In our previous blog, we discussed how the Fundamental Review of the Trading Book (FRTB) implementation will impact foreign banking entities and US banking entities in areas including trading desk structure, definition, and instruments.

Under the Volcker Rule, the “trading account” definition is a statutory concept to identify transactions that are subject to the final rule’s restrictions on proprietary trading.1  Therefore, trading accounts under Volcker do not identify if the trading account aligns to the trading book or banking book within the bank. FRTB, however, defines a boundary that governs trading book instruments, purpose and interaction between a regulatory trading account and the banking book.2

Trading desk definitions also differ under FRTB and Volcker.  Under Volcker, a trading desk is defined as “the smallest discreet unit of an organization of a banking entity that purchases or sells Financial Instruments for the trading account of the banking entity.”3  Under Volcker’s  Enhanced Minimum Standards for Programmatic Compliance, trading desks are required to have policies and procedures, internal controls, testing, limits, products (such as instruments, strategy, risks, and exposure), defined holding period, authorization procedures, compensation arrangements, and counterparty definitions.4

Under FRTB, a trading desk is defined as a “group of traders or trading accounts that implements a well defined business strategy operating within a clear risk management structure” but subject to regulatory approval of the supervisor for capital purposes.5  Trading desks’ key attributes are a defined group of traders or trading accounts, clear reporting line to senior management and compensation policy linked to pre-established objectives, defined business strategy, clear risk management structure, and supervisory reports (inventory aging, daily limits, intraday limits and respective utilization and breaches, and reports on the assessment of market liquidity) and foreign or commodity positions held in banking book.6

With different trading desk definitions under Volcker and FRTB – and strict trading desk boundaries under FRTB – banks can anticipate a medium to high degree of change as they balance these regulatory requirements.

In the next blog in this series, we will examine how the different rules look and identify instruments in scope.

For more information, see our presentation “How the Fundamental Review of Trading Book Impacts the Volcker Regime Trading Desk Structure.

References:

  1. “Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds (Volcker Rule),” Federal Deposit Insurance Corporation, December 10, 2013. Access at: https://www.fdic.gov/regulations/reform/volcker/rule.html
  2. “Minimum capital requirements for market risk,” Basel Committee on Banking Supervision, Standards, January 2016. Access at: http://www.bis.org/bcbs/publ/d352.pdf
  3. “Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds (Volcker Rule),” Federal Deposit Insurance Corporation, December 10, 2013. Access at: https://www.fdic.gov/regulations/reform/volcker/rule.html
  4. Ibid
  5. “Minimum capital requirements for market risk,” Basel Committee on Banking Supervision, Standards, January 2016. Access at: http://www.bis.org/bcbs/publ/d352.pdf
  6. Ibid

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