AI Summary of Article 325l General interest rate risk factors
This document outlines the regulatory framework governing interest rate risk factors across different currencies. Institutions are required to create distinct buckets for each currency, encompassing risk factors for various maturities. Delta risk factors must be derived from the lowest credit risk money market instruments, with provisions for alternative sources where necessary. Additionally, sensitivity to inflation and cross-currency basis risks must be calculated and netted within respective currency buckets.
The framework stipulates that options linked to interest rates shall be addressed through implied volatilities, with specific mapping requirements based on maturity alignment. Curvature risk factors will also be managed per currency but are exempt from own funds requirements related to inflation and cross-currency basis risks.
Article 325l General interest rate risk factors
1. For all general interest rate risk factors, including inflation risk and cross-currency basis risk, there shall be one bucket per currency, each containing different types of risk factor.
The delta general interest rate risk factors applicable to interest rate-sensitive instruments shall be the relevant risk-free rates per currency and per each of the following maturities: 0,25 years, 0,5 years, 1 year, 2 years, 3 years, 5 years, 10 years, 15 years, 20 years, 30 years. Institutions shall assign risk factors to the specified vertices by linear interpolation or by using a method that is most consistent with the pricing functions used by the independent risk control function of the institution to report market risk or profits and losses to senior management.
2. Institutions shall obtain the risk-free rates per currency from money market instruments held in the trading book of the institution that have the lowest credit risk, such as overnight index swaps.
3. Where institutions cannot apply the approach referred to in paragraph 2, the risk-free rates shall be based on one or more market-implied swap curves used by the institution to mark positions to market, such as the interbank offered rate swap curves.