Introduction
CA-5.6.1
This section sets out the minimum capital requirements to cover the risk of holding or taking positions in commodities, including precious metals, but excluding gold and silver (which is treated as a foreign currency according to the methodology explained in section CA-5.5).
Apr 08CA-5.6.2
The commodities position risk and the capital charges are calculated with reference to the entire business of a bank (i.e. the banking and trading books combined).
Apr 08CA-5.6.3
The price risk in commodities is often more complex and volatile than that associated with currencies. Banks need to guard against the risk that arises when a liability (i.e. in a Parallel Salam transaction) position falls due before the asset position (i.e. a failure associated with or delay in the Salam contract). Owing to a shortage of liquidity in some markets, it might be difficult to close the Parallel Salam position and the bank might be "squeezed by the market". All these commodity market characteristics can result in price transparency and the effective management of risk.
Apr 08CA-5.6.4
All contracts (Salam, Musharakah or Mudarabah) involving commodities as defined in chapters CA-3.3, CA-3.6 and CA-3.7 are subject to commodities risk and a capital charge as per the relevant provisions must be computed.
Apr 08CA-5.6.5
Banks should adopt either the simplified approach to calculate their commodities risk and the resultant capital charges or the maturity ladder approach.
Apr 08
