PIB A5.5 PIB A5.5 Commodities Risk Capital Requirement
PIB A5.5 Guidance
Authorised Firmwhich calculates its Commodities Risk Capital Requirementsin accordance with PIB Rule 5.7.1(b) must apply the Rulesin this section.
Calculation of Commodities Risk Capital Requirement
PIB A5.5.2(1) An
Authorised Firmmust calculate its Commodities Risk Capital Requirementby applying the Maturity Ladderapproach in PIB Rule A5.5.5 or the Simplified Approachin 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 Requirementhas been applied.(2) An Authorised Firmmust 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.
Treatment of Commodity Derivatives
Authorised Firmmust:(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 Ladderaccordingly. The positions will be long positions if the Authorised Firmis paying fixed and receiving floating, and short positions if the Authorised Firmis 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.
PIB A5.5.4 PIB A5.5.4(1) Subject to (2), an
Authorised Firmmust not net positions in different commodities for the purpose of calculating open positions.(2) An Authorised Firmmay 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;
PIB A5.5.4 Guidance1. 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 Approachand the Maturity Ladderapproach, long and short positions in each commodity may be reported on a net basis for the purposes of calculating open positions.
Maturity Ladder Approach
PIB A5.5.5 PIB A5.5.5(1) An
Authorised Firmwhich uses the Maturity Ladderapproach to calculate the Commodities Risk Capital Requirementmust:(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 Firmmust:(a) allocate physical stocks to the first maturity band; and(b) set a separate Maturity Ladderfor each commodity.
PIB A5.5.5 Guidance
The table below illustrates the calculation of the
Commodity Risk Capital Requirementon an individual commodity using the Maturity Ladderapproach.
Authorised Firmusing the Simplified Approachto calculate the Commodities Risk Capital Requirementmust 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.