The banking book has not been looked at in depth and turnover of trading personnel
raised the issue of unknown trading losses lurking in the banking book. Price testing
of the positions forced the risk practitioner to review the positions and relevant
hedges in the books. In developing techniques to assess the less liquid positions, the
risk practitioner became more familiar with the number and type of transactions on
the banking book and identified liquid positions that were in the banking report as
hedges.
When reviewing the valuation between marked to market and accrual valuation,
the practitioner is able to assure management that there are no unexpected surprises
hidden in the banking books and proper accounting treatment is being followed.
Level of policy in the organization
Regardless of the size of the organization, it is recommended that it develop and
implements a written price testing policy. A policy, if written at a high enough
level, is flexible for local challenges and eliminates the need for multiple policy
developments. This is more challenging the larger and the more global an organization
becomes.
The purpose is to impose consistency across trading desks and products that
have separate challenges. The policies will foster consistency to the approach and
considerations made while developing procedures and the level of documentation
maintained.
In large organizations that are typically product aligned, such a policy provides
consistency across product lines and locations. This supports both business line
and regional reporting requirements. In smaller organizations, or those with fewer
diverse product offerings, the policy should be able to address products without
additional revision. 563
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