Prudential Regulation Authority Rulebook

1.

Institutions shall ensure that an internal hedge shall in particular meet the following requirements:

1. (a) it shall not be primarily intended to avoid or reduce own funds requirements;
2. (b) it shall be properly documented and subject to particular internal approval and audit procedures;
3. (c) it shall be dealt with at market conditions;
4. (d) the market risk that is generated by the internal hedge shall be dynamically managed in the trading book within the authorised limits;
5. (e) it shall be carefully monitored in accordance with adequate procedures.

2.

The requirements of paragraph 1 apply without prejudice to the requirements applicable to the hedged position in the non-trading book.

3.

By way of derogation from paragraphs 1 and 2, when an institution hedges a non-trading book credit risk exposure or counterparty risk exposure using a credit derivative booked in its trading book using an internal hedge, institutions shall ensure that the non-trading book exposure or counterparty risk exposure shall not be deemed to be hedged for the purposes of calculating risk-weighted exposure amounts unless the institution purchases from an eligible third party protection provider a corresponding credit derivative meeting the requirements for unfunded credit protection in the non-trading book. Without prejudice to point (h) of Article 299(2), where such third party protection is purchased and recognised as a hedge of a non-trading book exposure for the purposes of calculating capital requirements, institutions shall ensure that neither the internal nor external credit derivative hedge shall be included in the trading book for the purposes of calculating capital requirements.

[Note: This rule corresponds to Article 106 of the CRR as it applied immediately before revocation by the Treasury.]