27.The Standards allows banks to choose between two options for aggregating the effective notional amounts that are calculated for each maturity category for interest rate derivatives. The primary formula is the following:

28.In this formula, D1 is the effective notional amount for maturity category 1, D2 is the effective notional amount for maturity category 2, and D3 is the effective notional amount for maturity category 3. As defined in the Standards, maturity category 1 is less than one year, maturity category 2 is one to five years, and maturity category 3 is more than five years.

29.As an alternative, the bank may choose to combine the effective notional values as the simple sum of the absolute values of D1, D2, and D3 within a hedging set, which has the effect of ignoring potential diversification benefits. That is, as an alternative to the calculation above, the bank may calculate:

|D1| + |D2| + |D3|
 

This alternative is a simpler calculation, but is more conservative in the sense that it always produces a larger result. To see this, note that the two calculations would give identical results only if the values 1.4 and 0.6 in the first formula are replaced with the value 2.0. Since the actual coefficient values are smaller than 2.0, the first formula gives a smaller result than the second formula. Choosing the second formula is equivalent to choosing to use the first formula with the 1.4 and 0.6 values replaced by 2.0, increasing measured CCR exposure and therefore minimum required capital.