Guidance

1. This Chapter 7 does not impose an explicit Capital Requirement relating to interest rate risk. Rather, the Regulator may impose an Individual Capital Requirement (ICR) under Chapter 10 where it is of the view that the Authorised Person's Capital Requirement is insufficient to address adequately all its risks, and in particular its Exposure to interest rate risk in the Non-Trading Book .
2. Sections 10.3 and 10.4 of Chapter 10 require an Authorised Person to submit IRAP and ICAAP assessments to the Regulator within four months of the end of the firm's financial year. The provisions also require the firm to ensure the assessments are documented in writing and to retain the records for at least six years.
3. An Authorised Person's record of its approach to evaluating and managing interest rate risk in its Non-Trading Book, as part of its ICAAP should cover the following issues:
a. the internal definition of, and boundary between, "Non-Trading Book " and "trading activities" in accordance with Chapter 2 and App2;
b. the definition of economic value and its consistency with the method used to value assets and liabilities (e.g. discounted cashflows);
c. the size and the form of the different shocks to be used for internal calculations;
d. the use of a dynamic and / or static approach in the application of interest rate shocks;
e. the treatment of commonly called "pipeline transactions" (including any related hedging);
f. the aggregation of multi-currency interest rate Exposures;
g. the inclusion (or not) of non-interest bearing assets and liabilities (including capital and reserves);
h. the treatment of current and savings accounts (i.e. the maturity attached to Exposures without a contractual maturity);
i. the treatment of fixed rate assets (liabilities) where customers still have a right to repay (withdraw) early;
j. the extent to which sensitivities to small shocks can be scaled up on a linear basis without material loss of accuracy (i.e. covering both convexity generally and the non-linearity of pay-off associated with explicit Option products);
k. the degree of granularity employed (for example, offsets within a time bucket); and
l. whether all future cash flows or only principal balances are included.