Maturity Ladder Approach
CA-5.6.9
A worked example of the maturity ladder approach is set out in Appendix CA-13 and the table in Paragraph CA-5.6.10 illustrates the maturity time-bands of the maturity ladder for each commodity.
January 2015CA-5.6.10
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; and(b) The sum of short and long positions in the same time-band that are matched is multiplied first by the spot price of the commodity, and then by the spread rate 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 band37 0–1 months 1–3 months 3–6 months 6–12 months 1–2 years 2–3 years over 3 years
37 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.
January 2015CA-5.6.11
After the two steps in Paragraph CA-5.6.10 are completed, the residual (or 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. This surcharge is in addition to the capital charge calculated in Paragraph CA-5.6.10 for each matched amount created by carrying net positions forward.
January 2015CA-5.6.12
Any net position at the end of the carrying forward and offsetting processes described in Paragraphs CA-5.6.10 and CA-5.6.11 attract a capital charge of 15%.
January 2015CA-5.6.12A
Although there are differences in volatility between different commodities, only one uniform capital charge for open positions in all commodities applies in the interest of simplicity.
January 2015
