CA-7.3.2
The steps in the calculation of the
(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-7.2 earlier in this Chapter. The net positions in commodities are calculated as explained in Section CA-7.2.
(b) Long and short positions in each time-band are matched. The sum of the matched long and short positions is multiplied first by the spot price of the commodity , and then by a 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 forward gap and interest rate risk within a time-band (which, together, are sometimes referred to as curvature/spread risk).
| Time-bands11 |
|
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. long against short, 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 hedging 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) above, there will be either only long or only short 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, to enable the Central Bank to evaluate whether the models approach should be adopted by the bank, to capture the market risk on this business.
11 For instruments, the maturity of which is on the boundary of two maturity time-bands, the instrument 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