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  • CA-6.3 CA-6.3 Maturity Ladder Approach

    • CA-6.3.1

      A worked example of the maturity ladder approach is set out in Appendix CA-1 and the table below illustrates the maturity time-bands of the maturity ladder for each commodity. As stated in Section CA-6.1, banks having Salam and Parallel Salam transactions must use the maturity ladder approach.

      October 07

    • CA-6.3.2

      The steps in the calculation of the commodities risk by the maturity ladder approach are:

      (a) The net positions in individual commodities, expressed in terms of the standard unit of measurement, are first slotted into the maturity ladder. Physical stocks are allocated to the first-time band. A separate maturity ladder is used for each commodity as defined in Section CA-6.2. The net positions in commodities are calculated as explained in Section CA-6.2.
      (b) Asset and liability positions in the same time-band are matched. The sum of the matched asset and liability positions is multiplied first by the spot price of the commodity, and then by a spread of 1.5% for each time-band as set out in the table below. This represents the capital charge in order to capture all risks within a time-band (which, together, are sometimes referred to as curvature risk).
      Time band3
      0-1 months
      1-3 months
      3-6 months
      6-12 months
      1-2 years
      2-3 years
      over 3 years
      (c) The residual (unmatched) net positions from nearer time-bands are then carried forward to offset opposite positions (i.e. asset against liability and vice versa) in time bands that are further out. However, a surcharge of 0.6% of the net position carried forward is added in respect of each time-band that the net position is carried forward, to recognise that such management of positions between different time-bands is imprecise. The surcharge is in addition to the capital charge for each matched amount created by carrying net positions forward, and is calculated as explained in step (b) above.
      (d) At the end of step (c), there will be either asset or liability positions, to which a capital charge of 15% will apply. The Central Bank recognises that there are differences in volatility between different commodities, but has, nevertheless, decided that one uniform capital charge for open positions in all commodities shall apply in the interest of simplicity of the measurement, and given the fact that banks normally run rather small open positions in commodities. Banks will be required to submit in writing, details of their commodities business in order to capture the market risk on this business and to enable the Central Bank to evaluate whether the models approach should be adopted by the bank.

      3 Instruments, where the maturity is on the boundary of two maturity time-bands, should be placed into the earlier maturity band. For example, instruments with a maturity of exactly one-year are placed into the 6 to 12 months time-band.

      October 07