This chapter sets out the calculation of the default risk capital requirement under the standardised approach for market risk.

Version effective as of 01 Jan 2023

First version in the format of the consolidated framework, updated to take account of the revised implementation date announced on 27 March 2020.

Main concepts of default risk capital requirements

22.1 The default risk capital (DRC) requirement is intended to capture jump-to-default (JTD) risk that may not be captured by credit spread shocks under the sensitivities-based method. DRC requirements provide some limited hedging recognition. In this chapter offsetting refers to the netting of exposures to the same obligor (where a short exposure may be subtracted in full from a long exposure) and hedging refers to the application of a partial hedge benefit from the short exposures (where the risk of long and short exposures in distinct obligors do not fully offset due to basis or correlation risks).

Instruments subject to the default risk capital requirement

22.2 The DRC requirement must be calculated for instruments subject to default risk:

(1) Non-securitisation portfolios

(2) Securitisation portfolio (non-correlation trading portfolio, or non-CTP)

(3) Securitisation (correlation trading portfolio, or CTP)

Overview of DRC requirement calculation