No offset is permitted between good quality and tow quality bonds or between two low quality issues because the low quality issues are subject to considerable specific risk which makes such hedges highly imperfect. As for bonds issued or guaranteed by the U.S. government, its agencies and the Canadian government, a complete offset is allowed between long and short positions in the same subcategory of maturity. The long and short positions of the same issue will also be completely offset. In addition the long and short positions of the different categories of maturity will be offset under certain circumstances. In some cases, complete offset can be allowed between the positions of the bonds with rating in one of the top four categories under certain circumstances.
French regulations contain general provisions which allow for partial offsetting.
All four countries have rules for the treatment of financial futures or options on debt or interest rate products. In the case of options three of the countries have regard in the allowable treatment to the extent to which the option is likely to be exercised In those countries which investment firms which undertake interest rate swaps the rules treat the swaps for the purposes of market risk as national government bonds 3. Comparison of the offset rules All four countries have offset rules between long and short positions. Japan, the U.K. and France do not allow for complete offset other than between the long and short positions of the same issue. The offset coefficients. which reflect interrelation of the volatility between the long and short positions that are being matched, is used for offset.