The trading bookThe trading book

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.

11. To obtain an accurate and fair measure of market risk, an ADI may, subject to prior written approval from APRA, include within its market risk measure certain non-trading instruments which hedge trading activities. Such instruments will be subject to the credit risk capital requirements (refer to APS 112 or APS 113 as appropriate) but not to specific risk capital charges.

12. An ADI that raises funds by the issue of instruments may only include these positions in the trading book if the instrument meets the trading book definition.

13. A banking book exposure hedged using a credit derivative booked in the trading book cannot be treated as hedged for regulatory capital purposes unless an ADI purchases a credit derivative that meets the requirements for recognition for credit risk mitigation purposes from an eligible third-party credit protection seller (refer to Attachment J to APS 112 or Attachment B of APS 113 as appropriate). Where third-party protection is recognised as hedging a banking book exposure for regulatory capital purposes, neither the internal nor external credit derivative hedge can be included in the trading book for regulatory capital purposes.