• PRU A6.2 PRU A6.2 Interest Rate Risk Capital Requirement

    • Guidance

      Section A6.2 presents the method for the calculation of Specific Risk and General Market Risk in respect of the Interest Rate Risk Capital Requirement as referred to in Rule 5.4.1(b).

    • PRU A6.2.1

      An Authorised Person which calculates its Interest Rate Risk Capital Requirement in accordance with Rule 5.4.1(b) must apply the Rules in this Section.

    • PRU A6.2.2

      An Authorised Person must calculate its Interest Rate Risk Capital Requirement as the sum of the two following separate charges:

      (a) Specific Risk of each net position as calculated in accordance with Rule A6.2.13; and
      (b) General Market Risk calculated in accordance with Rule A6.2.15.

    • PRU A6.2.3 PRU A6.2.3

      An Authorised Person must calculate its Interest Rate Risk Capital Requirement in Trading Book positions in all fixed-rate and floating-rate debt Securities and instruments which behave like them, including:

      (a) non-convertible preference Shares;
      (b) Futures or forwards on a debt security or on interest rates;
      (c) swaps (or contracts for differences) whose value is based on interest rates;
      (d) the cash leg of a repurchase or a reverse repurchase agreement;
      (e) forward foreign exchange contracts or currency Futures;
      (f) interest rate legs of equity swaps;
      (g) interest rate legs of equity Futures or forwards; and
      (h) interest rate legs of equity based Options treated under internal models in Section 5.3.

      • Guidance

        Where these positions will require the derivation of notional positions before they can be included in the calculation of Specific Risk and General Market Risk requirements, an Authorised Person must derive the notional positions in accordance with Rules A6.2.5 to A6.2.12.

    • PRU A6.2.4

      (1) An Authorised Person may net, by value, long and short positions in the same debt instrument in its Trading Book to generate the individual net position in that instrument.
      (2) Instruments are considered to be the same for the purposes of (1) where:
      (a) the Issuer is the same;
      (b) the instruments have equivalent standing in liquidation; and
      (c) the currency, coupon and maturity are the same.

    • Derivation of notional positions for certain instruments (including interest rate Derivatives)

      • PRU A6.2.5

        (1) The interest rate risk measurement must include all interest rate Derivatives and off-balance sheet instruments in the Trading Book that react to changes in interest rates, including forward rate agreements other forward contracts, Futures, interest rate and cross-currency swaps and forward foreign exchange positions.
        (2) Derivatives must be converted into positions in the relevant underlying instruments and are subject to Specific and General Market Risk requirements set out in Rules A6.2.13 and A6.2.15. The amounts used in the calculation must be the market values of the principal amount of the underlying instrument or of the notional underlying instrument.
        (3) The manner in which an Authorised Person must derive a notional position (in the currency concerned) for certain instruments (including interest rate Derivatives) is set out in Rules A6.2.6 to A6.2.12.

    • Futures on interest rates and forward rate agreements

      • PRU A6.2.6

        A Future on an interest rate and a forward rate agreement must be treated as two notional zero coupon government Securities as follows:

        (a) where an Authorised Person sells an interest rate Future or buys a forward rate agreement:
        (i) the notional short position has a maturity equal to the time to expiry of the Future (or the settlement date of the forward rate agreements) plus the maturity of the borrowing period; and
        (ii) the notional long position has a maturity equal to the time to expiry of the Future (or the settlement date of the forward rate agreement); and
        (b) where an Authorised Person buys an interest rate Future or sells a forward rate agreement:
        (i) the notional short position has a maturity equal to the time to expiry of the Future (or the settlement date of the forward rate agreement); and
        (ii) the notional long position has a maturity equal to the time to expiry of the Future (or the settlement date of the forward rate agreement) plus the maturity of the Deposit period.

    • Futures and forwards on a single debt security

      • PRU A6.2.7

        A Future and a forward on a single debt Security must be treated as a notional debt a notional zero coupon government Security as follows:

        (a) where an Authorised Person has bought the Future or forward:
        (i) a notional long position in the underlying Security with a maturity:
        (A) in the case of a fixed rate bond, equal to the underlying Security; and
        (B) in the case of a floating rate bond, at the time to the next reset; and
        (ii) a notional short position in a zero coupon government Security with a maturity equal to the time to expiry of the Futures contract; and
        (b) where an Authorised Person has sold the Future or forward:
        (i) a notional short position in the underlying Security with a maturity:
        (A) in the case of a fixed rate bond, equal to the underlying Security; and
        (B) in the case of a floating rate bond, at the time to the next reset; and
        (ii) a notional long position in a zero coupon government Security with a maturity equal to the time to expiry of the Futures contract.

    • Future or forward on a basket of debt Securities

      • PRU A6.2.8

        A Future and a forward on a basket of debt Securities must be treated as a set of notional positions in the constituent debt Securities.

    • Interest rate and currency swaps

      • PRU A6.2.9 PRU A6.2.9

        An interest rate and a currency swap must be treated as two notional government Securities as follows:

        (a) where the Authorised Person is receiving fixed rate interest and paying floating rate interest:
        (i) a notional long position with a maturity equal to the length of the swap; and
        (ii) a notional short position with a maturity equal to the period remaining to the next interest rate reset date;
        (b) where the Authorised Person is paying fixed rate interest and receiving floating rate interest:
        (i) a notional short position with a maturity equal to the length of the swap; and
        (ii) a notional long position with a maturity equal to the period remaining to the next interest rate reset date;
        (c) where the Authorised Person is receiving fixed rate interest and paying fixed rate interest:
        (i) a notional long position with a maturity equal to the length of the swap; and
        (ii) a notional short position with a maturity equal to the length of the swap.
        (d) where the Authorised Person is receiving floating rate interest and paying floating rate interest:
        (i) a notional long position with a maturity equal to the period remaining to the next interest date reset date; and
        (ii) a notional short position with a maturity equal to the period remaining to the next interest rate reset date; and
        (e) the two notional government Securities must have a coupon equal to the rate of interest payable or receivable on the leg.

        • Guidance

          A currency swap is also subject to a Foreign Exchange Risk Capital Requirement (see Section 5.6).

    • Dual currency bonds

      • PRU A6.2.10

        A dual currency bond must be treated as two positions as follows:

        (a) a debt Security denominated in the currency in which the dual currency bond is issued; and
        (b) a foreign exchange forward for the purchase of the redemption currency (see Section 5.6).

    • Cash legs of repos

      • PRU A6.2.11 PRU A6.2.11

        The forward cash leg of a repo must be treated as a notional short position in a government Security with a maturity equal to that of the repo and coupon equal to the repo rate.

        • Guidance

          If a Security is subject to a repurchase agreement (but not a reverse repurchase agreement), the Authorised Person continues to calculate an Interest Rate Risk Capital Requirement on the Security because, although legal ownership transfers to the Counterparty, the economic benefit or loss remains with the Authorised Person.

    • Cash legs of reverse repos

      • PRU A6.2.12 PRU A6.2.12

        (1) The forward cash leg of a reverse repo must be treated as a notional long position in a government security with a maturity equal to that of the reverse repo and coupon equal to the repo rate.
        (2) An Authorised Person may exclude from the interest rate maturity framework (for both Specific and General Market Risk) long and short positions (both actual and notional) in identical Derivative instruments with exactly the same Issuer, coupon, currency and maturity. A fully-matched position in a Future or forward and its corresponding underlying instrument may also be fully offset, and thus excluded from the calculation.

        • Guidance

          If a Security is subject to a reverse repurchase agreement (but not a repurchase agreement), the Authorised Person does not calculate an Interest Rate Risk Capital Requirement on the Security because, although the firm obtains the legal title, the economic benefit or loss remains with the original holder.

    • Specific Risk

      • Guidance

        In respect of interest rate risk, a capital charge for Specific Risk is designed to protect against an adverse movement in the price of an individual Security owing to factors related to the individual Issuer.

      • PRU A6.2.13 PRU A6.2.13

        (1) An Authorised Person must calculate its Specific Risk as the sum of the market values of the individual net positions (whether they are long or short) multiplied by the appropriate risk percentage in (3).
        (2) An Authorised Person must not offset between different issues.
        (3) An Authorised Person must determine the appropriate risk percentage by reference to the following table:
         
        Issuer Credit Quality Grades Residual Term to Maturity Risk Percentage
        Sovereign Debt

        This category includes —
        (a) all forms of government debt, including bonds, treasury bills and other short-term instruments; and
        (b) Securities issued by PSEs which qualify for a 0% risk weight for Credit Risk.

        An Exposure to any debt Security issued by—

        (i) the central government or monetary authority; or
        (ii) other central governments with a Credit Quality Grade of 3 or better as set out in Chapter 4,
        which is denominated in the domestic currency and funded in the same currency must be assigned a 0% Specific Risk charge.
        The Regulator may, at its discretion, assign a higher risk charge other than the above to Securities issued by certain governments, especially in cases where the Securities are denominated in a currency other than that of the issuing government.
        1 Any 0.00%
        2 or 3 6 months or less 0.25%
        More than 6 and up to 24 months 1.00%
        More than 24 months 1.60%
        4 or 5 Any 8.00%
        6 Any 12.00%
        Unrated Any 8.00%
        Qualifying Debt

        This category includes —
        (a) any Security that is issued by an MDB;
        (b) any Security (including one issued by a PSE) which has a Credit Quality Grade of 3 or better as set out in Chapter 4; and
        (c) any unrated Security issued by a PSE which belongs to a country with a Credit Quality Grade of 1 as set out in Chapter 4.
          6 months or less 0.25%
          More than 6 and up to 24 months 1.00%
          More than 24 months 1.60%
        Other

        For Securities which have a high yield to redemption relative to government debt Securities issued in the same country, the Regulator will require the Authorised Person:
        (a) to apply a higher Specific Risk charge to such instruments; or
        (b) to disallow offsetting for the purpose of defining the extent of General Market Risk between such instruments and any other debt instruments.
        4 Any 8% or such other percentage as the Regulator may direct.
        5 or 6 Any 12% or such other percentage as the Regulator may direct.
        Unrated Any 8% or such other percentage as the Regulator may direct.

        • Guidance

          1. Offsetting is not permitted since differences in coupon rates, liquidity, and call features, for example, signify that prices may diverge in the short run.
          2. The "Other" category will receive the same Specific Risk requirement as a private-sector borrower under the CRCOM, 8%. However, since this may, in certain cases, considerably underestimate the Specific Risk for debt Securities which have a high yield to redemption relative to government debt Securities, the Regulator has the right to apply to such Securities a Specific Risk percentage higher than 8%.

      • PRU A6.2.14

        [Reserved]

    • General Market Risk

      • PRU A6.2.15

        (1) Subject to (3), an Authorised Person must calculate its General Market Risk on a currency by currency basis, irrespective of where the individual instruments are physically traded or listed. The calculations for each currency must then be added together to determine the amount of the Authorised Person's General Market Risk requirement.
        (2) An Authorised Person must calculate its General Market Risk requirement for each currency by applying one of the following approaches to all currencies, including to the single maturity ladder derived from the currencies identified under (3):
        (a) the simplified framework set out in Rule A6.2.16;
        (b) the Maturity Method set out in Rule A6.2.17; or
        (c) with the consent of the Regulator, the Duration Method set out in Rule A6.2.19.

    • Simplified Framework

      • PRU A6.2.16 PRU A6.2.16

        In applying the simplified framework, an Authorised Person must calculate its General Market Risk requirement for each currency by taking the following steps:

        (a) allocating the individual net positions to one of the time bands in the table below, as follows:
        (i) fixed-rate instruments are allocated to their time bands based upon the residual time to maturity; and
        (ii) floating-rate instruments are allocated to time bands based upon the time remaining to the re-determination of the coupon;
        (b) adding the market values of the individual net positions within each band irrespective of whether they are long or short positions to produce a gross position figure;
        (c) multiplying the amount in (b) by the risk percentage for the relevant maturity band in the table below; and
        (d) adding the calculations in (c) to arrive at the General Market Risk requirement.
         
        Zone Time band Risk percentage
        Coupon of 3% or more Coupon of less than 3%
        A 0≤1month 0≤1month 0.00%
        > 1≤3months > 1≤3months 0.20%
        > 3 ≤ 6 months > 3 ≤ 6 months 0.40%
        > 6 ≤ 12 months > 6 ≤ 12 months 0.70%
        B > 1 ≤ 2 years > 1.0 ≤ 1.9 years 1.25%
        > 2 ≤ 3 years > 1.9 ≤ 2.8 years 1.75%
        > 3 ≤ 4 years > 2.8 ≤ 3.6 years 2.25%
        C > 4 ≤ 5 years > 3.6 ≤ 4.3 years 2.75%
        > 5 ≤ 7 years > 4.3 ≤ 5.7 years 3.25%
        > 7 ≤ 10 years > 5.7 7.3 years 3.75%
        > 10 ≤ 15 years > 7.3 9.3 years 4.50%
        > 15 ≤ 20 years > 9.3 10.6 years 5.25%
        > 20 years > 10.6 ≤ 12.0 years 6.00%
          > 12.0 ≤ 20.0 years 8.00%
          > 20 years 12.50%

        • Guidance

          The risk percentages in the table above are designed to reflect the price sensitivity of the positions to changes in the interest rate.

    • Maturity Method

      • PRU A6.2.17

        Under the Maturity Method, the following steps must be carried out:

        (a) the maturity weighted position for each instrument must be calculated by multiplying the market value of each individual long or short net position by the appropriate risk percentage per the table in Rule A5.2.16;
        (b) the sum of the weighted long and the sum of the weighted short positions in each maturity band must be calculated;
        (c) these weighted long and short positions must be matched within a maturity band to give the total matched weighted position in the maturity band and the total unmatched weighted position which will be long or short in the maturity band;
        (d) the matched weighted positions in all maturity bands must be summed;
        (e) the unmatched weighted positions in all the maturity bands must then be matched within a zone leaving an unmatched position for the zone (which will either be short or long); and
        (f) the unmatched positions in each zone must be matched with the unmatched positions in other zones leaving the residual unmatched weighted position.

      • PRU A6.2.18 PRU A6.2.18

        The General Market Risk requirement for each currency must be calculated as the sum of the following:

        (a) 10% of the matched weighted positions in each maturity band;
        (b) 40% of the matched weighted position in zone A;
        (c) 30% of the matched weighted position in zones B and C;
        (d) 40% of the matched weighted position between zones A and B, and between zones B and C;
        (e) 100% of the matched weighted position between zones A and C; and
        (f) 100% of the residual unmatched weighted positions.

        • Guidance

          A worked example under the Maturity Method of the General Market Risk requirement calculation is as follows:

          Zone

          Time band
          (m = months, y = years)

          Aggregate positions
          per time band ($)
          Risk
          percentages
          Aggregate positions per time band – weighted ($)
          (M = matched, U = unmatched)
            By time band By zone Between zones
          Coupon ≥3% Coupon <3% Long Short   Long Short M U M U M U
          A ≤ 1m 0 ≤ 1m 100 -50 0.00% 0.00 0.00 0.00 0.00        
          > 1 and ≤ 3m > 1 and ≤ 3m 200 -100 0.20% -0.20 0.20 0.20 0.20 0.00 1.30    
          > 3 and ≤ 6 m > 3 and ≤ 6 m 300 -200 0.40% 1.20 -0.80 0.80 0.40        
          > 6 and ≤ 12 m > 6 and ≤ 12 m 400 -300 0.70% 2.80 -2.10 2.10 0.70        
                                   
          B > 1 and ≤ 2 y > 1.0 and ≤ 1.9 y 100 -200 1.25% 1.25 -2.50 1.25 -1.25     Zones A&B

          1.30

           
          > 2 and ≤ 3 y > 1.9 and ≤ 2.8 y 200 -300 1.75% 3.50 -5.25 3.50 -1.75 0.00 -5.25  
          > 3 and ≤ 4 y > 2.8 and ≤ 3.6 y 300 -400 2.25% 6.75 -9.00 6.75 -2.25       Zones A&C

          0.00

                                 
          C > 4 and ≤ 5 y > 3.6 and ≤ 4.3 y 100 -100 2.75% 2.75 -2.75 2.75 0.00     Zones B&C

          1.30

           
          > 5 and ≤ 7 y > 4.3 and ≤ 5.7 y 200 -200 3.25% 6.50 -6.50 6.50 0.00      
          > 7 and ≤ 10 y > 5.7 and ≤ 7.3 y 300 -100 3.75% 11.25 -3.75 3.75 7.50        
          > 10 and ≤ 15 y > 7.3 and ≤ 9.3 y 100 -200 4.50% 4.50 -9.00 4.50 -4.50 4.50 8.25    
          > 15 and ≤ 20 y > 9.3 and ≤ 10.6 y 200 -100 5.25% 10.50 5.25 5.25 5.25        
          > 20 y > 10.6 and ≤ 12.0 y 300 -300 6.00% 18.00 -18.00 18.00 0.00        
            > 12 and ≤ 20 y 0 0 8.00%                
            > 20 y 0 0 12.50%                
                                   
          Total               55.35     4.30    

          Total General Market Risk requirement = 10% ($55.35) + 40% ($0.00) + 30% ($0.00 + $4.50) + 40% ($1.30 + $3.95) + 100% ($4.30) + 100% ($0.00) = $13.29

    • Duration Method

      • PRU A6.2.19

        An Authorised Person with the necessary capability may, with the written consent of the Regulator, use the Duration Method, which produces a more accurate measure for General Market Risk than the Maturity Method. An Authorised Person must elect and use the Duration Method on a continuous basis and will be subject to supervisory monitoring of the systems used.

      • PRU A6.2.20

        Under the Duration Method, the following steps must be carried out:

        (a) the duration weighted position for each instrument must be calculated by multiplying the market value of each individual long or short net position by the Modified Duration in years and the assumed interest rate change in the table below;
        (b) the sum of the weighted long and the sum of the weighted short positions in each time band must be calculated;
        (c) these weighted long and short positions must be matched within a maturity band to give the total matched weighted position in the maturity band and the total unmatched weighted position which will be long or short in the maturity band;
        (d) the matched weighted positions in all maturity bands must be summed;
        (e) the unmatched weighted positions in all the maturity bands must then be matched within a zone leaving an unmatched position for the zone (which will either be short or long); and
        (f) the unmatched positions in each zone must be matched with the unmatched positions in other zones leaving the residual unmatched weighted position.
        Zone Modified Duration Assumed move in interest rates
        A 0 ≤ 1 month 1.00%
        > 1 ≤ 3 months 1.00%
        > 3 ≤ 6 months 1.00%
        > 6 ≤ 12 months 1.00%
        B > 1.0 ≤ 1.9 years 0.90%
        > 1.9 ≤ 2.8 years 0.80%
        > 2.8 ≤ 3.6 years 0.75%
        C > 3.6 ≤ 4.3 years 0.75%
        > 4.3 ≤ 5.7 years 0.70%
        > 5.7 ≤ 7.3 years 0.65%
        > 7.3 ≤ 9.3 years 0.60%
        > 9.3 ≤ 10.6 years 0.60%
        > 10.6 ≤ 12.0 years 0.60%
        > 12.0 ≤ 20.0 years 0.60%
        > 20 years 0.60%

         

      • PRU A6.2.21

        For the purposes of this Section Modified Duration is calculated as follows:

        Modified Duration = duration(D) / (1 + r)

        where:

        r = yield to maturity

        Ct = cash payment in time t

        m = total maturity

      • PRU A6.2.22 PRU A6.2.22

        The General Market Risk requirement for each currency must be calculated as the sum of the following:

        (a) 5% of the matched weighted positions in each time band;
        (b) 40% of the matched weighted position in zone A;
        (c) 30% of the matched weighted position in zones B and C;
        (d) 40% of the matched weighted position between zones A and B, and between zones B and C;
        (e) 100% of the matched weighted position between zones A and C; and
        (f) 100% of the residual unmatched weighted positions.

        • Guidance

          A worked example of the General Market Risk requirement calculation under the Duration Method is as follows:

          Zone

          Time band
          (m = months, y = years)

          Aggregate positions
          per time band ($)
          Assumed move
          in interest rates
          (% pa)
          Modified
          duration
          (years)
          Aggregate positions per time band – weighted ($)
          (M = matched, U = unmatched)
            By time band By zone Between zones
          Long Short Long Short M U M U M U
          A ≤ 1m 100 -50 1.00% 0.00 0.00 0.00 0.00 0.00 0.00 1.30    
          > 1 and ≤ 3m 200 -100 1.00% 0.20 0.40 -0.20 0.20 0.20        
          > 3 and ≤ 6 m 300 -200 0.40% 1.00 0.40 1.20 -0.80 0.40        
          > 6 and ≤ 12 m 400 -300 1.00% 0.70 2.80 -2.10 2.10 0.70        
                                   
          B > 1.0 and ≤ 1.9 y 100 -200 0.90% 1.40 1.26 -2.52 1.26 -1.26 0.00 -5.27 Zones A&B
          1.30
           
          > 1 and ≤ 3m 200 -100 1.00% 0.20 0.40 -0.20 0.20 0.20      
          > 2.8 and ≤ 3.6 y 300 -400 0.75% 3.00 6.75 -9.00 6.75 -2.25       Zones A&C 0.00
                                 
          C > 3.6 and ≤ 4.3 y 100 -100 0.75% 3.65 2.74 -2.74 2.74 0.00 4.50 8.89 Zones B&C
          3.97
           
          > 4.3 and ≤ 5.7 y 200 -200 0.70% 4.65 6.51 -6.51 6.51 0.00      
          > 5.7 and ≤ 7.3 y 300 -100 0.65% 5.80 11.31 -3.77 3.77 7.54        
          > 7.3 and ≤ 9.3 y 100 -200 0.60% 7.50 4.50 -9.00 4.50 -4.50        
          > 9.3 and ≤ 10.6 y 200 -100 0.60% 9.75 11.70 -5.85 5.85 5.85        
          > 10.6 and ≤ 12.0 y 0 0 0.60% 11.00 0.00 0.00 0.00 0.00        
          > 12 and ≤ 20 y 300 -300 0.60% 14.50 26.10 -26.10 26.10 0.00        
          > 20 y 0 0 0.60% 22.00 0.00 0.00 0.00 0.00        
                                   
          Total                 64     4.92  

          Total General Market Risk requirement = 5% ($64.10) + 40% ($0) + 30% ($4.50) + 40% ($5.27) + 100% ($0) + 100% ($4.92) = $11.58