PIB A2.1.13 Guidance

An example of the application of PIB Rule A2.1.13(c) is as follows:

a. An Authorised Firm may have a fixed-rate loan portfolio in the Non-Trading Book. Although the Non-Trading Book does not attract a regulatory capital charge for interest rate risk, the portfolio is subject to interest rate risk. Firms may prefer to transfer this risk to the Trading Book where it may be actively managed.
b. The Authorised Firm may transfer this interest rate risk by entering into, for example, a fixed versus floating rate swap between the Trading Book and the Non-Trading Book. The notional long and short positions created as result of the swap are recorded in the Trading Book, and the swap positions may be treated as financial instruments provided that appropriate documentation is in place (see PIB Rule A2.1.14). The General Market Risk requirements associated with the swap legs are allocated to the appropriate Trading BookGeneral Market Risk bucket and thus may reduce the overall General Market Risk requirement in the Trading Book.
c. For an Authorised Firm to undertake such a transaction there should be existing positions in the Trading Book, which result in a sufficient General Market Risk requirement to offset the General Market Risk created as a result of the swap.
Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]