8.A Bank must specify risk factors corresponding to each of the commodity markets in which it holds significant positions. A Bank’s commodity risk factors must, at a minimum, include the following:
a.Directional risk, to capture the exposure from changes in spot prices arising from net open positions;
b.Forward gap and interest rate risks, to capture the exposure to changes in forward prices; and
c.Basis risk, to capture the exposure to changes in the price relationships between two similar, but not identical, commodities.
9.For a Bank with relatively limited positions in commodity-based instruments, a less complex specification of risk factors would be acceptable. Such a specification would likely entail one risk factor for each commodity price to which the Bank is exposed. In cases where the aggregate positions are quite small, it might be acceptable to use a single risk factor for a relatively broad sub-category of commodities (for instance, a single risk factor for all types of oil.) For more active trading, the model must also take account of variation in the “convenience yield” between derivatives positions such as forwards and swaps and cash positions in the commodity.