9 Definition of Trading Desks
57 For the purposes of market risk capital calculations, a trading desk is the level at which model approval is granted for the Internal Models Approach and is defined as a group of traders or trading accounts that implements a well-defined business strategy operating within a clear risk management structure.
58 Trading desks are defined by the AI but subject to the regulatory approval of the HKMA for regulatory capital purposes under the Internal Models Approach.
59 The HKMA will consider the definition of the trading desk as part of the initial model approval for the trading desk, as well as ongoing approval.
The HKMA shall determine, based on the size of the AI’s overall trading operations, whether the proposed trading desk definitions are sufficiently granular.
The HKMA shall review the policy document prepared by the AI documenting how the proposed definition of trading desk meets the criteria listed in this subsection.
60 An AI may further define operational subdesks for internal operational purposes without the HKMA approval.
61 A trading desk for regulatory capital purpose is an unambiguously defined group of traders or trading accounts12.
The trading desk should have one head trader who has direct oversight of the group of traders or trading accounts. The trading desk can have up to two head traders provided their roles, responsibilities and authorities are either clearly separated or one has ultimate oversight over the other.
Each trader or each trading account in the trading desk should have a clearly defined specialty (or specialities).
Each trading account should only be assigned to a single trading desk that has a clearly defined risk scope (e.g. permitted risk class and risk factors) consistent with its pre-established objectives.
There is a presumption that traders (as well as head traders) are allocated to one trading desk. An AI can deviate from this presumption provided it can be justified to the HKMA on the basis of sound management, business and/or resource allocation reasons. Such assignments should not be made for the only
12 A trading account is an indisputable and unambiguous unit of observation in accounting for trading activity.
purpose of avoiding other trading desk requirements (e.g. to optimise the likelihood of success in the backtesting and profit and loss attribution tests).
The trading desk should have a clear reporting line to the senior management, and should have a clear and formal compensation policy clearly linked to the pre-established objectives of the trading desk.
62 A trading desk should have a well-defined and documented business strategy.
There should be a clear description of the economics of the business strategy for the trading desk, its primary activities and trading/hedging strategies.
The management team at the trading desk should have a clear annual plan for the budgeting and staffing of the trading desk.
The documented business strategy of a trading desk should include regular management information reports, covering revenue, costs and risk-weighted assets for the trading desk.
63 A trading desk should have a clear risk management structure.
The AI should identify key groups and personnel responsible for overseeing the risk-taking activities at the trading desk.
A trading desk should clearly define trading limits (e.g. sensitivity or notional limits) based on the business strategy of the trading desk and these limits should be reviewed at least annually by senior management of the AI. In setting limits, the trading desk should have well-defined trader mandates.
A trading desk should produce, at least weekly, appropriate risk management reports. This would include, at a minimum:
– profit and loss reports, which would be periodically reviewed, validated and modified (if necessary) by Product Control; and
– internal and regulatory risk measure reports, including trading desk value-at-risk (VaR) / expected shortfall (ES), trading desk VaR/ES sensitivities to risk factors and backtesting.
64 The AI should prepare, evaluate, and have available for the HKMA the following for all trading desks:
inventory ageing reports;
daily limit reports including exposures, limit breaches, and follow-up action;
reports on intraday limits and respective utilisation and breaches for AIs with active intraday trading; and
reports on the assessment of market liquidity.
65 Any foreign exchange or commodity positions held in the banking book should be included in the market risk capital charge as set out in paragraph 7. For regulatory capital calculation purposes, these positions will be treated as if they were held on notional trading desks within the trading book.
HKMA, uses the Simplified Standardised Approach.
67 An AI should also determine its regulatory capital charge for market risk according to the Standardised Approach at any time at the demand of the HKMA.
68 An AI should calculate the capital charge for market risk with the Standardised Approach for all its trading book positions and the foreign exchange and commodity risks from its banking book positions as the sum of the following three components, as well as any capital surcharge specified elsewhere in the framework:
Sensitivities-based method (SBM) allows the use of sensitivities to capture delta, vega and curvature risks within a prescribed set of risk classes. The SBM entails expanding the use of sensitivities across the Standardised Approach;
Residual risk add-on (RRAO) is introduced to capture any other risks beyond the main risk factors already captured in the sensitivities-based method and the default risk charge. It provides for a simple and conservative capital treatment for the universe of more sophisticated instruments; and
Standardised default risk charge (SA-DRC) is intended to capture jump-to-default risk for equity and credit instruments.
Capital charge under the