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:
