## PRU A6.5 PRU A6.5 Commodities Risk Capital Requirement

## Guidance

Section A6.5 presents the method for the calculation of Commodities Risk Capital Requirement for the purpose of Rule 5.7.1(b).

## PRU A6.5.1

An Authorised Person which calculates its Commodities Risk Capital Requirements in accordance with Rule 5.7.1(b) must apply the Rules in this Section.

## Calculation of Commodities Risk Capital Requirement

## PRU A6.5.2

(1) An Authorised Person must calculate its Commodities Risk Capital Requirement by applying the Maturity Ladder approach in Rule A6.5.5 or the Simplified Approach in Rule A6.5.6 to all Non-Trading and Trading Book:(a) commodity positions;(b) commodity Derivatives and off-balance sheet positions that are affected by changes in commodity prices, having derived notional commodity positions; and(c) other positions against which no other Market or Credit Risk Capital Requirement has been applied.(2) An Authorised Person must determine notional commodity positions by converting the commodity Derivatives into notional underlying commodity positions and assigning appropriate maturities in accordance with Rule A6.5.3.## Treatment of commodity Derivatives

## PRU A6.5.3

An Authorised Person must:

(a) incorporate all Futures and forward contracts relating to individual commodities in the measurement system as notional amounts and assigned a maturity with reference to the expiry date;(b) incorporate commodity swaps where one leg is a fixed price and the other the current market price as a series of positions equal to the notional amount of the contract, with one position corresponding to each payment on the swap and slotted into the Maturity Ladder accordingly. The positions will be long positions if the Authorised Person is paying fixed and receiving floating, and short positions if the Authorised Person is receiving fixed and paying floating; and(c) incorporate commodity swaps where the legs are in different commodities in the relevant Maturity Ladder. No offsetting will be allowed in this regard except where the commodities belong to the same sub-category.## PRU A6.5.4 PRU A6.5.4

(1) Subject to (2), an Authorised Person must not net positions in different commodities for the purpose of calculating open positions.(2) An Authorised Person may net positions in different commodities where those commodities:(a) are deliverable against each other; and(b) are in one or more sub-categories of the same category;## Guidance

1. For the purposes of Rule A6.5.4, an example of a category is oil. An example of a sub-category is Brent.2. For the Simplified Approach and the Maturity Ladder approach, long and short positions in each commodity may be reported on a net basis for the purposes of calculating open positions.## Maturity Ladder approach

## PRU A6.5.5 PRU A6.5.5

(1) An Authorised Person which uses the Maturity Ladder approach to calculate the Commodities Risk Capital Requirement must:(a) express each commodity position (spot and forward) in terms of the standard unit of measurement and net long and short positions maturing on the same day or maturing within ten business days of each other in the case of contracts traded in markets with daily delivery dates;(b) allocate the positions remaining after taking the steps in (a) to the appropriate maturity band in the following table:

**Band****Maturity of Position**1 0 to 1 month 2 1 to 3 months 3 3 to 6 months 4 6 to 12 months 5 1 to 2 years 6 2 to 3 years 7 Over 3 years (c) calculate the spread charge each time long and short positions are matched within each band. In each instance, the spread charge equals the matched amount multiplied first by the unit spot price for the commodity and then by a spread rate of 1.5%;(d) calculate a carry charge for each position that is carried across to another maturity band. In each instance, the carry charge equals the carried position multiplied first by the unit spot price for the commodity, then by the carry rate of 0.6% and finally by the number of bands by which the position is carried;(e) repeat (c) if necessary;(f) calculate the outright charge by multiplying all remaining unmatched positions (long plus short, ignoring the sign) by the unit spot price for the commodity, then by 15%; and(g) sum the totals for Bands 2 to 7 referred to in (b), to reach the total requirement.(2) For the purposes of (1)(b), an Authorised Person must:(a) allocate physical stocks to the first maturity band; and(b) set a separate Maturity Ladder for each commodity.## Guidance

The table below illustrates the calculation of the Commodity Risk Capital Requirement on an individual commodity using the Maturity Ladder approach.

## Simplified Approach

## PRU A6.5.6

An Authorised Person using the Simplified Approach to calculate the Commodities Risk Capital Requirement must sum:

(a) 15% of the net position multiplied by the spot price for the commodity; and(b) 3% of the gross position (long plus short, ignoring the sign) multiplied by the spot price of the commodity.