Prudential Regulation Authority Rulebook

• CEO (+CFO/FM) + Board
• Dealing / settlement segregation (minimum 4 eyes)

• CEO + CFO (or FM) + Board
• Dealing / settlement segregation (minimum 4 eyes)
• Risk oversight by executive committee / Board ALCO

• (CEO)/CFO + Treasurer + ALM Management ALCO
• Front Office / Back Office segregation
• Independent risk manager/team in second line, reporting to CRO + Board RiskCo

• CFO + Treasurer + ALM + Management ALCO + Daily Treasury Committee
• Front + Middle + Back Office segregation
• Fully independent second line reporting to Risk Director (ALM review in second line)
• EWRM capability

• Commercial (loan book) assets: Minimum 90% on administered rates
• Liabilities: Minimum 90% SDL on administered rates
• Fixed rate lending <=2 years, only if predominantly matched by fixed rate retail deposits of same duration
• Non-administered variable rate (eg base rate/SONIA-linked) lending and funding only if with tracking period limited to <=3 years.
• Internal limits on volume/stock of variable rate tracker assets and liabilities.

• Commercial assets: A minimum of 50% either on administered rates or due to revert to administered rates in the next 12 months and of that a minimum 40% already on administered rates
• Liabilities: Minimum 50% SDL on administered rates
• Fixed rate lending/funding - max 5 years to reprice date (subject to limits)
• Non-administered variable rate (eg base rate/SONIA-linked) lending and funding - max tracking period 5 years.
• Internal limits on volume/stock of variable rate tracker assets and liabilities.

• Commercial assets: A minimum of 40% either on administered rates or due to revert to administered rates in the next 12 months, and of that a minimum 25% already on administered rates.
• Liabilities: Minimum 40% SDL on administered rates
• Internal limits on repricing maturity and volume of new lending/funding at fixed rates.
• Internal limits on reversions to variable rate within a period.
• Internal limits on volume/stock of variable rate tracker assets and liabilities.

• Internal limits controlling level of administered rate assets and liabilities
• Internal limits controlling repricing maturity and volume of new lending/funding at fixed rates
• Internal limits controlling reversions to variable rate within a period.
• Internal limits controlling volume/stock of variable rate tracker assets and liabilities.

• Matching Report + Static Gap analysis (if any fixed rate lending / funding - (monthly)
• Net interest margin analysis and projection
• Basis risk report.
• MTM of fixed rate liquid assets (at least monthly)
• Forward looking corporate plan (incorporating stress scenario)

• Matching Report (min monthly) + Static Gap analysis
• Net interest margin analysis and projection
• Basis risk analysis and projection
• Forward looking corporate plan (incorporating interest rate stress scenario)

• Run-off B/S Gap or VaR / PV01 Analysis (min 2 x monthly)
• NII static / run-off B/S simulation modelling using a range of stressed assumptions (min quarterly)
• Behavioural modelling (prepayment risk)
• Basis risk modelling and projected impact (min 2 years)
• Forward looking corporate plan (incorporating a range of interest rate stress scenarios)

• Run-off B/S Gap or VaR / PV01 Analysis (min weekly)
• Dynamic balance sheet simulation modelling of NII (incorporating future business flows, optionality) under multiple interest rate stress scenarios and yield curves assumptions
• Structural basis risk modelling (using projected business flows)
• Behavioural modelling (NMDs, prepayments)
• Corporate planning system fully integrated with ALM systems (incorporating ‘what if’ analysis and stress testing)

• Management accounting system
• Loan/deposit matching capability (if lending/funding at fixed rates)
• Cashflow projection capability.

• Management accounting system
• Basic ALM IT capable of matching and static/run-off balance sheet modelling
• Cashflow and interest rate basis projection capability

• ALM system capable of static / run-off balance sheet modelling under dynamic rate conditions
• Optionality modelling capability (particularly to capture prepayment propensity)

• ALM system capable of projecting forward balance sheet and simulating different interest rate environments, plus measuring embedded optionality, basis risk, etc.

• Sterling only

• Sterling only

• GBP, EUR, USD only.
• No mismatch
• Min 90%SDL Sterling

• Multi-currency (subject to policy)
• Minimal FX mismatch (subject to limits)

• EV sensitivity limit measured under standard interest rate shock
• NII sensitivity limit (min current and next financial year)
• Minimal gap limits
• Basis risk limits
• Structural risk limits

• EV and minimum 24 month NII sensitivity limits measured under standard interest rate shock
• Low gap bucket limits (to cover residuals, prepayment and pipeline only)
• Basis risk limits
• Structural risk limits

• EV & minimum 24 month NII sensitivity limits measured under standard, bespoke and non-parallel rate shock scenarios
• Gap limits (bucket and cumulative)
• Basis risk limits
• Structural risk limits

• Range of EV and NII sensitivity limits measured under multiple scenarios
• Range of mismatch limits
• Basis risk limits
• Structural risk limits

• Interest rate outlook used for business planning only

• Interest outlook used for pipeline management and business planning only - No positioning for interest rate view

• Interest view used to inform business outlook and minimal open positions (subject to risk limits)

• Interest view used to inform business outlook and strategic/open positions (subject to risk limits)

• Any fixed rate lending matched with fixed rate funding (& vice versa)
• No derivatives

• Fixed interest rates matched product by product (in tranches)
• Simple derivatives, subject to achieving hedge accounting.
• No structural hedging

• Natural hedging (of offsetting balance sheet net mismatch positions)
• Net hedging of rate positions using a range of vanilla instruments
• Minimal open positions (subject to limits) for pipeline and residual balances

• Natural and structural hedging (of balance sheet net mismatch positions)
• Full range of derivative instruments available for hedging
• Open positions (subject to limits)

• None

• None

• Earnings / economic value stabilisation on free reserves – duration set as part of strategic review process and amended at other times only with approval of board. No other material position taking in support of an interest rate view

• Earnings / economic value stabilisation on free reserves – duration set by ALCO/Board. Some position taking in support of an interest rate view subject to agreed limits and appropriate regulatory capital allocation.

• None

• None

• None

• Behavioural modelling of non-maturity deposits
• NII hedging within limits that balance NII stability benefits against EV risks incurred

• None

• Vanilla interest rate swaps
• Vanilla interest rate caps/collars/floors (purchase only)
• FTSE swaps (receive only)

• Vanilla interest rate swaps
• Vanilla interest rate caps/collars /floors (purchase only)
• Swaptions (purchase only)
• FRAs / Futures (purchase only)
• FTSE swaps (receive only)
• FX swaps/forward contracts (purchase only)
• FX options (purchase only)

• All market available instruments, subject to compliance with Section 9A of the 1986 Act

PRICING COMPONENTS

(see Appendix 6 for a glossary of theoretical pricing components, and an additional table linking these to the treasury approaches)

• Marginal cost of funding
• Liquidity cost overlay
• Operational costs

• Marginal cost of funding (adjusted for term)
• Liquidity costs
• Hedging costs
• Operational costs
• Minimum return on Capital

• Cost of core funding (incorporating liquidity, term, optionality, hedging costs)
• Behavioural modelling (prepayment)
• Target return on regulatory capital

• Pricing system (incorporating liquidity, term, currency, optionality, hedging costs)
• Behavioural modelling (prepayment, non-maturity deposits)
• Credit EL estimates
• Target return on economic capital
• FTP system (optional)

• Non-specialist Internal Audit

• Non-specialist Internal Audit supplemented by outsourced/co-sourced specialist support for Treasury

• Specialist IT and Treasury Internal Audit resource (may be outsourced or co-sourced)

• Specialist Treasury systems and controls Internal Audit resource (may be outsourced or co-sourced).

In this table:

ALCO = Assets and Liabilities Committee
HPIs = house price indices
MTM = mark to market
NII = net interest income
NPV = net present value