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