PIB 7.2 PIB 7.2 Stress Testing for Non-Trading Book Interest Rate Risk
Authorised Firmmust carry out an evaluation of its Exposureto the interest rate risk arising from its Non-Trading Bookactivities. An Authorised Firmwith balance sheet positions in different currencies must measure its risk Exposuresin each of the material currencies.
PIB 7.2.2(1) The evaluation under PIB Rule 7.2.1 must cover the effect of a sudden and unexpected parallel change in interest rates of 200 basis points in both directions.(2) An
Authorised Firmmust apply a 200 basis point shock to each material currency Exposureit faces as part of its Non-Trading Book.
PIB 7.2.3 PIB 7.2.3
Authorised Firmmust immediately notify the DFSAif any evaluation under this section suggests that, as a result of the change in interest rates described in PIB Rule 7.2.2, the economic value of the firm would decline by more than 20% of its Capital Resources.
PIB 7.2.3 Guidance
For the purposes of PIB Rule 7.2.1, an
Authorised Firmshould consider each currency accounting for 5% or more of its Non-Trading Bookassets or Non-Trading bookliabilities as a material currency Exposure.
PIB 7.2.4 Frequency of Stress Testing
Authorised Firmmust carry out the evaluations required by PIB Rule 7.2.1 as frequently as necessary for it to be reasonably satisfied that it has at all times a sufficient understanding of the degree to which it is exposed to the risks referred to in that PIB Ruleand the nature of that Exposure. In any case it must carry out those evaluations no less frequently than required by PIB Rule 7.2.6.
In order to carry out effectively the stress testing requirements specified in PIB Rule 7.2.2, an
Authorised Firmmust include appropriate scenarios into its stress testing programmes for measuring its vulnerability to loss arising from the impact of adverse interest rate movements on its Non-Trading Bookstructure.
PIB 7.2.6 PIB 7.2.6(1) Subject to (2), the minimum frequency of the evaluation referred to in PIB Rule 7.2.1 is once each year.(2) The minimum frequency of an evaluation of the effect of a sudden and unexpected parallel change in interest rates as referred to in PIB Rule 7.2.2 is once each quarter.
PIB 7.2.6 Guidance
For the purposes of PIB Rule 7.2.6, an
Authorised Firmshould consider the standards for stress testing recommended in the paper published by the Basel Committee for BankingSupervision — Principlesfor management and supervision of interest rate risk — in July 2004. In particular, an Authorised Firmshould include the technical specifications of a standardised interest rate shock detailed in Annex 3 of that paper as part of its systems for measurement of interest rate risk in the Non-Trading Book.