Interest Rate Risk

A bank must determine the specific risk capital requirement for the correlation trading portfolio (CTP) as follows: (1) The bank computes: (a) the total specific risk capital requirements that would apply just to the net long positions from the net long correlation trading exposures combined; and (b) the total specific risk capital requirements that would apply just to the net short positions from the net short correlation trading exposures combined. (2) The larger of these total amounts is then the specific risk capital requirement for the CTP. The approach of taking the larger of the specific risk capital requirements for net long positions and the specific risk capital requirement for net short positions are not applied to leveraged securitisation positions or option products on securitisation positions. Leveraged securitisation positions and option products on securitisation positions are securitisation positions. They are not admissible for the CTP. The capital requirements for specific risk will be determined as the sum of the capital requirements for specific risk against net long and net short positions. General market risk 14.23 The capital requirements for general market risk are designed to capture the risk of loss arising from changes in market interest rates. A choice between two principal methods of measuring the risk is permitted – a maturity method and a duration method. In each method, the capital requirement is the sum of four components: (1) the net short or long position in the whole trading book; (2) a small proportion of the matched positions in each time band (the “vertical disallowance”); (3) a larger proportion of the matched positions across different time bands (the “horizontal disallowance”); and (4) a net charge for positions in options, where appropriate (see [14.84] and [14.85] ). 14.24 Separate maturity ladders should be used for each currency and capital requirements should be calculated for each currency separately and then summed with no offsetting between positions of the opposite sign. In the case of those currencies in which business is insignificant, separate maturity ladders for each currency are not required. Rather, the bank may construct a single maturity ladder and slot, within each appropriate time band, the net long or short position for each currency. However, these individual net positions are to be summed within each time band, irrespective of whether they are long or short positions, to produce a gross position figure. 14.25 In the maturity method (see [14.29] for the duration method), long or short positions in debt securities and other sources of interest rate exposures including derivative instruments, are slotted into a maturity ladder comprising 13 time bands (or 15 time bands in the case of low coupon instruments). Fixed rate instruments should be allocated according to the residual term to maturity and floating-rate instruments according to the residual term to the next repricing date. Opposite positions of the same amount in the same issues (but not different issues by the same issuer), whether actual or notional, can be omitted from the interest rate maturity framework, as well as closely matched swaps, forwards, futures and forward rate agreements (FRAs) which meet the conditions set out in [14.35] and [14.36] below.