Unraveling Proprietary Trading – implementing the Volcker metrics

Posted by on Oct 22, 2012 in Classification, Dodd Frank, P&L Attribution, Regulatory, Risk, Volcker | 0 comments

The Volcker Rule mandates that banking entities cease proprietary trading, subject to certain exceptions for “permitted activities” including market making and risk-mitigating hedging.

The current proposed implementation of the rule includes recommendations for a framework of 17 quantitative metrics to be calculated and analyzed daily, and reported to regulators monthly.

The 17 quantitative metrics are grouped into 5 metrics groups (as listed to the left)

Each metrics group variously seeks to establish that a bank’s risk taking appetite, revenue profile, trading inventory and origination are all consistent with that of a market maker providing liquidity and hedging any residual risks incurred in the provision of this service.

Risk Management: the 4 metrics in this group try to establish that the bank’s trading units retain risk that is not in excess of the size and type required to provide intermediation/market making services to customers.

Sources of Revenue: the 5 metrics in this group try to establish that the bank’s trading units’ revenues are earned primarily from customer revenues (fees, commissions and bid-offer spreads) and not from price movements of retained principal positions.

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For whom the bell tolls…or regulatory reporting compliance

Posted by on Oct 15, 2012 in Regulatory, Uncategorized | 0 comments

For Swap Dealers (SD) and Major Swap Participants (MSP), Friday October 12, 2012 was the effective date for which compliance to the swap public and regulatory reporting rules of the Dodd-Frank Act is required (for interest rate and credit swaps). Many financial institutions have implemented solutions to support these requirements. We published a note (downloadable here) providing an overview of the technical complexities that a reporting solution would need to resolve. Some of these complexities emerge from the following:

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