Standards for Assigning Instruments to the Regulatory Books

There is a general presumption that any of the following instruments are being held for at least one of the purposes listed in [5.5] and therefore are trading book instruments, unless specifically otherwise provided for in [5.3] or [5.8]: (1) instruments held as accounting trading assets or liabilities; 3 (2) instruments resulting from market-making activities; (3) equity investments in a fund excluding those assigned to the banking book in accordance with [5.8](5); (4) listed equities; 4 (5) trading-related repo-style transaction; 5 or (6) options including embedded derivatives 6 from instruments that the institution issued out of its own banking book and that relate to credit or equity risk. Trading-related repo-style transactions comprise those entered into for the purposes of market-making, locking in arbitrage profits or creating short credit or equity positions. Liabilities issued out of the bank’s own banking book that contain embedded derivatives and thereby meet the criteria of [5.9](6) should be bifurcated. This means that banks should split the liability into two components: (i) the embedded derivative, which is assigned to the trading book; and (ii) the residual liability, which is retained in the banking book. No internal risk transfers are necessary for this bifurcation. Likewise, where such a liability is unwound, or where an embedded option is exercised, both the trading and banking book components are conceptually unwound simultaneously and instantly retired; no transfers between trading and banking book are necessary. An option that manages FX risk in the banking book is covered by the presumptive list of trading book instruments included in [5.9](6). Only with SAMA Written approval may a bank include in its banking book an option that manages banking book FX risk. The reference in [5.9](6) that relate to credit or equity risk include; a floor to an equity- linked bond is an embedded option with an equity as part of the underlying, and therefore the embedded option should be bifurcated and included in the trading book.