Managing Regulatory Trading Desk Frameworks

Sanjay Sharma and John Beckwith

“There is nothing permanent except change” – Heraclitus

Much of the FRTB’s new paradigm for market risk management revolves around the creation of the RTD. At its core, FRTB’s risk framework calls for the management, reporting and attribution of regulatory capital at the regulatory trading desk (RTD) level. This is a paradigm shift from the current framework of risk and capital attribution at the enterprise level. Concurrent with the new paradigm, management of businesses under the FRTB must be accomplished at the RTD level. This includes decisions such as whether to elect SA or IMA frameworks on a desk-by-desk basis. It also includes decisions regarding how to manage underperforming desks, how to defend against IMA capital cliffs caused by PLA test failures, where to allocate resources and which RTDs require investment, despite sub-par profitability.

Complex decisions regarding trading-desk risk and capital, that are generally made at the enterprise level post-FRTB, will have to be made at the RTD level. Consequently, banks need a new framework for making these decisions in a rational, efficient and transparent manner. This chapter will outline potential frameworks to address