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  • CA-9.4 CA-9.4 Maturity Method

    • CA-9.4.1

      A worked example of the maturity method is included in Appendix CA-11. The various time-bands and their risk weights, relevant to the maturity method, are illustrated in Paragraph CA-9.4.2(a) below.

      Amended: January 2012
      Apr 08

    • CA-9.4.2

      The steps in the calculation of the general market risk for interest rate positions, under this method, are set out below:

      (a) Individual long or short positions in interest-rate related instruments, including derivatives, are slotted into a maturity ladder comprising thirteen time-bands (or fifteen time-bands in the case of zero-coupon and deep-discount instruments, defined as those with a coupon of less than 3%), on the following basis:
      (i) Fixed rate instruments are allocated according to their residual term to maturity (irrespective of embedded puts and calls), and whether their coupon is below 3%;
      (ii) Floating rate instruments are allocated according to the residual term to the next repricing date;
      (iii) Positions in derivatives, and all positions in repos, reverse repos and similar products are decomposed into their components within each time band. Derivative instruments are covered in greater detail in Sections CA-9.6 to CA-9.9;
      (iv) Opposite positions of the same amount in the same issues (but not different issues by the same issuer), whether actual or notional, can be omitted from the interest rate maturity framework, as well as closely matched swaps, forwards, futures and FRAs which meet the conditions set out in Section CA-9.8. In other words, these positions are netted within their relevant time-bands; and
      (v) The CBB's advice must be sought on the treatment of instruments that deviate from the above structures, or which may be considered sufficiently complex to warrant the CBB's attention.

      Maturity Method: Time-bands and Risk Weights

        Coupon 3% or more Coupon < 3% Risk weight
      Zone 1 1 month or less 1 month or less 0.00%
      1 to 3 months 1 to 3 months 0.20%
      3 to 6 months 3 to 6 months 0.40%
      6 to 12 months 6 to 12 months 0.70%
      Zone 2 1 to 2 years 1 to 1.9 years 1.25%
      2 to 3 years 1.9 to 2.8 years 1.75%
      3 to 4 years 2.8 to 3.6 years 2.25%
      Zone 3 4 to 5 years 3.6 to 4.3 years 2.75%
      5 to 7 years 4.3 to 5.7 years 3.25%
      7 to 10 years 5.7 to 7.3 years 3.75%
      10 to 15 years 7.3 to 9.3 years 4.50%
      15 to 20 years 9.3 to 10.6 years 5.25%
      > 20 years 10.6 to 12 years 6.00%
        12 to 20 years 8.00%
        > 20 years 12.50%
      (b) The market values of the individual long and short net positions in each maturity band are multiplied by the respective risk weighting factors given in Paragraph CA-9.4.2(a) above;
      (c) Matching of positions within each maturity band (i.e. vertical matching) is done as follows:
      (i) Where a maturity band has both weighted long and short positions, the extent to which the one offsets the other is called the matched weighted position. The remainder (i.e. the excess of the weighted long positions over the weighted short positions, or vice versa, within a band) is called the unmatched weighted position for that band.
      (d) Matching of positions, across maturity bands, within each zone (i.e. horizontal matching - level 1), is done as follows:
      (i) Where a zone has both unmatched weighted long and short positions for various bands, the extent to which the one offsets the other is called the matched weighted position for that zone. The remainder (i.e. the excess of the weighted long positions over the weighted short positions, or vice versa, within a zone) is called the unmatched weighted position for that zone.
      (e) Matching of positions, across zones (i.e. horizontal matching - level 2), is done as follows:
      (i) The unmatched weighted long or short position in zone 1 may be offset against the unmatched weighted short or long position in zone 2. The extent to which the unmatched weighted positions in zones 1 and 2 are offsetting is described as the matched weighted position between zones 1 and 2.
      (ii) After step (i) above, any residual unmatched weighted long or short position in zone 2 may be matched by offsetting the unmatched weighted short or long position in zone 3. The extent to which the unmatched positions in zones 2 and 3 are offsetting is described as the matched weighted position between zones 2 and 3.
      The calculations in steps (i) and (ii) above may be carried out in reverse order (i.e. zones 2 and 3, followed by zones 1 and 2).
      (i) After steps (i) and (ii) above, any residual unmatched weighted long or short position in zone 1 may be matched by offsetting the unmatched weighted short or long position in zone 3. The extent to which the unmatched positions in zones 1 and 3 are offsetting is described as the matched weighted position between zones 1 and 3.
      (f) Any residual unmatched weighted positions, following the matching within and between maturity bands and zones as described above, will be summed.
      (g) The general interest rate risk capital requirement is the sum of:
      (i) Matched weighted positions in all maturity bands
      		x 10%
      (ii) Matched weighted positions in zone 1
      		x 40%
      (iii) Matched weighted positions in zone 2
      		x 30%
      (iv) Matched weighted positions in zone 3
      		x 30%
      (v) Matched weighted positions between zones 1 & 2
      		x 40%
      (vi) Matched weighted positions between zones 2 & 3
      		x 40%
      (vii) Matched weighted positions between zones 1 & 3
      		x 100%
      (viii) Residual unmatched weighted positions
      		x 100%

      Item (i) is referred to as the vertical disallowance, items (ii) through (iv) as the first set of horizontal disallowances, and items (v) through (vii) as the second set of horizontal disallowances.

      Amended: January 2012
      Amended: April 2011
      Apr 08