Commodities Risk

In calculating the capital requirements under the maturity ladder approach, banks will first have to express each commodity position (spot plus forward) in terms of the standard unit of measurement (barrels, kilos, grams etc). The net position in each commodity will then be converted at current spot rates into the national currency. 14.69 Secondly, in order to capture forward gap and interest rate risk within a time band (which, together, are sometimes referred to as curvature/spread risk), matched long and short positions in each time band will carry a capital requirement. The methodology is similar to that used for interest rate related instruments as set out in [14.3] to [14.40] . Positions in the separate commodities (expressed in terms of the standard unit of measurement) will first be entered into a maturity ladder while physical stocks should be allocated to the first time band. A separate maturity ladder will be used for each commodity as defined in [14.67] above. 78 For each time band as set out in Table 10, the sum of short and long positions that are matched will be multiplied first by the spot price for the commodity, and then by the spread rate of 1.5%. Time bands and spread rates Table 10 Time band Spread rate 0-1 month 1.5% 1-3 months 1.5% 3-6 months 1.5% 6-12 months 1.5% 1-2 years 1.5% 2-3 years 1.5% over 3 years 1.5% 14.70 The residual net positions from nearer time bands may then be carried forward to offset exposures in time bands that are further out. However, recognising that such hedging of positions among different time bands is imprecise, a surcharge equal to 0.6% of the net position carried forward will be added in respect of each time band that the net position is carried forward. The capital requirement for each matched amount created by carrying net positions forward will be calculated as in [14.69] above. At the end of this process, a bank will have either only long or only short positions, to which a capital requirement of 15% will apply. 14.71 All commodity derivatives and off-balance sheet positions that are affected by changes in commodity prices should be included in this measurement framework. This includes commodity futures, commodity swaps, and options where the “delta-plus” method 79 is used (see [14.77] to [14.80] below). In order to calculate the risk, commodity derivatives should be converted into notional commodities positions and assigned to maturities as follows: (1) Futures and forward contracts relating to individual commodities should be incorporated as notional amounts of the standard unit of measurement (barrels, kilos, grams etc) and should be assigned a maturity with reference to expiry date. (2) Commodity swaps where one leg is a fixed price and the other the current market price should be incorporated as a series of positions equal to the notional amount of the contract, with one position corresponding with each payment on the swap and slotted into the maturity ladder accordingly. The positions would be long positions if the bank is paying fixed and receiving floating, and short positions if the bank is receiving fixed and paying floating. 80 (3) Commodity swaps where the legs are in different commodities are to be incorporated in the relevant maturity ladder. No offsetting will be allowed in this regard except where the commodities belong to the same subcategory as defined in [14.67] above. Simplified approach 14.72 In calculating the capital requirement for directional risk under the simplified approach, the same procedure will be adopted as in the maturity ladder approach described above (see [14.68] and [14.71]. Once again, all commodity derivatives and off-balance sheet positions that are affected by changes in commodity prices should be included. The capital requirement will equal 15% of the net position, long or short, in each commodity.