Prudential Regulation Authority Rulebook

1.

Institutions shall have in place clearly defined policies and procedures for the overall management of the trading book. Those policies and procedures shall at least address:

1. (a) the activities which the institution considers to be trading business and as constituting part of the trading book for own funds requirement purposes;
2. (b) the extent to which a position can be marked-to-market daily by reference to an active, liquid two-way market;
3. (c) for positions that are marked-to-model, the extent to which the institution can:
1. (i) identify all material risks of the position;
2. (ii) hedge all material risks of the position with instruments for which an active, liquid two-way market exists;
3. (iii) derive reliable estimates for the key assumptions and parameters used in the model;
4. (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;
5. (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;
6. (f) the extent to which the institution can, and is required to, actively manage the risks of positions within its trading operation.
7. (g) [Note: Provision left blank]

2.

In managing its positions or portfolios of positions in the trading book, the institution shall comply with all the following requirements:

1. (a) the institution shall have in place a clearly documented trading strategy for the position or portfolios in the trading book, which shall be approved by senior management and include the expected holding period;
2. (b) the institution shall have in place clearly defined policies and procedures for the active management of positions or portfolios in the trading book; those policies and procedures shall include the following:
1. (i) which positions or portfolios of positions may be entered into by each trading desk or, as the case may be, by designated dealers;
2. (ii) the setting of position limits and monitoring them for appropriateness;
3. (iii) ensuring that dealers have the autonomy to enter into and manage the position within agreed limits and according to the approved strategy;
4. (iv) ensuring that positions are reported to senior management as an integral part of the institution's risk management process;
5. (v) ensuring that positions are actively monitored with reference to market information sources and an assessment is made of the marketability or hedgeability of the position or its component risks, including the assessment, the quality and availability of market inputs to the valuation process, level of market turnover, sizes of positions traded in the market;
6. (vi) active anti-fraud procedures and controls;
3. (c) the institution shall have in place clearly defined policies and procedures to monitor the positions against the institution's trading strategy, including the monitoring of turnover and positions for which the originally intended holding period has been exceeded.

[Note: This rule corresponds to Article 103 of the CRR as it applied immediately before revocation by the Treasury.]