Treatment of Internal Risk Transfers

Effective from Dec 28 2022 - Dec 27 2022
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5.18	An internal risk transfer is an internal written record of a transfer of risk within the banking book, between the banking and the trading book or within the trading book (between different desks).
5.19	There will be no regulatory capital recognition for internal risk transfers from the trading book to the banking book. Thus, if a bank engages in an internal risk transfer from the trading book to the banking book (eg for economic reasons) this internal risk transfer would not be taken into account when the regulatory capital requirements are determined.
5.20	For internal risk transfers from the banking book to the trading book, [5.21] to [5.27]apply.
Internal risk transfer of credit and equity risk from banking book to trading book.
5.21	When a bank hedges a banking book credit risk exposure or equity risk exposure using a hedging instrument purchased through its trading book (ie using an internal risk transfer),
	(1)	The credit exposure in the banking book is deemed to be hedged for capital requirement purposes if and only if:
		(a)	The trading book enters into an external hedge with an eligible third- party protection provider that exactly matches the internal risk transfer; and
		(b)	The external hedge meets the requirements of paragraphs 9.73 to 9.74 and 9.76 9.77 of the SAMA Minimum Capital Requirements for Market Risk vis-a-vis the banking book exposure⁸.
	(2)	The equity exposure in the banking book is deemed to be hedged for capital requirement purposes if and only if:
		(a)	The trading book enters into an external hedge from an eligible third- party protection provider that exactly matches the internal risk transfer; and
		(b)	The external hedge is recognised as a hedge of a banking book equity exposure.
	(3)	External hedges for the purposes of [5.21](1) can be made up of multiple transactions with multiple counterparties as long as the aggregate external hedge exactly matches the internal risk transfer, and the internal risk transfer exactly matches the aggregate external hedge.
5.22	Where the requirements in [5.21] are fulfilled, the banking book exposure is deemed to be hedged by the banking book leg of the internal risk transfer for capital purposes in the banking book. Moreover both the trading book leg of the internal risk transfer and the external hedge must be included in the market risk capital requirements.
5.23	Where the requirements in [5.21] are not fulfilled, the banking book exposure is not deemed to be hedged by the banking book leg of the internal risk transfer for capital purposes in the banking book. Moreover, the third-party external hedge must be fully included in the market risk capital requirements and the trading book leg of the internal risk transfer must be fully excluded from the market risk capital requirements.
5.24	A banking book short credit position or a banking book short equity position created by an internal risk transfer⁹ and not capitalised under banking book rules must be capitalised under the market risk rules together with the trading book exposure.

Internal risk transfer of general interest rate risk from banking book to trading book.

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:
	(1)	The internal risk transfer is documented with respect to the banking book interest rate risk being hedged and the sources of such risk;
	(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
	(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.
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.
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.
Internal risk transfers within the scope of application of the market risk capital requirement.
5.28	Internal risk transfers between trading desks within the scope of application of themarket 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.
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.
Eligible hedges for the CVA capital requirement.
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.
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
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.
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.
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.
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.

⁸ With respect to paragraph 9.74 of the SAMA Minimum Capital Requirements for Credit Risk, the cap of 60% on a credit derivative without a restructuring obligation only applies with regard to recognition of credit risk mitigation of the banking book instrument for regulatory capital purposes and not with regard to the amount of the internal risk transfer.
⁹ Banking book instruments that are over-hedged by their respective documented internal risk transfer create a short (risk) position in the banking book.