| 5.25 | When a bank hedges a banking book interest rate risk exposure using an internal risk transfer with its trading book, the trading book leg of the internal risk transfer is treated as a trading book instrument under the market risk framework if and only if:
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| | (1) | The internal risk transfer is documented with respect to the banking book interest rate risk being hedged and the sources of such risk;
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| | (2) | The internal risk transfer is conducted with a dedicated internal risk transfer trading desk which has been specifically approved by SAMA for this purpose; and
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| | (3) | The internal risk transfer must be subject to trading book capital requirements under the market risk framework on a stand-alone basis for the dedicated internal risk transfer desk, separate from any other Generalised Interest Rate Risk (GIRR) or other market risks generated by activities in the trading book.
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| 5.26 | Where the requirements in [5.25] are fulfilled, the banking book leg of the internal risk transfer must be included in the banking book’s measure of interest rate risk exposures for regulatory capital purposes.
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| 5.27 | The SAMA-approved internal risk transfer desk may include instruments purchased from the market (ie external parties to the bank). Such transactions may be executed directly between the internal risk transfer desk and the market. Alternatively, the internal risk transfer desk may obtain the external hedge from the market via a separate non-internal risk transfer trading desk acting as an agent, if and only if the GIRR internal risk transfer entered into with the non-internal risk transfer trading desk exactly matches the external hedge from the market. In this latter case the respective legs of the GIRR internal risk transfer are included in the internal risk transfer desk and the non-internal risk transfer desk.
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Internal risk transfers within the scope of application of the market risk capital requirement.
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| 5.28 | Internal risk transfers between trading desks within the scope of application of the market risk capital requirements (including FX risk and commodities risk in the banking book) will generally receive regulatory capital recognition. Internal risk transfers between the internal risk transfer desk and other trading desks will only receive regulatory capital recognition if the constraints in [5.25] to [5.27] are fulfilled.
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| 5.29 | The trading book leg of internal risk transfers must fulfil the same requirements under [25] as instruments in the trading book transacted with external counterparties.
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Eligible hedges for the CVA capital requirement.
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| 5.30 | Eligible external hedges that are included in the credit valuation adjustment (CVA) capital requirement must be removed from the bank’s market risk capital requirement calculation.
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FX and commodity risk, arising from CVA hedges that are eligible under the CVA standard, are excluded from the bank’s market risk capital requirements calculation
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| 5.31 | Banks may enter into internal risk transfers between the CVA portfolio and the trading book. Such an internal risk transfer consists of a CVA portfolio side and a non-CVA portfolio side. Where the CVA portfolio side of an internal risk transfer is recognised in the CVA risk capital requirement, the CVA portfolio side should be excluded from the market risk capital requirement, while the non-CVA portfolio side should be included in the market risk capital requirement.
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| 5.32 | In any case, such internal CVA risk transfers can only receive regulatory capital recognition if the internal risk transfer is documented with respect to the CVA risk being hedged and the sources of such risk.
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| 5.33 | Internal CVA risk transfers that are subject to curvature, default risk or residual risk add-on as set out in [6] through [9] may be recognised in the CVA portfolio capital requirement and market risk capital requirement only if the trading book additionally enters into an external hedge with an eligible third-party protection provider that exactly matches the internal risk transfer.
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| 5.34 | Independent from the treatment in the CVA risk capital requirement and the market risk capital requirement, internal risk transfers between the CVA portfolio and the trading book can be used to hedge the counterparty credit risk exposure of a derivative instrument in the trading or banking book as long as the requirements of [5.21] are met.
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