We now have the boundary (RBC25) and the vocabulary (MAR10) behind us. MAR11 is where the standard finally defines market risk itself, sets out exactly which risks and which positions fall inside its scope, and establishes how the capital requirement applies across a banking group. This chapter splits naturally into two halves, and we are following that same split: Part A covers the definition and scope of application (MAR11.1–11.6), and Part B covers the three methods a bank can use to measure market risk (MAR11.7–11.9).
What Counts as Market Risk?
The standard defines market risk simply as the risk of losses arising from movements in market prices. What is genuinely useful is the list of risks this covers, because it is not limited to the trading book alone.
| Where the Instrument Sits | Risks Subject to Market Risk Capital |
| Trading book instruments | Default risk, interest rate risk, credit spread risk, equity risk, foreign exchange (FX) risk, and commodities risk. |
| Banking book instruments | FX risk and commodities risk only. |
| Why Banking Book Instruments Still Show Up Here This is a detail worth sitting with, because it connects directly to Article 2 of this series. RBC25 determines which book an instrument sits in, and a long list of instruments — unlisted equities, retail credit, real estate holdings — are mandatorily assigned to the banking book. That does not mean those instruments escape market risk capital entirely. If a banking book position carries FX or commodity risk, that specific slice of its risk is still captured under the market risk framework, even though the instrument as a whole sits in the banking book and its credit or equity risk is handled separately under credit risk rules. |
Sourced from MAR11.1. The standard notes this list of risks is illustrative, not exhaustive (“include but are not limited to”).
https://www.bis.org/basel_framework/chapter/MAR/11.htm?inforce=20230101&published=20200327
Continuous Compliance, Not Just a Quarter-End Snapshot
All transactions — including forward sales and purchases — must be brought into the capital requirement calculation from the date they are entered into, not from settlement. This matters because of what comes next: although formal regulatory reporting typically happens only at intervals (quarterly in most countries), banks are expected to manage market risk so that capital requirements are met on a continuous basis, including at the close of every single business day.
The standard is explicit about why this continuous requirement exists: supervisory authorities have effective measures available to stop banks from window-dressing — deliberately showing lower market risk positions specifically on reporting dates while running larger positions the rest of the time. Banks are also expected to maintain strict risk management systems to keep intraday exposures from becoming excessive between those reporting snapshots. If a bank does fail to meet its capital requirement at any point, the national authority must ensure the bank takes immediate measures to fix the situation — this is not something that can wait for the next reporting cycle.
Sourced from MAR11.2.
https://www.bis.org/basel_framework/chapter/MAR/11.htm?inforce=20230101&published=20200327
The Structural FX Position Exemption
This is one of the more counterintuitive ideas in the chapter, so it’s worth building up carefully. A matched currency position — where a bank’s foreign currency assets and liabilities are equal in size — genuinely protects the bank against profit-and-loss losses from exchange rate movements. But it does not necessarily protect something else that matters just as much: the bank’s capital adequacy ratio.
| Why a “Perfectly Matched” FX Position Can Still Hurt the Capital Ratio Picture a bank whose capital is denominated in its home currency, holding a portfolio of foreign currency assets and liabilities that are completely matched in size. If the domestic currency depreciates, the foreign currency assets and liabilities move together and cancel out in P&L terms — but the capital/asset ratio itself still falls, purely because the capital (in domestic currency) has not grown while the foreign-currency-denominated assets, now worth more in domestic terms, have. The standard’s proposed fix: a bank can deliberately run a short risk position in its own domestic currency to protect the capital adequacy ratio. This does introduce a new risk — the position would generate a loss if the domestic currency appreciated instead — but it stabilises the ratio against depreciation. |
Because this structural position is being held to protect a capital ratio rather than to trade or profit from FX movements, supervisors are permitted — though not required — to let banks exclude certain currency risk positions from their net open currency risk position calculation. This exclusion is only available if every one of the following seven conditions is met.
| # | Condition |
| 1 | The risk position is taken or maintained specifically to hedge, partially or totally, against the potential for exchange rate changes to adversely affect the capital ratio. |
| 2 | The risk position is structural in nature — not related to dealing activity — such as positions from investments in affiliated but non-consolidated entities, or investments in consolidated subsidiaries or branches, denominated in foreign currencies. |
| 3 | The exclusion is limited strictly to the amount of the risk position that neutralises the capital ratio’s sensitivity to exchange rate movements. |
| 4 | The exclusion from the calculation must be maintained for at least six months. |
| 5 | The structural FX position, and any changes to it, must follow the bank’s own risk management policy for structural FX positions — and that policy must be pre-approved by the national supervisor. |
| 6 | Any exclusion must be applied consistently, with the exclusionary treatment of the hedge remaining in place for the life of the assets or other items it relates to. |
| 7 | The bank must document the excluded positions and amounts, and make this available for supervisory review, as required by the national supervisor. |
Sourced from MAR11.3, including all seven conditions in full.
What Never Enters the Market Risk Framework at All
Two related rules keep the market risk framework from double-penalising items that are already dealt with elsewhere in the capital framework.
First, no FX risk capital requirement needs to apply to positions related to items that are already deducted from a bank’s capital when its capital base is calculated. If an item has already been stripped out of capital entirely, charging FX capital against it as well would be redundant.
Second, and more broadly, holdings of capital instruments that are either deducted from a bank’s capital or risk-weighted at 1250% are not allowed to be included in the market risk framework at all. This covers two categories specifically:
- Holdings of the bank’s own eligible regulatory capital instruments.
- Holdings of other banks’, securities firms’, and other financial entities’ eligible regulatory capital instruments, along with intangible assets, wherever the national supervisor requires these to be deducted from capital.
There is one further carve-out here worth flagging: where a bank can demonstrate it is a genuinely active market-maker, the national supervisor may establish a dealer exception, allowing holdings of other financial institutions’ capital instruments in the trading book. Qualifying for this exception requires the bank to have adequate systems and controls specifically around trading in financial institutions’ eligible regulatory capital instruments.
Sourced from MAR11.4–MAR11.5.
https://www.bis.org/basel_framework/chapter/MAR/11.htm?inforce=20230101&published=20200327
Consolidation: Applying Capital Requirements Across the Whole Group
Market risk capital requirements apply on a worldwide consolidated basis — the same principle used for credit risk and operational risk. Within that principle, the standard sets out four specific rules.
- Supervisory authorities may permit banking and financial entities within a group that runs a globally consolidated trading book, with capital assessed on a global basis, to include only the net short and net long risk positions across the group — regardless of where those positions are actually booked.
- This treatment may only be granted where the Standardised Approach (MAR20–MAR23) permits a full offset of the risk position — meaning risk positions of opposite sign genuinely attract no capital requirement when netted.
- Even so, there will be circumstances where supervisory authorities require individual risk positions to be measured without any offsetting or netting against the rest of the group — for example, where there are obstacles to quickly repatriating profits from a foreign subsidiary, or legal and procedural difficulties in managing risk on a timely, consolidated basis.
- All supervisory authorities retain the right to continue monitoring the market risk of individual entities on a non-consolidated basis, specifically to ensure significant imbalances within a group do not escape supervision — with particular vigilance against banks concealing risk positions around reporting dates.
A footnote adds one further technical detail: the positions of less-than-wholly-owned subsidiaries are subject to the generally accepted accounting principles of the country where the parent company is supervised.
Sourced from MAR11.6 and its footnote. https://www.bis.org/basel_framework/chapter/MAR/11.htm?inforce=20230101&published=20200327
Looking Ahead
With the definition and scope of market risk now fully covered, Part B turns to the practical question every bank has to answer: which of the three available methods — Simplified Standardised Approach, full Standardised Approach, or Internal Models Approach — applies, who gets to choose, and which exposures are always forced onto the Standardised Approach no matter what a bank’s broader strategy is.
Frequently Asked Questions
Does market risk capital apply to banking book instruments?
Yes, but only for FX risk and commodities risk. Trading book instruments face a wider set of market risks — default, interest rate, credit spread, equity, FX, and commodities.
Why would a bank want to exclude an FX position from its capital calculation?
To protect its capital adequacy ratio from structural currency mismatches — such as unconsolidated foreign investments — rather than to profit from currency movements. This is only permitted if all seven conditions in MAR11.3 are met, including six-month minimum duration and pre-approved policy documentation.
Can a bank include capital instrument holdings of another bank in its market risk framework?
Generally no, if those holdings are deducted from capital or risk-weighted at 1250%. An exception exists for banks that can demonstrate they are active market-makers with adequate trading systems and controls.