Policies and procedures for trading book eligibility

89.Clear policies and procedures used to determine the exposures that may be included in, and those that must be excluded from, the trading book for purposes of calculating regulatory capital are critical to ensure the consistency and integrity of a bank’s trading book. The Central Bank must be satisfied that the policies and procedures clearly delineate the boundaries of the bank’s trading book and consistent with the bank’s risk management capabilities and practices. The Central Bank must also be satisfied that transfers of positions between banking and trading books can only occur in a very limited set of circumstances. The Central Bank will require a bank to modify its policies and procedures when they prove insufficient with the general principles set forth in this Standard, or not consistent with the bank’s risk management capabilities and practices.
 

Valuation

90.Prudent valuation policies and procedures form the foundation on which any robust assessment of market risk capital adequacy must be built. For a well-diversified portfolio consisting of highly liquid cash instruments, and without market concentration, the valuation of the portfolio, combined with the minimum quantitative standards may deliver sufficient capital to enable a bank, in adverse market conditions, to close out or hedge its positions in a quick and orderly fashion. However, for less well diversified portfolios, for portfolios containing less liquid instruments, for portfolios with concentrations in relation to market turnover, and/or for portfolios which contain large numbers of positions that are marked-to-model this is less likely to be the case. In such circumstances, the Central Bank will consider whether a bank has sufficient capital. To the extent, if there is a shortfall, the Central Bank will react appropriately. This will usually require the bank to reduce its risks and set higher minimum capital requirements.