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  • CA-12.2 CA-12.2 Calculation of Commodities Positions

    • Netting

      • CA-12.2.1

        Conventional bank licensees must first express each commodity position (spot plus forward) in terms of the standard unit of measurement (i.e., barrels, kilograms, grams etc.). Long and short positions in a commodity are reported on a net basis for the purpose of calculating the net open position in that commodity. For markets which have daily delivery dates, any contracts maturing within ten days of one another may be offset. The net position in each commodity is then converted, at spot rates, into the conventional bank licensee's reporting currency.

        January 2015

      • CA-12.2.2

        Positions in different commodities cannot be offset for the purpose of calculating the open positions as described in Paragraph CA-12.2.1 above. However, where two or more sub-categories50 of the same category are, in effect, deliverable against each other, netting between those sub-categories is permitted. Furthermore, if two or more sub-categories of the same category are considered as close substitutes for each other, and minimum correlation of 0.9 between their price movements is clearly established over a minimum period of one year, the conventional bank licensee may, with the prior written approval of the CBB, net positions in those sub-categories. Conventional bank licensees which wish to net positions based on correlations, in the manner discussed above, must satisfy the CBB of the accuracy of the method which it proposes to adopt.

        50 Commodities can be grouped into clans, families, sub-groups and individual commodities. For example, a clan might be Energy Commodities, within which Hydro-Carbons is a family with Crude Oil being a sub-group and West Texas Intermediate, Arabian Light and Brent being individual commodities.

        January 2015

    • Derivatives

      • CA-12.2.3

        All commodity derivatives and off-balance-sheet positions which are affected by changes in commodity prices must be included in the measurement framework for commodities risks. This includes commodity futures, commodity swaps, and options where the "delta plus" method is used51. In order to calculate the risks, commodity derivatives are converted into notional commodities positions and assigned to maturities as follows:

        (a) Futures and forward contracts relating to individual commodities must be incorporated in the measurement framework as notional amounts of barrels, kilograms etc., and must be assigned a maturity with reference to their expiry date;
        (b) Commodity swaps where one leg is a fixed price and the other one is the current market price, must be incorporated as a series of positions equal to the notional amount of the contract, with one position corresponding to each payment on the swap and slotted into the maturity time-bands accordingly. The positions would be long positions if the conventional bank licensee is paying fixed and receiving floating, and short positions if vice versa. (If one of the legs involves receiving/paying a fixed or floating interest rate, that exposure must be slotted into the appropriate repricing maturity band for the calculation of the interest rate risk, as described in Chapter CA-9); and
        (c) Commodity swaps where the legs are in different commodities must be incorporated in the measurement framework of the respective commodities separately, without any offsetting. Offsetting will only be permitted if the conditions set out in Paragraphs CA-12.2.1 and CA-12.2.2 are met.

        51 For banks applying other approaches to measure options risks, all Options and the associated underlying instruments must be excluded from both the maturity ladder approach and the simplified approach. The treatment of options is described, in detail, in Chapter CA-13.

        January 2015