CA-4.5.4
The steps in the calculation of the general market risk for interest rate positions, under this method, are set out below:
(a) The bank will determine the Yield-to-Maturity (YTM) for each individual net position in fixed rate and floating rate instruments, based on the current market value. The basis of arriving at individual net positions is explained in Section CA-4.4 above. The YTM for fixed rate instruments is determined without any regard to whether the instrument is coupon bearing, or whether the instrument has any embedded options. In all cases, YTM for fixed rate instruments is calculated with reference to the final maturity date and, for floating rate instruments, with reference to the next repricing date.
(b) The bank will calculate, for each debt instrument, the modified duration (M) on the basis of the following formula:
r = YTM % per annum expressed as a decimal
C = Cash flow at time t
t = time at which cash flows occur, in years
m = time to maturity, in years
| M | = | D/(1+r) |
| where, | Sigma m t = 1 t × C/(1+r) t | |
| D (duration) | = | Sigma m t = 1 C/(1+r) t |
r = YTM % per annum expressed as a decimal
C = Cash flow at time t
t = time at which cash flows occur, in years
m = time to maturity, in years
(c) Individual net positions, at current market value, are allocated to the time-bands illustrated in Paragraph CA-4.5.1, based on their modified duration.
(d) The bank will then calculate the modified duration-weighted position for each individual net position by multiplying its current market value by the modified duration and the assumed change in yield.
(e) Matching of positions within each time band (i.e. vertical matching) is done as follows:
• Where a time band has both weighted long and short positions, the extent to which the one offsets the other is called the matched weighted position. The remainder (i.e. the excess of the weighted long positions over the weighted short positions, or vice versa, within a band) is called the unmatched weighted position for that band.
(f) Matching of positions, across time bands, within each zone (i.e. horizontal matching - level 1), is done as follows:
• Where a zone has both unmatched weighted long and short positions for various bands, the extent to which the one offsets the other is called the matched weighted position for that zone. The remainder (i.e. the excess of the weighted long positions over the weighted short positions, or vice versa, within a zone) is called the unmatched weighted position for that zone.
(g) Matching of positions, across zones (i.e. horizontal matching - level 2), is done as follows:
(i) The unmatched weighted long or short position in zone 1 may be offset against the unmatched weighted short or long position in zone 2. The extent to which the unmatched weighted positions in zones 1 and 2 are offsetting is described as the matched weighted position between zones 1 and 2.
(ii) After step (i) above, any residual unmatched weighted long or short position in zone 2 may be matched by offsetting the unmatched weighted short or long position in zone 3. The extent to which the unmatched positions in zones 2 and 3 are offsetting is described as the matched weighted position between zones 2 and 3.
The calculations in steps (i) and (ii) above may be carried out in reverse order (i.e. zones 2 and 3, followed by zones 1 and 2).
The calculations in steps (i) and (ii) above may be carried out in reverse order (i.e. zones 2 and 3, followed by zones 1 and 2).
(iii) After steps (a) and (b) above, any residual unmatched weighted long or short position in zone 1 may be matched by offsetting the unmatched weighted short or long position in zone 3. The extent to which the unmatched positions in zones 1 and 3 are offsetting is described as the matched weighted position between zones 1 and 3.
(h) Any residual unmatched weighted positions, following the matching within and between maturity bands and zones as described above, will be summed.
(i) The general interest rate risk capital requirement is the sum of:
(i) Matched weighted positions in all maturity bands × 5%
(ii) Matched weighted positions in zone 1 × 40%
(iii) Matched weighted positions in zone 2 × 30%
(iv) Matched weighted positions in zone 3 × 30%
(v) Matched weighted positions between zones 1 & 2 × 40%
(vi) Matched weighted positions between zones 2 & 3 × 40%
(vii) Matched weighted positions between zones 1 & 3 × 100%
(viii) Residual unmatched weighted positions × 100%
Item (i) is referred to as the vertical disallowance, items (ii) through (iv) as the first set of horizontal disallowances, and items (v) through (vii) as the second set of horizontal disallowances.
Item (i) is referred to as the vertical disallowance, items (ii) through (iv) as the first set of horizontal disallowances, and items (v) through (vii) as the second set of horizontal disallowances.
October 07