Document ID: chunk:federal_register_of_legislation:F2012L02334:body:0:p13
Version: federal_register_of_legislation:F2012L02334
Segment Type: other
Provision Reference: 
Character Range: 32913–35771

to a principal payment must be calculated using historical wholesale rates (refer to paragraphs 15 and 16 of this Attachment).[8]
    15.         For banking book items with defined inception and principal payment dates, the historical wholesale rate applicable to a principal payment is the wholesale market rate applicable to a payment on the repricing date, taken from the yield curve applicable on the inception date of the instrument incorporating the principal payment. APRA will review the appropriateness of an ADI's choice of wholesale rates for the purposes of this paragraph and paragraph 12 of this Attachment and may, in writing, determine that the ADI must use different rates for the purpose of determining its IRRBB capital requirement.
    16.         For banking book items that do not have defined inception or principal payment dates, assumptions must also be made about inception dates. In such cases, the historical wholesale rate applicable to a principal payment will be determined as described in paragraph 15 of this Attachment but using the inception and principal payment dates specified in the ADI's repricing assumptions.
    17.         For the purposes of paragraph 13 of this Attachment, the earnings offset must be calculated as the economic value, as at the beginning of the holding period, of a notional twelve-month, equally weighted, monthly moving average portfolio of fixed for floating interest rate swaps. For this purpose, the ADI receives fixed and makes floating rate payments and the total principal amount covered by the swaps is equal to the sum of the book value of all banking book items.
    18.         The above approach to the measurement of repricing and yield curve risks is based on the use of value-at-risk techniques on a static balance sheet. An ADI that develops new methodologies, such as the use of dynamic simulation, is encouraged to approach APRA to discuss the use of such methodologies within the capital adequacy framework. If APRA has already approved the ADI's internal model, it may be necessary for APRA to vary its approval to permit the use of a new methodology by the ADI.

Modelling basis and optionality risks

    19.         An ADI that does not have APRA's written approval to exclude basis and/or optionality risks from its IRRBB capital requirement and does not have a risk measurement model for these risks, must use a method approved by APRA, in writing, for determining an appropriate amount of regulatory capital for those risks.
    20.         To the extent possible, the data sets and assumptions used for modelling repricing and yield curve risks and optionality and basis risks should be consistent.
    21.         An ADI's internal model for basis risk must explain the historical variation of margins between product interest rates and the implied cost of funds.