interest rate or equity markets may be exposed to potentially large swings in market prices and significant consequential losses.  Potential losses may arise from both general market price movements and, in the case of interest rate and equity instruments, from price movements specific to particular issuers.  The capital required to guard against potential loss should be commensurate with the risks involved.

2.             Institutions engaging in activities in these markets must ensure that appropriately stringent risk measurement and management systems are in place.  In a number of its standards APRA has adopted a “two-tier” regulatory philosophy whereby regulated entities are encouraged to adopt a best-practice, internal model based approach tailored to the risks involved, but are permitted also to apply a simpler, standard approach where appropriate.  Consistent with this philosophy, ADIs may choose the approach which best matches the complexity of their business and the capacity of their technical resources.  As with other standards, APRA must be satisfied that the ADI’s preferred methodology is suitably rigorous and broadly consistent with best practice in comparable segments of the industry.

3.             In normal circumstances, APRA would expect an ADI to manage market-related activities and calculate market risk capital charges on a globally consolidated basis.  Where these activities are managed independently (eg in different centres), then APRA may require any market risk capital charges to be measured on a non-consolidated basis.



4.             It is the responsibility of an ADI’s board of directors (Board) to approve strategies and policies with respect to market risk and to ensure that senior management takes the steps necessary to monitor and control these risks.  This, in turn, requires ensuring that the ADI has in place adequate systems to identify, measure and manage market risk.  The management of risks should pay adequate attention to governance issues such as identifying responsibilities, providing adequate separation of duties and avoiding conflicts of interest.  An ADI should keep APRA informed of all significant changes in these systems and in its market risk profile.  It must ensure that market risk capital requirements are met on a continuous basis, and that intra-day exposures are not excessive.



5.             APRA’s approach to measuring and managing market risk distinguishes between assets held in an ADI’s “trading” book and those held in its “banking” book.  Positions may be allocated to either the trading book or the banking book according to the ADI’s trading book policy statement (see paragraph 9 below and AGN 113.1).  An ADI must hold market risk capital against interest rate risks and equity risks arising from positions held in the trading book.  No explicit capital charge relating to market risk is required for interest rate risks and equity risks outside an ADI’s trading activities.  Market risk capital must also be held against credit derivatives in an ADI’s trading book (see AGN 113.4).  Market risk capital must be held against all foreign exchange and commodity risks.  For the purposes of the market risk capital requirements, no distinctions are drawn, in principle, between risks arising from physical positions and from positions in derivative instruments.

6.             Market risk is split into two components: general market risk and specific risk.  Positions in interest rate, equities, foreign exchange and commodities all give rise to general market risk, which is the risk of loss owing to changes in the general level of market prices or interest rates.  Specific risk, the risk that the value of a security will change due to issuer-specific factors (such as changes in creditworthiness), is only relevant for interest rate and equity positions related to a specific issuer. 

7.             Allocating derivatives to the trading book does not obviate the need to hold capital against the risk of counterparty default on these exposures.  Derivative transactions across the four risk categories are subject to the same credit risk capital requirements as exposures in the banking book (see APS 112 – Capital Adequacy: Credit Risk).  The credit risk associated with physical holdings in traded debt and equity is captured by the specific risk capital charge while physical holdings in foreign exchange and commodities are not exposed to the risk of counterparty default. 

8.             An ADI with no trading book activity, and no foreign exchange or commodity positions, is exempt from the capital and reporting requirements of this Standard, but must include a statement to this effect in its risk management system description.


Trading Book Policy Statement

9.             Each ADI intending to operate a trading book will agree with APRA a trading book policy statement specifying which activities constitute trading and therefore belong in the trading book (refer AGN 113.1 for details).  The banking book covers all businesses not included in the trading book.  Arrangements should be in place to prevent inappropriate switching of transactions between the trading and banking books.


Measuring Market Risk – Internal Model

10.        An ADI seeking to adopt an internal model approach  –  requiring explicit APRA approval in advance  –  must meet the requirements detailed in AGN 113.2.  Under this method, an ADI uses its own internal risk measurement model, subject to the following APRA conditions:

(a)          criteria concerning the adequacy of the risk management system;

(b)         qualitative standards for internal oversight by management;

(c)         guidelines for specifying an appropriate set of market risk factors (ie the market rates and prices that affect the value of an ADI’s positions);

(d)         quantitative standards setting out the use of common minimum statistical parameters for measuring risk;

(e)         guidelines for stress testing; and

(f)          model review procedures for APRA oversight of the use of models.

11.        An ADI’s internal model is required to produce a measure of the value-at-risk (aggregate exposure) from all market risks over a period of 10 trading days.  To derive the regulatory capital required to cover these risks, the model’s measure of value-at-risk will be multiplied by a multiplication factor, set by APRA in the range 3 to 5 according to how well an ADI adheres to the criteria listed in paragraph 10 above.  Added to this will be a “plus” factor of up to one depending on the ex-post performance of the ADI’s internal model, as determined by “back testing” (see AGN 113.2).

12.        Where an ADI’s internal model does not readily fit the value-at-risk framework of this Standard, the ADI may use an alternative approach, provided APRA is satisfied that the model adequately captures the risks involved and identifies the capital needed to support those risks in a comparable manner.


Measuring Market Risk – Standard Method

13.        An ADI opting for the standard method of calculation should follow the details in AGN 113.3, which includes sections that deal with interest rate risk, equity position risk, foreign exchange risk, commodities risk and alternative methods for measuring the price risk in all kinds of options.

14.        The standard method provides a set of pre-specified rules for determining market risk exposure.  The capital charge for each risk category is determined by approximating the sensitivity of an ADI’s positions to shifts in rates and prices, and then subjecting these positions to a pre-determined adverse price/rate shift.  The ADI must hold capital equivalent to the losses which would result if these price/rate shifts were to take place.


Mixed Approaches

15.        ADIs are free to use a combination of the internal model approach and the standard method approach to measure their overall market risk.  As a general rule, however, a combination of two methodologies for the same risk category (eg interest rate risk) is not permitted.  ADIs wishing to apply different approaches to positions in the same risk category but in different offshore centres should seek APRA approval in advance. 

16.        APRA expects that ADIs which have adopted an internal model approach for any single risk category will eventually extend this to a comprehensive model to capture all market risk categories.  An ADI using an internal model will not be permitted, save in exceptional circumstances, to revert to the standard method.  However, even ADIs using comprehensive models to measure their market risks may still incur risks which are not captured by their internal model, for example, in remote locations, in minor currencies or in negligible business areas.  Any such risks that are not included in an internal model should, as agreed with APRA, be separately measured and reported using the standard method described in AGN 113.3.


Capital Requirement

17.        An ADI’s capital requirement for market risk shall be based on:

(a)          either the measure of market risk derived from the model based approach described in AGN 113.2; or

(b)         the market risk charges calculated in accordance with AGN 113.3 summed arithmetically; or

(c)         a mixture of (a) and (b) summed arithmetically (refer Section “Combination of the Internal Model Approach and the Standard Method” of AGN 113.2).


Reporting Requirements

18.        All locally incorporated ADIs must provide APRA each quarter (or more frequently if required by APRA) with reports on their market risk capital charge calculations in the form determined by APRA.