Minimum Capital Requirements for Market Risk

Any reassignment between books must be approved by senior management and SAMA as follows. Any reallocation of securities between the trading book and banking book, including outright sales at arm’s length, should be considered a reassignment of securities and is governed by requirements of this paragraph. (1) Any reassignment must be approved by senior management thoroughly documented; determined by internal review to be in compliance with the bank’s policies; subject to prior approval by SAMA based on supporting documentation provided by the bank; and publicly disclosed. (2) Unless required by changes in the characteristics of a position, any such reassignment is irrevocable. (3) If an instrument is reclassified to be an accounting trading asset or liability there is a presumption that this instrument is in the trading book, as described in [5.9]. Accordingly, in this case an automatic switch without approval of SAMA is acceptable. The treatment specified for internal risk transfers applies only to risk transfers done via internal derivatives trades. The reallocation of securities between trading and banking book should be considered a re-assignment of securities and is governed by [5.16]. 5.17 A bank must adopt relevant policies that must be updated at least yearly. Updates should be based on an analysis of all extraordinary events identified during the previous year. Updated policies with changes highlighted must be sent to SAMA. Policies must include the following: (1) The reassignment restriction requirements in [5.14] through [5.16], especially the restriction that re-designation between the trading book and banking book may only be allowed in extraordinary circumstances, and a description of the circumstances or criteria where such a switch may be considered. (2) The process for obtaining senior management and SAMA approval for such a transfer. (3) How a bank identifies an extraordinary event. (4) A requirement that re-assignments into or out of the trading book be publicly disclosed at the earliest reporting date. Treatment of Internal Risk Transfers 5.18 An internal risk transfer is an internal written record of a transfer of risk within the banking book, between the banking and the trading book or within the trading book (between different desks). 5.19 There will be no regulatory capital recognition for internal risk transfers from the trading book to the banking book. Thus, if a bank engages in an internal risk transfer from the trading book to the banking book (eg for economic reasons) this internal risk transfer would not be taken into account when the regulatory capital requirements are determined. 5.20 For internal risk transfers from the banking book to the trading book, [5.21] to [5.27]apply. Internal risk transfer of credit and equity risk from banking book to trading book.