Restrictions on Moving Instruments Between the Regulatory Books

Effective from Dec 28 2022 - Dec 27 2022
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5.14	Apart from moves required by [5.5] through [5.10], there is a strict limit on the ability of banks to move instruments between the trading book and the banking book by their own discretion after initial designation, which is subject to the process in [5.15] and [5.16]. Switching instruments for regulatory arbitrage is strictly prohibited. In practice, switching should be rare and will be allowed by SAMA only in extraordinary circumstances. Examples are a major publicly announced event, such as a bank restructuring that results in the permanent closure of trading desks, requiring termination of the business activity applicable to the instrument or portfolio or a change in accounting standards that allows an item to be fair-valued through P&L. Market events, changes in the liquidity of a financial instrument, or a change of trading intent alone are not valid reasons for reassigning an instrument to a different book. When switching positions, banks must ensure that the standards described in [5.5] to [5.10] are always strictly observed.
In the context of [5.14], “change in accounting standards” refers to the accounting standards themselves changing, rather than the accounting classification of an instrument changing.
5.15	Without exception, a capital benefit as a result of switching will not be allowed in any case or circumstance. This means that the bank must determine its total capital requirement (across the banking book and trading book) before and immediately after the switch. If this capital requirement is reduced as a result of this switch, the difference as measured at the time of the switch will be imposed on the bank as a disclosed Pillar 1 capital surcharge. This surcharge will be allowed to run off as the positions mature or expire, in a manner agreed with SAMA. To maintain operational simplicity, it is not envisaged that this additional capital requirement would be recalculated on an ongoing basis, although the positions would continue to also be subject to the ongoing capital requirements of the book into which they have been switched.
If an instrument is reclassified for accounting purposes (eg reclassification to accounting trading assets or liabilities through P&L), an automatic prudential switch may be necessary given the requirements set out in [5.5] and [5.10](1). In this situation, The disallowance of capital benefits [5.15] (regarding an additional Pillar 1 capital requirement) as a result of switching positions from one book to another applies without exception and in any case or circumstance. It is therefore independent of whether the switch has been made at the discretion of the bank or is beyond its control, eg in the case of the delisting of an equity.
5.16	Any reassignment between books must be approved by senior management and SAMA as follows. Any reallocation of securities between the trading book and banking book, including outright sales at arm’s length, should be considered a reassignment of securities and is governed by requirements of this paragraph.
	(1)	Any reassignment must be approved by senior management thoroughly documented; determined by internal review to be in compliance with the bank’s policies; subject to prior approval by SAMA based on supporting documentation provided by the bank; and publicly disclosed.
	(2)	Unless required by changes in the characteristics of a position, any such reassignment is irrevocable.
	(3)	If an instrument is reclassified to be an accounting trading asset or liability there is a presumption that this instrument is in the trading book, as described in [5.9]. Accordingly, in this case an automatic switch without approval of SAMA is acceptable.
The treatment specified for internal risk transfers applies only to risk transfers done via internal derivatives trades. The reallocation of securities between trading and banking book should be considered a re-assignment of securities and is governed by [5.16].
5.17	A bank must adopt relevant policies that must be updated at least yearly. Updates should be based on an analysis of all extraordinary events identified during the previous year. Updated policies with changes highlighted must be sent to SAMA. Policies must include the following:
	(1)	The reassignment restriction requirements in [5.14] through [5.16], especially the restriction that re-designation between the trading book and banking book may only be allowed in extraordinary circumstances, and a description of the circumstances or criteria where such a switch may be considered.
	(2)	The process for obtaining senior management and SAMA approval for such a transfer.
	(3)	How a bank identifies an extraordinary event.
	(4)	A requirement that re-assignments into or out of the trading book be publicly disclosed at the earliest reporting date.