PRU A2.2 PRU A2.2 Trading Book Policy
The requirement for a Trading Book policy is prescribed in Rule A2.1.1.
A Trading Book policy must include clearly defined policies, procedures and methodologies by which the Authorised Person:(a) defines its Trading Book and identifies positions to be included in its Trading Book;(b) allocates positions between the Non-Trading Book and the Trading Book;(c) actively manages and values its positions in the Trading Book;(d) measures its Trading Book risks; and(e) controls transfers of positions between the Non-Trading Book and the Trading Book.
An Authorised Person must obtain the prior written approval of its Governing Body for its Trading Book policy. The Authorised Person must review and where necessary update the policy at least annually. The Authorised Person must obtain the prior written approval of the Governing Body for all significant changes.
PRU A2.2.3 PRU A2.2.3
An Authorised Person must, without undue delay, notify the Regulator when its Governing Body approves the adoption of a Trading Book policy or approves any changes to the policy.
Guidance1. At a minimum, the Regulator expects that a Trading Book policy will address the following:a. the definition of Trading Book and trading strategy, including:i. the activities that the Authorised Person considers to be trading and the types of positions that are to be allocated to the Trading Book for the purposes of calculating its regulatory Capital Requirements;ii. the types of positions that are excluded from the Trading Book; andiii. the procedures to ensure that the criteria by which positions are allocated to the Trading Book are adhered to on a consistent basis, including details on:A. the organisational unit or department within the Authorised Person responsible for monitoring adherence to the Trading Book policy;B. the frequency of monitoring;C. process and methodology of this monitoring; andD. how the continuing appropriateness of allocations is confirmed;b. the extent of active management and valuation, including:i. the extent to which a position can be marked-to-market daily by reference to an active, liquid two-way market;ii. for positions which are marked-to-model, the extent to which the Authorised Person can:A. identify all the material risks of the position;B. hedge the material risks of the position and, where the material risks of the position are hedged, the extent to which hedging instruments used have an active and liquid two-way market; andC. derive reliable external estimates for the key assumptions and parameters used in the model;iii. the extent to which the Authorised Person can, and is required to, generate valuations for the position which can validated externally by its Auditors or by the Regulator in a consistent manner;iv. the extent to which the Authorised Person can, and is required to, maintain documents to support valuations of its Trading Book positions;v. the basis for determining and maintaining valuation adjustments for the purposes of calculating regulatory Capital Requirements;vi. the extent to which legal restrictions or other operational requirements would impede the ability of the Authorised Person to effect an immediate liquidation of the position; andvii. the extent to which the Authorised Person can, and is required to, actively risk manage a position within its trading operations;c. transfers between Non-Trading and Trading Books, including:i. the extent to which an Authorised Person may transfer positions between the Non-Trading Book and the Trading Book and the criteria for such transfers;ii. the procedures to effect such transfers; andiii. the controls in place to prevent inappropriate transfers of positions between the Non-Trading Book and the Trading Book; andd. the following additional considerations:i. whether there are any subsidiaries or offshore branches of the Authorised Person undertaking transactions to be included in the Trading Book. If so, a list of such subsidiaries or branches shall be included, along with a description of the trading activities carried out by such entities;ii. the treatment of inter-desk deals; andiii. the identification and management of structural foreign exchange positions.2. An Authorised Person should prepare its Trading Book policy on a consolidated basis where the Financial Group either manages its trading risk centrally or employs the same risk management techniques across all the entities in the Financial Group. Where a Trading Book policy is prepared on a consolidated basis, an Authorised Person should ensure that its application to the Authorised Person and each of the other entities in the Financial Group is made clear and approved by the Governing Body of the Authorised Person and the Governing Body of each of those entities.