This report reviews the role of capital and controls in a supervisory context with reference to the key risks faced by securities firms. An assessment is made of value-at-risk (VaR) 1 models in respect of those risks and regulatory capital requirements. The paper then identifies the need for additional capital charges ("buffers") to deal with the risks not captured through models and discusses options for providing those buffers. Finally, it looks at complementary regulatory approaches to dealing with some of these risks. |
1. Generally, VaR is an estimate of the maximum potential loss expected over a fixed time period at a certain probability or confidence level. In practice, VaR models aggregate several components of price risk into a single quantitative measure of the potential for loss.