Entire Section

  • PIB A5.5 PIB A5.5 Commodities Risk Capital Requirement

    • PIB A5.5 Guidance

      PIB section A5.5 presents the method for the calculation of Commodities Risk Capital Requirement for the purpose of PIB Rule 5.7.1(b).

      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A5.5.1

      An Authorised Firm which calculates its Commodities Risk Capital Requirements in accordance with PIB Rule 5.7.1(b) must apply the Rules in this section.

      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Calculation of Commodities Risk Capital Requirement

      • PIB A5.5.2

        (1) An Authorised Firm must calculate its Commodities Risk Capital Requirement by applying the Maturity Ladder approach in PIB Rule A5.5.5 or the Simplified Approach in PIB Rule A5.5.6 to all Non-Trading and Trading Book:
        (a) commodity positions;
        (b) commodity derivatives and off-balance sheet positions that are affected by changes in commodity prices, having derived notional commodity positions; and
        (c) other positions against which no other Market or Credit Risk Capital Requirement has been applied.
        (2) An Authorised Firm must determine notional commodity positions by converting the commodity derivatives into notional underlying commodity positions and assigning appropriate maturities in accordance with PIB Rule A5.5.3.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Treatment of Commodity Derivatives

      • PIB A5.5.3

        An Authorised Firm must:

        (a) incorporate all futures and forward contracts relating to individual commodities in the measurement system as notional amounts and assigned a maturity with reference to the expiry date;
        (b) incorporate commodity swaps where one leg is a fixed price and the other the current market price as a series of positions equal to the notional amount of the contract, with one position corresponding to each payment on the swap and slotted into the Maturity Ladder accordingly. The positions will be long positions if the Authorised Firm is paying fixed and receiving floating, and short positions if the Authorised Firm is receiving fixed and paying floating; and
        (c) incorporate commodity swaps where the legs are in different commodities in the relevant Maturity Ladder. No offsetting will be allowed in this regard except where the commodities belong to the same sub-category.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A5.5.4 PIB A5.5.4

        (1) Subject to (2), an Authorised Firm must not net positions in different commodities for the purpose of calculating open positions.
        (2) An Authorised Firm may net positions in different commodities where those commodities:
        (a) are deliverable against each other; and
        (b) are in one or more sub-categories of the same category;
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A5.5.4 Guidance

          1. For the purposes of PIB Rule A5.5.4, an example of a category is oil. An example of a sub-category is Brent.
          2. For the Simplified Approach and the Maturity Ladder approach, long and short positions in each commodity may be reported on a net basis for the purposes of calculating open positions.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Maturity Ladder Approach

      • PIB A5.5.5 PIB A5.5.5

        (1) An Authorised Firm which uses the Maturity Ladder approach to calculate the Commodities Risk Capital Requirement must:
        (a) express each commodity position (spot and forward) in terms of the standard unit of measurement and net long and short positions maturing on the same day or maturing within ten business days of each other in the case of contracts traded in markets with daily delivery dates;
        (b) allocate the positions remaining after taking the steps in (a) to the appropriate maturity band in the following table:
        Band Maturity of Position
        1. 0–1 month
        2. 1–3 months
        3. 3–6 months
        4. 6–12 months
        5. 1–2 years
        6. 2–3 years
        7. Over 3 years
        (c) calculate the spread charge each time long and short positions are matched within each band. In each instance, the spread charge equals the matched amount multiplied first by the spot price for the commodity and then by a spread rate of 1.5%;
        (d) calculate a carry charge for each position that is carried across to another maturity band. In each instance, the carry charge equals the carried position multiplied first by the spot price for the commodity, then by the carry rate of 0.6% and finally by the number of bands by which the position is carried;
        (e) repeat (c) if necessary;
        (f) calculate the outright charge by multiplying all remaining unmatched positions (long plus short, ignoring the sign) by the spot price for the commodity, then by 15%; and
        (g) sum the totals for Bands 2 to 7 referred to in (b), to reach the total requirement.
        (2) For the purposes of (1)(b), an Authorised Firm must:
        (a) allocate physical stocks to the first maturity band; and
        (b) set a separate Maturity Ladder for each commodity.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A5.5.5 Guidance

          The table below illustrates the calculation of the Commodity Risk Capital Requirement on an individual commodity using the Maturity Ladder approach.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Simplified Approach

      • PIB A5.5.6

        An Authorised Firm using the Simplified Approach to calculate the Commodities Risk Capital Requirement must sum:

        (a) 15% of the net position multiplied by the spot price for the commodity; and
        (b) 3% of the gross position (long plus short, ignoring the sign) multiplied by the spot price of the commodity.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]