Governance and the trading book policy sGovernance and the trading book policy statement and prudent valuation practices

Attachment A

Governance and the trading book policy statement and prudent valuation practices

Board and senior management responsibilities

1. An ADI’s Board of directors (Board) is responsible for approving strategies and policies with respect to market risk and ensuring that senior management takes the steps necessary to monitor and control these risks.
2. In particular, the Board, or a Board committee, must ensure that the ADI has in place adequate systems to identify, measure and manage market risk, including identifying responsibilities, providing adequate separation of duties and avoiding conflicts of interest. An ADI must inform APRA of all significant changes in these systems and in its market risk profile and must ensure that market risk capital requirements are met on a continuous basis and that intra-day exposures are not excessive.

The trading book

1. An ADI must allocate to the trading book positions in financial instruments, including derivative products and other off-balance sheet instruments, that are held either with trading intent or to hedge other elements of the trading book. Positions held with trading intent are those which:

   1. are held for short-term resale; or
   2. are taken on by the ADI with the intention of benefiting in the short‑term from actual and/or expected differences between their buying and selling prices, or from other price or interest rate variations; or
   3. arise from broking and market-making.

2. For a position to be eligible to receive trading book capital treatment, an ADI must have:

3. a clearly documented trading strategy for the position/instrument or portfolios that has been approved by senior management (which must include the expected holding horizon); and

4. clearly defined policies and procedures for the active management of positions such that:

5. positions are managed on a trading desk;

6. position limits are set and monitored for appropriateness;

7. dealers have the autonomy to enter into and manage positions within agreed limits and according to the agreed strategy;

8. positions are marked-to-market daily and when marking-to-model the parameters are assessed on a daily basis;

9. positions are reported to senior management as an integral part of the institution’s risk management process; and

10. positions are actively monitored with reference to market information sources and assessments are made of the market liquidity or the ability to hedge positions or the portfolio risk profile; this includes assessments of the quality and availability of market inputs to the valuation process, level of market turnover and sizes of positions traded in the market.