BASEL REFORMS

The interest rate add-on is calculated at the hedging set level. Trades in the same currency are grouped together, their risk positions are summed into three maturity buckets, and the bucket sums feed a regulatory formula that allows partial — but not full — cross-bucket netting. The result is scaled by the supervisory factor to produce the hedging set add-on. </p>

Hedging sets are groups of trades within a netting set for which partial offsetting is permitted. Only trades assigned to the same hedging set can net against one another — trades in different hedging sets contribute independently to the Add-On, with no cancellation between them.

The Maturity Factor (MF) is the third component of the Risk Position. Calculated at the trade level, it scales each trade's contribution to the Add-On by its remaining time horizon. The formula depends on whether the netting set is margined or unmargined.