Minimum Capital Requirements for Market Risk

For the purpose of aggregating commodity risk positions within a bucket using a correlation parameter, the correlation parameter ρ kl between two sensitivities WS k and WS l within the same bucket, is set as follows, where: (1) ρ kl (cty) is equal to 1 where the two commodities of sensitivities k and l are identical, and to the intra-bucket correlations in Table 12 otherwise, where, any two commodities are considered distinct commodities if in the market two contracts are considered distinct when the only difference between each other is the underlying commodity to be delivered. For example, WTI and Brent in bucket 2 (ie energy – liquid combustibles) would typically be treated as distinct commodities; (2) ρ kl (tenor) is equal to 1 if the two tenors of the sensitivities k and l are identical, and to 99.00% otherwise; and (3) ρ kl (basis) is equal to 1 if the two sensitivities are identical in the delivery location of a commodity, and 99.90% otherwise. Values of ρ kl (cty) for intra-bucket correlations Table 12 Bucket number Commodity bucket Correlation ρ kl (cty) 1 Energy - Solid combustibles 55% 2 Energy - Liquid combustibles 95% 3 Energy - Electricity and carbon trading 40% 4 Freight 80% 5 Metals - non-precious 60% 6 Gaseous combustibles 65% 7 Precious metals (including gold) 55% 8 Grains and oilseed 45% 9 Livestock and dairy 15% 10 Softs and other agriculturals 40% 11 Other commodity 15% Instruments with a spread as their underlying are considered sensitive to different risk factors. In the example cited, the swap will be sensitive to both WTI and Brent, each of which require a capital charge at the risk factor level (ie delta of WTI and delta of Brent). The correlation to aggregate capital charges is specified in [7.83]. 7.84 For determining whether the commodity correlation parameter ( ρ kl (cty) ) as set out in Table 12 in [7.83](1)(a) should apply, this paragraph provides non-exhaustive examples of further definitions of distinct commodities as follows: (1) For bucket 3 (energy – electricity and carbon trading): (a) Each time interval (i) at which the electricity can be delivered and (ii) that is specified in a contract that is made on a financial market is considered a distinct electricity commodity (eg peak and off-peak). (b) Electricity produced in a specific region (eg Electricity NE, Electricity SE or Electricity North) is considered a distinct electricity commodity. (2) For bucket 4 (freight): (a) Each combination of freight type and route is considered a distinct commodity. (b) Each week at which a good has to be delivered is considered a distinct commodity. 7.85 For aggregating delta commodity risk positions across buckets, the correlation parameter y bc is set as follows: (1) 20% if bucket b and bucket c fall within bucket numbers 1 to 10; and (2) 0% if either bucket b or bucket c is bucket number 11. Foreign exchange risk buckets, risk weights and correlations 7.86 An FX risk bucket is set for each exchange rate between the currency in which an instrument is denominated and the reporting currency. 7.87 A unique relative risk weight equal to 15% applies to all the FX sensitivities. 7.88 For specified currency pairs, 32 and for currency pairs forming first- order crosses across these specified currency pairs, 33 the above risk weight may at the discretion of the bank be divided by the square root of 2.