Central assumptionsCentral assumptions

Central assumptions

1. An ADI must have a method of allocating a cash flow profile to each non-market-related item, consisting of a series of notional cash flows and associated dates at which they are assumed to occur.

2. The total value at a non-market-related item’s inception date of all its notional cash flows, each discounted using the NMR curve for its currency, must not be materially different to the consideration paid to establish the item, or the initial book value of the item if there is no such consideration.

3. The notional cash flows of a principal-and-interest item must be classified into notional principal cash flows and notional interest cash flows. The repricing profile of a principal-and-interest item is the set of notional principal cash flows and associated dates, which are called repricing dates. At any date, the future notional principal cash flows must sum to the principal then outstanding.

4. An ADI must have a documented method of determining the notional interest cash flows of a principal-and-interest item based on its notional principal cash flows, such that:

   1. the notional interest cash flows occur on the dates upon which interest is actually required to be paid under the item, except that a notional interest cash flow associated with any notional principal cash flow occurring on the next business day after the calculation date may occur at the same time as the notional principal cash flow; and
   2. projections of notional interest cash flows may be changed only to the extent that the change is necessitated by changes to the item’s repricing profile.

5. An ADI’s augmented banking book is the ADI’s banking book together with an earnings offset, which is a notional principal and interest item. The earnings offset must be calculated as the economic value, as at the beginning of the holding period, of a notional twelve-month, equally weighted, monthly moving average portfolio of fixed-for-floating interest rate swaps. The total principal amount covered by the swaps is equal to the sum of the book value of all banking book items.

6. For the earnings offset, the ADI must choose a repricing profile consisting of at least twelve outgoing notional principal cash flows, spaced evenly over the year following the calculation date, each of magnitude one-twelfth the book value of the banking book at the calculation date. Notional interest cash flows on the earnings offset must be determined in accordance with paragraphs 25 to 27 of this Attachment as if the earnings offset were incepted at the calculation date and a notional principal cash flow occurs, equal to all unpaid, accrued interest at that time.