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K. Calculation of Commodities Risk Capital Requirement
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K. Calculation of Commodities Risk Capital Requirement

143. This section of the BPG sets out the standards, methodology, formulae and parameters to be employed by a Bank in calculating the Commodities risk capital requirements, specified in BBR Rule 6.5 (1) (d). These elements constitute the framework which the AFSA would use to assess compliance with BBR Rules requiring a Bank to maintain adequate capital to support its commodities risk exposures. In order to ensure compliance with the requirement under this Rule and to demonstrate adequacy of capital to address equity risk exposures, the AFSA expects a Bank to follow the methodology specified in this section.


144. In measuring its Market risk, a Bank must include the risk of holding or taking positions in commodities and commodities options (commodities risk). Commodities means physical or energy products that may be traded. Commodities include precious metals (other than gold), base metals, agricultural products, minerals, oil, gas and electricity. A Bank must also include commodity derivatives and off-balance sheet positions that are affected by changes in commodity prices, having derived notional commodity positions; and other positions against which no other Market or Credit Risk Capital Requirement has been applied.


145. If a Bank is exposed to foreign exchange or interest rate risk from funding commodities positions, it must include the relevant positions in the measurement of interest rate or foreign exchange risk. Gold is dealt with as a foreign exchange position (rather than as a commodity position) because the volatility of its prices is similar to that of a currency. If a commodity is to be received or delivered under a forward contract, the Bank must report any foreign currency, equity or interest rate exposure from the other leg of the contract in accordance with the relevant section of this Chapter.


146. In calculating the capital charge for commodities risk, a Bank must include commodity derivatives and off-balance- sheet positions that are affected by changes in commodity prices (such as commodity futures and commodity swaps). Options on commodities for which the options risk is measured using the delta-plus method must also be included (with their underlying assets). Options for which the options risk is measured using the simplified approach must be excluded.


147. Commodity derivatives need to be converted into notional commodities positions and assigned to maturities. Futures and forward contracts relating to a particular commodity must be included in the measurement of commodities risk as notional amounts in terms of the standard unit of measurement multiplied by the spot price of the commodity.


148. A Bank must first state each commodity position (spot plus forward) in terms of the standard unit of measurement for the commodity (such as barrels, kilos or grams). The firm must then convert the net position in each commodity into the reporting currency at the current spot market exchange rates.

Measuring commodities risk

149. A Bank must use the simplified approach to measure commodities risk. To calculate open positions using this approach, the firm may report short and long positions in each commodity on a net basis. Positions are reported on a net basis by offsetting them against each other if they are in the same commodity. Positions in different commodities must not be offset unless:


(a) the commodities are deliverable against each other; or


(b) the commodities are close substitutes for each other and a minimum correlation between price movements of 0.9 can be clearly established over at least the preceding year.


Correlation-based offsetting mentioned in (b) above may not be used unless the AFSA has approved its use in writing.


150. Gross position in a commodity, is the sum of the absolute values of all short positions and all long positions of the firm, regardless of maturity. A Bank must use the current spot price to calculate its gross position in commodity derivatives.

Capital charges—simplified approach

151. The capital charge for commodities risk of a Bank is the sum of:

(a) 15% of the firm’s overall net position, long or short, in each commodity; and

(b) 3% of the firm’s gross position in each commodity.