• Transfer of General Market Risk between the Trading Book and the Non-Trading Book

    • Guidance

      1. General Market Risk arising from the Trading Book may hedge Non-Trading Book positions without reference to specific Financial Instruments.
      2. An Authorised Person may achieve the transfer of General Market Risk between the Trading Book and Non-Trading Book by entering into a notional legal agreement between the Trading Book and Non-Trading Book as if they were third parties.

    • PRU A2.1.13 PRU A2.1.13

      An Authorised Person must ensure that:

      (a) a transfer of General Market Risk between its Trading Book and Non-Trading Book is subject to appropriate documentation and evidenced by a clear audit trail;
      (b) positions held in its Non-Trading Book that are being hedged by General Market Risk arising from positions in the Trading Book remain in the Non-Trading Book; and
      (c) the General Market Risk Exposure associated with the positions in the Non-Trading Book is incorporated into the calculation of General Market Risk in the Trading Book.

      • Guidance

        An example of the application of Rule A2.1.13(c) is as follows:

        a. An Authorised Person may have a fixed-rate loan portfolio in the Non-Trading Book. Although the Non-Trading Book does not attract a regulatory capital charge for interest rate risk, the portfolio is subject to interest rate risk. Firms may prefer to transfer this risk to the Trading Book where it may be actively managed.
        b. The Authorised Person may transfer this interest rate risk by entering into, for example, a fixed versus floating rate swap between the Trading Book and the Non-Trading Book. The notional long and short positions created as result of the swap are recorded in the Trading Book, and the swap positions may be treated as Financial Instruments provided that appropriate documentation is in place (see Rule A2.1.14). The General Market Risk requirements associated with the swap legs are allocated to the appropriate Trading Book General Market Risk bucket and thus may reduce the overall General Market Risk requirement in the Trading Book.
        c. For an Authorised Person to undertake such a transaction there should be existing positions in the Trading Book, which result in a sufficient General Market Risk requirement to offset the General Market Risk created as a result of the swap.

    • PRU A2.1.14 PRU A2.1.14

      Appropriate documentation under A2.1.13 must cover:

      (a) details of the instruments or Exposures being transferred and the method used to transfer; and
      (b) the pricing of the transfer.

      • Guidance

        1. Separate documentation need not be produced for every transfer. If the same method is used for a number of transfers, a single document detailing the procedures will suffice. However, an Authorised Person must still be able to distinguish transactions that have been undertaken for risk transfer purposes from other transactions.
        2. Arm's-length prices must be used in any transfer. 'Arm's-length' means the prevailing market price for the particular transaction.