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  • Policies and Procedures

    • CA-5.1.6

      Policies and procedures must, at a minimum, address the following:

      (a) The activities the Islamic bank licensee considers to be trading and as constituting part of the trading book for regulatory capital purposes;
      (b) The extent to which an exposure can be marked-to-market daily by reference to an active, liquid two-way market;
      (c) For exposures that are marked-to-model, the extent to which the Islamic bank licensee can:
      (i) Identify the material risks of the exposure;
      (ii) Hedge (Sharia compliant hedging) the material risks of the exposure and the extent to which hedging instruments would have an active, liquid two-way market; and
      (iii) Derive reliable estimates for the key assumptions and parameters used in the model;
      (d) The extent to which the Islamic bank licensee can and is required to generate valuations for the exposure that can be validated by external parties in a consistent manner;
      (e) The extent to which legal restrictions or other operational requirements would impede the Islamic bank licensee's ability to effect an immediate liquidation of the exposure;
      (f) The extent to which the Islamic bank licensee is required to, and can, actively risk manage the exposure within its trading operations; and
      (g) The criteria for and the extent to which the Islamic bank licensee may transfer risk or exposures between the banking and the trading books.

      The list above is not intended to provide a series of tests that a product or group of related products must pass to be eligible for inclusion in the trading book. Rather, the list provides a minimum set of key points that must be addressed by the policies and procedures for overall management of an Islamic bank licensee's trading book.

      January 2015

    • CA-5.1.7

      The basic requirements for positions eligible to receive trading book capital treatment are:

      (a) Clearly documented trading strategy for the position/instrument or portfolios, approved by senior management (which would include expected holding horizon);
      (b) Clearly defined policies and procedures for the active management of the position, which must include the following points:
      (i) Positions are managed on a trading desk;
      (ii) Position limits are set and monitored for appropriateness;
      (iii) Dealers have the autonomy to enter into/manage the position within agreed limits and according to the agreed strategy;
      (iv) Positions are marked to market at least daily and when marking to model the parameters must be assessed on a daily basis;
      (v) Positions are reported to senior management as an integral part of the Islamic bank licensee's risk management process; and
      (vi) Positions are actively monitored with reference to market information sources (assessment must be made of the market liquidity or the ability to hedge positions or the portfolio risk profiles). This includes assessing the quality and availability of market inputs to the valuation process, level of market turnover, sizes of positions traded in the market, etc.; and
      (c) Clearly defined policy and procedures to monitor the positions against the Islamic bank licensee's trading strategy including the monitoring of turnover and stale positions in the Islamic bank licensee's trading book.
      January 2015