Compound Growth

© Compound Growth Limited 2012-2017

(Exempt from specific risk charge)

The capital requirement for market risk on equities under the standard methods is made up of two parts - general market risk and stock specific risk. Each of these components attracts a capital requirement.

There is, however, a concession for positions in stock indices which are deemed sufficiently broadly based and diverse. Because of their diversity, these are not considered to be exposed to stock specific risk but only to general market risk. And accordingly they are only subject to the general market risk capital requirement. This can reduce the capital requirement on the position by up to 50%.

If you are taking advantage of this concession, you will be pleased to know that it remains under CRD IV. All that has changed is that a different is now responsible for determining which indices should be eligible.

The current list is set by the PRA and the FCA. With the implementation of CRD IV comes a new list set by the EBA.

The EBA has set out the criteria for inclusion in the list. The actual list will be revised once a year. And the initial list which the EBA has proposed is open for consultation until 8th September.

The table below compares the current and proposed lists. If you would like to discuss any of this, please feel free to contact us or email us at crd-iv@compoundgrowth.co.uk.

CRD IV: Changes to Diversified Indices