Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p19
Version: federal_register_of_legislation:F2024L01519
Segment Type: other
Provision Reference: 
Character Range: 54382–57313

become subject to specific and general market risk charges. To determine the capital charge, the amounts reported must be the market value of the principal amount of the underlying or of the notional underlying.

     3.          An ADI must treat futures and forward contracts (including FRAs) as a combination of a long and a short position in a notional government security or, in the case of futures or forwards on bank or corporate debt, as a combination of a long and a short position in the underlying debt security. The maturity of a future or an FRA is the period until delivery or exercise of the contract, plus the life of the underlying or notional underlying instrument. The long and short positions must be reported at the market value of the underlying or notional underlying security or portfolio of securities. Where a range of deliverable instruments may be delivered to fulfil the contract, the ADI may elect which deliverable security goes into the maturity or duration ladder but must take account of any conversion factor defined by the exchange.[16]

     4.          An ADI must treat swaps as two notional positions in government securities with relevant maturities. Both legs of the swap must be reported at their market values. For swaps that pay or receive a fixed or floating interest rate against some other reference price, e.g. a stock index, the ADI must enter the interest rate component into the appropriate repricing maturity category, with the equity component being included in the equity framework. The separate legs of cross-currency swaps must be reported in the relevant maturity ladders for the currencies concerned and the capital for any foreign exchange risk calculated in accordance with the methods outlined in paragraphs 56 to 64 of this Attachment.

Pre-processing techniques

     1.          An ADI may use alternative methods to calculate the positions to be included in the maturity or duration ladder, subject to APRA determining in writing that it is satisfied as to the accuracy of the systems being used. Such formulae may be applied to all interest-rate-sensitive positions, arising from both physical and derivative instruments, including swaps, FRAs, option delta-equivalents[17] and forward foreign exchange. An ADI may only use an alternative treatment if:

        1.           the positions calculated fully reflect the sensitivity of the cash flows to interest rate changes and are entered into the appropriate time bands; and

        2.           the positions allocated to a single maturity ladder are denominated in the same currency.

     1.          An ADI may combine positions calculated using a pre-processing method with any weighted positions calculated using the duration method but must not offset such positions against weighted positions calculated using the maturity method.

Calculation of capital charge for derivatives under the standard