Minimum Capital Requirements for Market Risk

When a bank hedges a banking book credit risk exposure or equity risk exposure using a hedging instrument purchased through its trading book (ie using an internal risk transfer), (1) The credit exposure in the banking book is deemed to be hedged for capital requirement purposes if and only if: (a) The trading book enters into an external hedge with an eligible third- party protection provider that exactly matches the internal risk transfer; and (b) The external hedge meets the requirements of paragraphs 9.73 to 9.74 and 9.76 9.77 of the SAMA Minimum Capital Requirements for Market Risk vis-a-vis the banking book exposure 8 . (2) The equity exposure in the banking book is deemed to be hedged for capital requirement purposes if and only if: (a) The trading book enters into an external hedge from an eligible third- party protection provider that exactly matches the internal risk transfer; and (b) The external hedge is recognised as a hedge of a banking book equity exposure. (3) External hedges for the purposes of [5.21](1) can be made up of multiple transactions with multiple counterparties as long as the aggregate external hedge exactly matches the internal risk transfer, and the internal risk transfer exactly matches the aggregate external hedge. 5.22 Where the requirements in [5.21] are fulfilled, the banking book exposure is deemed to be hedged by the banking book leg of the internal risk transfer for capital purposes in the banking book. Moreover both the trading book leg of the internal risk transfer and the external hedge must be included in the market risk capital requirements. 5.23 Where the requirements in [5.21] are not fulfilled, the banking book exposure is not deemed to be hedged by the banking book leg of the internal risk transfer for capital purposes in the banking book. Moreover, the third-party external hedge must be fully included in the market risk capital requirements and the trading book leg of the internal risk transfer must be fully excluded from the market risk capital requirements. 5.24 A banking book short credit position or a banking book short equity position created by an internal risk transfer 9 and not capitalised under banking book rules must be capitalised under the market risk rules together with the trading book exposure. Internal risk transfer of general interest rate risk from banking book to trading book. 5.25 When a bank hedges a banking book interest rate risk exposure using an internal risk transfer with its trading book, the trading book leg of the internal risk transfer is treated as a trading book instrument under the market risk framework if and only if: (1) The internal risk transfer is documented with respect to the banking book interest rate risk being hedged and the sources of such risk; (2) The internal risk transfer is conducted with a dedicated internal risk transfer trading desk which has been specifically approved by SAMA for this purpose; and (3) The internal risk transfer must be subject to trading book capital requirements under the market risk framework on a stand-alone basis for the dedicated internal risk transfer desk, separate from any other Generalised Interest Rate Risk (GIRR) or other market risks generated by activities in the trading book. 5.26 Where the requirements in [5.25] are fulfilled, the banking book leg of the internal risk transfer must be included in the banking book’s measure of interest rate risk exposures for regulatory capital purposes.