MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4611.12.31derivative financial instruments. Afinancial asset is any asset that is cash,the right to receive cash or anotherfinancial asset; or the contractual rightto exchange financial assets onpotentially favorable terms, or an equityinstrument. A financial liability is thecontractual obligation to deliver cashor another financial asset or toexchange financial liabilities underconditions that are potentiallyunfavorable.4. Positions held with tradingintent are those held intentionally forshort-term resale and/or with the intentof benefiting from actual or expectedshort-term price movements or to lockin arbitrage profits, and may include forexample proprietary positions,positions arising from client servicing(e.g. matched principal brokering) andmarket making.5. The following will be the basicrequirements for positions eligible toreceive trading book capital treatment:a) Clearly documented tradingstrategy for the position/instrument orportfolios, approved by seniormanagement (which would includeexpected holding horizon);b) Clearly defined policies andprocedures for the active managementof the position, which must include:i. positions are managed on atrading desk;ii. position limits are set andmonitored for appropriateness;iii. dealers have the autonomy toenter into/manage the position withinagreed limits and according to theagreed strategy;iv. positions are marked to marketat least daily, and when marking tomodel the parameters must be assessedon a daily basis;v. positions are reported to seniormanagement as an integral part of theinstitution’s risk management process;andvi. positions are actively monitoredwith reference to market informationsources (assessment should be made ofthe market liquidity or the ability tohedge positions or the portfolio riskprofiles). This would include assessingthe quality and availability of marketinputs to the valuation process, level ofmarket turnover, sizes of positionstraded in the market, etc.c) Clearly defined policy andprocedures to monitor the positionsagainst the bank’s trading strategyincluding the monitoring of turnoverand stale positions in the bank’s tradingbook.6. The documentations of the basicrequirements of paragraph 5 should besubmitted to the BSP.7. In addition to the abovedocumentation requirements, the bankshould also submit to the BSP adocumentation of its systems andcontrols for the prudent valuation ofpositions in the trading book includingthe valuation methodologies.B. Measurement of capital charge8. The market risk capital chargeshall be computed according to themethodology set under Subsec. 1115.2of the MORB, subject to certainmodifications as outlined in thesucceeding paragraphs.9. The specific risk weights fortrading book positions in debtsecurities and debt derivatives shalldepend on the third party creditassessment of the issue or the type ofissuer, as may be appropriate, asfollows:Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 35