1. Basel Committee Recommendations

2. Framework Amendment to Capital Accord to incorporate market risk –1996 Application of Basel II to trading activities and the treatment of double default effects –2005 Comprehensive version of Basel II Framework –2006 Consultative documents on revisions to Basel II market risk framework and the guidelines for computing capital for incremental risk in trading book –2008

3. Basel Committee On Banking Supervision (BCBS) Provision of capital cushion for price risk Arising from trading activities Flexible bank models –Compliance with qualitative criteria –Compliance with quantitative criteria Market risk measure (Value-at-Risk (VaR)) Standardized measuring framework

4. Reserve Bank of India Initiatives Capital requirement for market risk Risk weight of 2.5% –Investments in Government and other approved securities Risk weight of 100% –Open position limits in forex and gold Small banks –Standardized method Large banks and international banks –Internal models

5. Basel II Guidelines Capital requirement for trading book positions Requirement of banks to model specific risk to measure and hold capital –Against default risk Incremental default risk charge in the trading book –Exposure in banks’ trading books to credit-risk –Holding of illiquid products –Other risk not reflected in value-at-risk Consideration of vide range of incremental risks Emphasize on improvement of internal value-at-risk models for market risk Prudent valuation guidance –Positions held by banks at fair value

6. Internal Value-at-Risk Models Justify factors used in pricing Calculation procedure of value-at-risk Hypothetical back testing Validation of Value-at-Risk model Relevant market data Market data collection interval at monthly or lesser intervals Use of weighting methods for historical data Maintain effective observation period for model performance for at least one year Conservative capital charge

7. Standardized Measurement Method for Market risk Apply a higher specific risk charge to instruments with high yield to maturity Disallow offsetting between instruments with high yield to maturity and any other debt instruments Defining the extent of market risk

8. Specific Risk Capital Standardized Approach (External Credit Rating) Credit Assessment AAA- to AA- A+ to A- BBB+ to BBB- BB+ to BB- Bellow BB- A-1 / p-1 A-2 / P-2 A-3 / p-3 Below A3/p3 Un rated Securitized exposure 1.6% 4% 8% 28% Deduction Re- Securitized exposure 3.2% 8% 18% 52% Deduction

9. Internal Rating Based Approach Interest Rating Securitized exposure Re- Securitized exposure Senior granular Non - Senior granular Non - granular Senior Non - Senior AAA / A1 / p1 0.56% 0.96% 1.60% 1.60% 2.40% AA 0.64% 1.20% 2.00% 2.00% 3.20% A+ 0.80% 1.44% 2.80% 2.80% 4.00% A / A - 2 / p - 2 0.96% 1.60% 2.80% 3.2% 5.20% A- 1.60% 2.80% 2.80% 4.80% 8.00% Note: granular-effective number of underlying exposure is 6 or more Non - granular - effective number of underlying exposure is les then 6

10. Internal Rating Based Approach Note: granular-effective number of underlying exposure is 6 or more Non - granular - effective number of underlying exposure is les then 6 Interest Rating Securitized exposure Re- Securitized exposure Senior granular Non - Senior granular Non - granular Senior Non - Senior BBB+ 2.80% 4.00% 8.00% 12.00% BBB / A3 / p - 3 BBB 4.80% 6.00% 12.00% 18.00% 8.00% 16.00% 28.00% BB+ 20.00% 24.00% 40.00% BB -1 34.00% 40% 52.00% BB -1 52.00% 60.00% 68.00% Below BB - /A-3 / p3 Deduction

11. Specific Risk Charge for Unrated Exposure Supervisory formula –Bank has approval for the Internal Rating Based Approach for the asset classes –Minimum requirements when probability of default and loss given default estimated –Bank has approval for using a value-at-risk measure for specific market risk –Approval of products or asset classes –Standards for calculating the incremental risk capital 8% of weighted average risk multiplied by a concentration ratio Concentration ratio –Sum of the nominal amounts of all tranches divided by the sum of the nominal amounts of the tranches junior to the tranche in which the position is held

12. General Criteria Bank’s risk management system is conceptually sound Risk management system is implemented with integrity Bank has in the supervisory authority’s view sufficient number of skilled staff Bank is capable of applying sophisticated models –Trading area –Risk control –Audit –Back office area Bank’s models have a proven track record of reasonable accuracy in measuring risk Bank regularly conducts stress tests

13. Qualitative Standards Independent risk control unit Responsible for design and implementation of the bank’s risk management system Prepare and analyse daily reports on the output of the bank’s risk measurement model Evaluate the relationship between measures of risk exposure and trading limits Independent from business trading units Report directly to senior management of the bank

14. Qualitative Standards Conduct a regular back-testing programme Ex-post comparison of the risk measure generated by the model against actual daily changes in portfolio value over longer periods of time Hypothetical changes based on static positions Conduct the initial and on-going validation of the internal model Active involvement of Board of directors and senior management Deployment of significant resources to risk management

15. Qualitative Standards Close integration of internal risk measurement model with the day-to-day risk management process of the bank Documentation set of internal policies Provide an explanation of the empirical techniques used to measure market risk

16. Indirect Review of Market Risk System Adequacy of the documentation of the risk management system and process Organisation of the risk control unit Integration of market risk measures into daily risk management Approval process for risk pricing models Valuation systems used by front and back-office personnel Validation of any significant change in the risk measurement process

17. Indirect Review of Market Risk System Market risk captured by the risk measurement model Integrity of the management information system Accuracy and completeness of position data Verification of the consistency, timeliness and reliability of data sources Independence of data sources Accuracy and appropriateness of volatility and correlation assumptions Accuracy of valuation and risk transformation computations Verification of the accuracy of the model

18. Quantitative Standards Value-at-risk computed on a daily basis Consideration of a 99 percentile, one-tailed confidence interval Computation of an instantaneous price shock equivalent to a 10 day movement in prices Minimum holding period at ten trading days Historical observation of data for a minimum period of one year

19. Quantitative Standards Capture the non-linear price characteristics of options positions Apply a 10 day price shock –options positions –positions that display option-like characteristic Adjustment of capital measure for options risk –periodic simulations –stress testing

20. Quantitative Standards Specification of risk factors that captures the volatilities of the rates and prices underlying option positions Vega risk Delta risk Gama risk Rho risk Banks with relatively large and/or complex options portfolios to disclose detailed specifications of the relevant volatilities broken down by different maturities

21. Capital Requirement Higher of its previous day’s value-at-risk number Average of the daily value-at-risk measures on each of the preceding sixty business days Multiplied by a multiplication factor Higher of its latest available stressed-value-at-risk number Average of the stressed value-at-risk numbers over the preceding sixty business days Multiplied by the same multiplication factor

22. Capital Requirement Formula `

23. Multiplication Factor Set by individual supervisory authorities Assessment of the quality of the bank’s risk management system Absolute minimum of 3 Banks to add to this factor a value directly related to the ex-post performance of the model –built-in positive incentive to maintain the predictive quality of the model