Directive 2006/49/EC of the European Parliament and of the Council (repealed)Show full title

PART D Inclusion In The Trading Book

1. Institutions shall have clearly defined policies and procedures for determining which position to include in the trading book for the purposes of calculating their capital requirements, consistent with the criteria set out in Article 11 and taking into account the institution's risk management capabilities and practices. Compliance with these policies and procedures shall be fully documented and subject to periodic internal audit.

2. Institutions shall have clearly defined policies and procedures for overall management of the trading book. At a minimum these policies and procedures shall address:

(a)

the activities the institution considers to be trading and as constituting part of the trading book for capital requirement purposes;

(b)

the extent to which a position can be marked‐to‐market daily by reference to an active, liquid two-way market;

(c)

for positions that are marked‐to‐model, the extent to which the institution can:

(i)

identify all material risks of the position;

(ii)

hedge all material risks of the position with instruments for which an active, liquid two‐way market exists; and

(iii)

derive reliable estimates for the key assumptions and parameters used in the model;

(d)

the extent to which the institution can, and is required to, generate valuations for the position that can be validated externally in a consistent manner;

(e)

the extent to which legal restrictions or other operational requirements would impede the institution's ability to effect a liquidation or hedge of the position in the short term;

(f)

the extent to which the institution can, and is required to, actively risk manage the position within its trading operation; and

(g)

the extent to which the institution may transfer risk or positions between the non‐trading and trading books and the criteria for such transfers.

3. Competent authorities may allow institutions to treat positions that are holdings in the trading book as set out in Article 57(l), (m) and (n) of Directive 2006/48/EC as equity or debt instruments, as appropriate, where an institution demonstrates that it is an active market maker in these positions. In this case, the institution shall have adequate systems and controls surrounding the trading of eligible own funds instruments.

4. Term trading-related repo‐style transactions that an institution accounts for in its non‐trading book may be included in the trading book for capital requirement purposes so long as all such repo-style transactions are included. For this purpose, trading‐related repo‐style transactions are defined as those that meet the requirements of Article 11(2) and of Annex VII, Part A, and both legs are in the form of either cash or securities includable in the trading book. Regardless of where they are booked, all repo‐style transactions are subject to a non‐trading book counterparty credit risk charge.