Amendment to the capital accord to incorporate market risks

November 2005

Note: This document has been incorporated in the comprehensive version of International Convergence of Capital Measurement and Capital Standards: A Revised Framework, including the June 2004 Basel II Framework, the elements of the 1988 Accord that were not revised during the Basel II process and the 2005 paper on The Application of Basel II to Trading Activities and the Treatment of Double Default Effects.

This document, commonly referred to as the Market Risk Amendment, represents the main section of a three-part package of documents issued by the Basel Committee to amend the Capital Accord of July 1988 to take account of and set capital requirements for market risks. It describes two alternative approaches to the measurement of market risk, a standardised method and an internal models approach, closing with a number of worked examples. The other papers in the three-part package are an overview of the market risk amendment and a technical paper on the backtesting of models.

Originally released in January 1996 and modified in September 1997, the Amendment was further revised on 14 November 2005 to incorporate the Basel Committee's 18 July 2005 paper, The application of Basel II to trading activities and the treatment of double default effects, solely as a matter of convenience to readers. This paper, which was prepared by a joint working group of the Basel Committee and the International Organization of Securities Commissions (IOSCO), sets forth capital requirements for banks' exposures to certain trading-related activities, including counterparty credit risk, and for the treatment of double default effects, or the risk that both a borrower and guarantor default on the same obligation. These requirements have been reflected into the appropriate sections of the Market Risk Amendment.