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) as well as the inventory risk which results from a bank holding assets with a view to reselling or leasing them. A commodity is defined as a physical product which is and can be traded on a secondary market — for example, agricultural products, minerals (including oil) and precious metals. Inventory risk is defined as arising from holding items in inventory either for resale under a Murabahah contract, or with a view to leasing under an Ijara contract. In the case of inventory risk, the simplified approach described in Paragraph CA-5.6.13 is applied.
January 2015CA-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). Furthermore, the funding of
commodities positions may well open anIslamic bank licensee to foreign exchange risk which should be captured within the measurement framework set out in Section CA-5.5.January 2015CA-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.
January 2015CA-5.6.4
All contracts (Salam, Musharakah, Mudarabah or Commodity Murabahah) involving commodities as defined in Sections CA-3.3, CA-3.6, CA-3.7 and CA-3.11 are subject to commodities risk and a capital charge as per the relevant provisions must be computed.
January 2015CA-5.6.5
Commodities risk can be measured using either the maturity ladder approach or the simplified approach for the purpose of calculating the capital charge for commodities risk.
Islamic bank licensees must notify the CBB of which approach they propose to follow. This is for reporting purposes on the form PIR. AnIslamic bank licensee which proposes to use the maturity ladder approach will not be allowed to revert to the simplified approach without the prior approval of the CBB.January 2015
