Directive 2006/49/EC of the European Parliament and of the Council (repealed)Show full title

PART C Internal Hedges

1. An internal hedge is a position that materially or completely offsets the component risk element of a non‐trading book position or a set of positions. Positions arising from internal hedges are eligible for trading book capital treatment, provided that they are held with trading intent and that the general criteria on trading intent and prudent valuation specified in Parts A and B are met. In particular:

(a)

internal hedges shall not be primarily intended to avoid or reduce capital requirements;

(b)

internal hedges shall be properly documented and subject to particular internal approval and audit procedures;

(c)

the internal transaction shall be dealt with at market conditions;

(d)

the bulk of the market risk that is generated by the internal hedge shall be dynamically managed in the trading book within the authorised limits; and

(e)

internal transactions shall be carefully monitored.

Monitoring must be ensured by adequate procedures.

2. The treatment referred to in point 1 applies without prejudice to the capital requirements applicable to the ‘non‐trading book leg’ of the internal hedge.

3. Notwithstanding points 1 and 2, when an institution hedges a non‐trading book credit risk exposure using a credit derivative booked in its trading book (using an internal hedge), the non‐trading book exposure is not deemed to be hedged for the purposes of calculating capital requirements unless the institution purchases from an eligible third party protection provider a credit derivative meeting the requirements set out in point 19 of Part 2 of Annex VIII to Directive 2006/48/EC with regard to the non‐trading book exposure. Where such third party protection is purchased and is recognised as a hedge of a non-trading book exposure for the purposes of calculating capital requirements, neither the internal nor external credit derivative hedge shall be included in the trading book for the purposes of calculating capital requirements.