| 5.5 | Any instrument a bank holds for one or more of the following purposes must, when it is first recognised on its books, be designated as a trading book instrument, unless specifically otherwise provided for in [5.3] or [5.8]:
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| | (1) | short-term resale;
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| | (2) | profiting from short-term price movements;
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| | (3) | locking in arbitrage profits; or
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| | (4) | hedging risks that arise from instruments meeting (1), (2) or (3) above.
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| 5.6 | Any of the following instruments is seen as being held for at least one of the purposes listed in [5.5] and must therefore be included in the trading book, unless specifically otherwise provided for in [5.3] or [5.8]:
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| | (1) | instruments in the correlation trading portfolio;
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| | (2) | instruments that would give rise to a net short credit or equity position in the banking book;2 or
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| | (3) | instruments resulting from underwriting commitments, where underwriting commitments refer only to securities underwriting, and relate only to securities that are expected to be actually purchased by the bank on the settlement date.
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Banks should continuously manage and monitor their banking book positions to ensure that any instrument that individually has the potential to create a net short credit or equity position in the banking book is not actually creating a non-negligible net short position at any point in time.
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| 5.7 | Any instrument which is not held for any of the purposes listed in [5.5] at inception, nor seen as being held for these purposes according to [5.6], must be assigned to the banking book.
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| 5.8 | The following instruments must be assigned to the banking book:
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| | (1) | unlisted equities;
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| | (2) | instruments designated for securitisation warehousing;
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| | (3) | real estate holdings, where in the context of assigning instrument to the trading book, real estate holdings relate only to direct holdings of real estate as well as derivatives on direct holdings;
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| | (4) | retail and small or medium-sized enterprise (SME) credit;
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| | (5) | equity investments in a fund, unless the bank meets at least one of the following conditions:
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| | | (a) | the bank is able to look through the fund to its individual components and there is sufficient and frequent information, verified by an independent third party, provided to the bank regarding the fund’s composition; or
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| | | (b) | the bank obtains daily price quotes for the fund and it has access to the information contained in the fund’s mandate or in the national regulations governing such investment funds;
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| | (6) | hedge funds;
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| | (7) | derivative instruments and funds that have the above instrument types as underlying assets; or
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| | (8) | instruments held for the purpose of hedging a particular risk of a position in the types of instrument above.
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Retail and SME lending commitments are excluded from the trading book.
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| 5.9 | There is a general presumption that any of the following instruments are being held for at least one of the purposes listed in [5.5] and therefore are trading book instruments, unless specifically otherwise provided for in [5.3] or [5.8]:
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| | (1) | instruments held as accounting trading assets or liabilities;3
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| | (2) | instruments resulting from market-making activities;
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| | (3) | equity investments in a fund excluding those assigned to the banking book in accordance with [5.8](5);
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| | (4) | listed equities;4
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| | (5) | trading-related repo-style transaction;5 or
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| | (6) | options including embedded derivatives6 from instruments that the institution issued out of its own banking book and that relate to credit or equity risk.
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Trading-related repo-style transactions comprise those entered into for the purposes of market-making, locking in arbitrage profits or creating short credit or equity positions.
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Liabilities issued out of the bank’s own banking book that contain embedded derivatives and thereby meet the criteria of [5.9](6) should be bifurcated. This means that banks should split the liability into two components: (i) the embedded derivative, which is assigned to the trading book; and (ii) the residual liability, which is retained in the banking book. No internal risk transfers are necessary for this bifurcation. Likewise, where such a liability is unwound, or where an embedded option is exercised, both the trading and banking book components are conceptually unwound simultaneously and instantly retired; no transfers between trading and banking book are necessary.
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An option that manages FX risk in the banking book is covered by the presumptive list of trading book instruments included in [5.9](6). Only with SAMA Written approval may a bank include in its banking book an option that manages banking book FX risk.
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The reference in [5.9](6) that relate to credit or equity risk include; a floor to an equity- linked bond is an embedded option with an equity as part of the underlying, and therefore the embedded option should be bifurcated and included in the trading book.
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| 5.10 | Banks are allowed to deviate from the presumptive list specified in [5.9] according to the process set out below7.
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| | (1) | If a bank believes that it needs to deviate from the presumptive list established in [5.9] for an instrument, it must submit a request to SAMA and receive Written approval. In its request, the bank must provide evidence that the instrument is not held for any of the purposes in [5.5].
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| | (2) | In cases where this approval is not given by SAMA, the instrument must be designated as a trading book instrument. Banks must document any deviations from the presumptive list in detail on an on-going basis.
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