Add - On For Interest Rate Derivatives
The add-on for interest rate derivatives is the sum of the add-ons for each hedging set of interest rate derivatives transacted with a counterparty in a netting set.
Interest rate derivatives consist of a separate hedging set for each currency. Interest rate derivatives are divided into three time 'buckets' as follows: less than or equal to one year, greater than one year and lessthanor equal to five years, and more than five years.
The add-on for a hedging set of interest rate derivatives is calculated in two steps:
PRU A4.6.40 PRU A4.6.40
The effective notional is calculated in accordance with the following formula:
i ε (Ccyj, MBk) refers to trades of currency j that belong to maturity bucket k.
The effect of this formula is that the effective notional for each time bucket and currency is the sum of the trade-level adjusted notional amounts multiplied by the supervisory delta adjustments and the maturity factor.
The Authorised Person must aggregate across maturity buckets for each hedging set in accordance with the following formula:
The Authorised Person must then determine the hedging set level add-on in accordance with the following formula:
The Authorised Person must then aggregate the interest rate derivative add-on across hedging sets by simple summation, as follows: