Commodities riskCommodities risk

Commodities risk

1. The standard method also covers the risk of holding positions in commodities, including precious metals (excluding gold), where a commodity is defined as a tradeable physical or energy product, e.g. agricultural products, minerals (including oil), electricity and precious and base metals.

2. If an ADI is exposed to interest rate or foreign exchange risk from funding commodities positions, the relevant positions must be included in the calculation of interest rate and foreign exchange risk.[28]

3. An ADI using the standard method may measure commodities risk using either the maturity ladder approach or the simplified approach.

4. Under these approaches, the ADI may report long and short positions in each commodity on a net basis for the purposes of calculating open positions. Positions in different commodities must not be offset unless they:

5. are deliverable against each other; or

6. are close substitutes for each other and a minimum correlation between price movements of 0.9 can be clearly established over a minimum period of one year. An ADI wishing to use correlation-based offsetting must seek APRA’s written approval.

7. Subject to prior written approval from APRA, an ADI may double-count foreign currency denominated commodities as both a commodity exposure and as a foreign currency exposure.

8. An ADI must first express each commodity position (spot plus forward) in terms of the standard unit of measurement (barrels, kilos, grams, etc). The net position in each commodity is then converted at current rates into Australian dollars.

9. An ADI must include all commodity derivatives and off-balance sheet positions that are affected by changes in commodity prices in the measurement framework. These include commodity futures, commodity swaps and options where the delta-plus method is used.[29] In order to calculate the risk, an ADI must convert commodity derivatives into notional commodities positions and assign them to maturities such that:

10. futures and forward contracts relating to individual commodities are incorporated in the measurement system as notional amounts in terms of the standard units of measurement multiplied by the spot price of the commodity, and are assigned a maturity based on the contract's expiry date;

11. commodity swaps where one leg is a fixed price and the other leg is the current market price are incorporated as a series of positions equal to the notional amount of the contract, with one position corresponding to each payment on the swap and entered into the maturity ladder accordingly. The positions are long positions if the ADI is paying fixed and receiving floating, and short positions if the ADI is receiving fixed and paying floating; and