6.1 Firms must have appropriate systems and processes, proportionate to the nature, scale and complexity of their business, to evaluate and manage interest rate risk in the non-trading book. Examples of interest rate risk in the non-trading book include:

• the mismatch of repricing of assets and liabilities and off balance sheet short and long-term positions (termed ‘repricing risk’);

• hedging exposure to one interest rate with exposure to a rate which reprices under slightly different conditions (‘basis risk’);

• the uncertainties of occurrence of transactions, eg where actual transactions do not equal those that were expected in the future (‘pipeline risk’); and

• consumers redeeming fixed rate products when market rates change (‘optionality risk’).

6.2 The systems and processes should allow the firm to include:

• the ability to measure the exposure and sensitivity of the firm’s activities, if material, to repricing risk, yield curve risk, basis risk and risks arising from embedded optionality (eg pipeline risk, prepayment risk) as well as changes in assumptions (eg those about customer behaviour);

• consideration as to whether a purely static analysis of the impact on its current portfolio of a given shock or shocks should be supplemented by a more dynamic simulation approach; and