• Add - On For Interest Rate Derivatives

    • PRU A4.6.37

      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.

    • PRU A4.6.38

      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.

    • PRU A4.6.39

      The add-on for a hedging set of interest rate derivatives is calculated in two steps:

    • Step 1

      • PRU A4.6.40 PRU A4.6.40

        The effective notional is calculated in accordance with the following formula:

        where:
        i ε (Ccyj, MBk) refers to trades of currency j that belong to maturity bucket k.

        • Guidance

          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.

    • Step 2

      • PRU A4.6.41

        The Authorised Person must aggregate across maturity buckets for each hedging set in accordance with the following formula:

      • PRU A4.6.42

        The Authorised Person must then determine the hedging set level add-on in accordance with the following formula:

      • PRU A4.6.43

        The Authorised Person must then aggregate the interest rate derivative add-on across hedging sets by simple summation, as follows: