I. Purpose a. This appendix sets forth reporting
and recordkeeping requirements that certain banking entities must
satisfy in connection with the restrictions on proprietary trading
set forth in subpart B (“proprietary trading restrictions”). Pursuant
to section 248.20(d), this appendix applies to a banking entity that,
together with its affiliates and subsidiaries, has significant trading
assets and liabilities. These entities are required to (i) furnish
periodic reports to the Board regarding a variety of quantitative
measurements of their covered trading activities, which vary depending
on the scope and size of covered trading activities, and (ii) create
and maintain records documenting the preparation and content of these
reports. The requirements of this appendix must be incorporated into
the banking entity’s internal compliance program under section 248.20.
b. The purpose of this appendix is to assist banking
entities and the Board in:
(1) Better understanding and evaluating
the scope, type, and profile of the banking entity’s covered trading
activities;
(2) Monitoring
the banking entity’s covered trading activities;
(3) Identifying covered trading activities
that warrant further review or examination by the banking entity to
verify compliance with the proprietary trading restrictions;
(4) Evaluating whether the
covered trading activities of trading desks engaged in market making-related
activities subject to section 248.4(b) are consistent with the requirements
governing permitted market making-related activities;
(5) Evaluating whether the covered trading
activities of trading desks that are engaged in permitted trading
activity subject to section 248.4, 248.5, or 248.6(a)-(b) (i.e., underwriting
and market making-related activity, risk-mitigating hedging, or trading
in certain government obligations) are consistent with the requirement
that such activity not result, directly or indirectly, in a material
exposure to high-risk assets or high-risk trading strategies;
(6) Identifying the profile
of particular covered trading activities of the banking entity, and
the individual trading desks of the banking entity, to help establish
the appropriate frequency and scope of examination by Board of such
activities; and
(7)
Assessing and addressing the risks associated with the banking entity’s
covered trading activities.
c. Information
that must be furnished pursuant to this appendix is not intended to
serve as a dispositive tool for the identification of permissible
or impermissible activities.
d. In addition to
the quantitative measurements required in this appendix, a banking
entity may need to develop and implement other quantitative measurements
in order to effectively monitor its covered trading activities for
compliance with section 13 of the BHC Act and this part and to have
an effective compliance program, as required by section 248.20. The
effectiveness of particular quantitative measurements may differ based
on the profile of the banking entity’s businesses in general and,
more specifically, of the particular trading desk, including types
of instruments traded, trading activities and strategies, and history
and experience (e.g., whether the trading desk is an established,
successful market maker or a new entrant to a competitive market).
In all cases, banking entities must ensure that they have robust measures
in place to identify and monitor the risks taken in their trading
activities, to ensure that the activities are within risk tolerances
established by the banking entity, and to monitor and examine for
compliance with the proprietary trading restrictions in this part.
e. On an ongoing basis, banking entities must carefully
monitor, review, and evaluate all furnished quantitative measurements,
as well as any others that they choose to utilize in order to maintain
compliance with section 13 of the BHC Act and this part. All measurement
results that indicate a heightened risk of impermissible
proprietary trading, including with respect to otherwise-permitted
activities under section 248.4 through 248.6(a)-(b), or that result
in a material exposure to high-risk assets or high-risk trading strategies,
must be escalated within the banking entity for review, further analysis,
explanation to Board, and remediation, where appropriate. The quantitative
measurements discussed in this appendix should be helpful to banking
entities in identifying and managing the risks related to their covered
trading activities.
II. Definitions The terms used in this appendix have
the same meanings as set forth in section 248.2 and section 248.3.
In addition, for purposes of this appendix, the following definitions
apply:
Applicability identifies
the trading desks for which a banking entity is required to calculate
and report a particular quantitative measurement based on the type
of covered trading activity conducted by the trading desk.
Calculation period means the period of time for
which a particular quantitative measurement must be calculated.
Comprehensive profit and loss means the net profit or loss of a trading desk’s material sources
of trading revenue over a specific period of time, including, for
example, any increase or decrease in the market value of a trading
desk’s holdings, dividend income, and interest income and expense.
Covered trading activity means
trading conducted by a trading desk under section 248.4, section 248.5,
section 248.6(a), or section 248.6(b). A banking entity may include
in its covered trading activity trading conducted under section 248.3(d),
section 248.6(c), section 248.6(d) or section 248.6(e).
Measurement frequency means the frequency with
which a particular quantitative metric must be calculated and recorded.
Trading day means a calendar
day on which a trading desk is open for trading.
III. Reporting and Recordkeeping a. Scope of Required Reporting
1. Quantitative measurements. Each banking entity made subject
to this appendix by section 248.20 must furnish the following quantitative
measurements, as applicable, for each trading desk of the banking
entity engaged in covered trading activities and calculate these quantitative
measurements in accordance with this appendix:
i. Internal
Limits and Usage;
ii. Value-at-Risk;
iii. Comprehensive Profit and Loss Attribution;
iv. Positions; and
v. Transaction Volumes.
2. Trading desk information. Each banking entity made subject to
this appendix by section 248.20 must provide certain descriptive information,
as further described in this appendix, regarding each trading desk
engaged in covered trading activities.
3. Quantitative
measurements identifying information. Each banking entity made
subject to this appendix by section 248.20 must provide certain identifying
and descriptive information, as further described in this appendix,
regarding its quantitative measurements.
4. Narrative
statement. Each banking entity made subject to this appendix
by section 248.20 may provide an optional narrative statement, as
further described in this appendix.
5. File identifying
information. Each banking entity made subject to this appendix
by section 248.20 must provide file identifying information in each
submission to the Board pursuant to this appendix, including the name
of the banking entity, the RSSD ID assigned to the top-tier banking
entity by the Board, and identification of the reporting period and
creation date and time.
b. Trading Desk Information
1. Each banking entity must provide descriptive
information regarding each trading desk engaged in covered trading
activities, including:
i. Name of the trading desk used internally by
the banking entity and a unique identification label for the trading
desk;
ii. Identification
of each type of covered trading activity in which the trading desk
is engaged;
iii.
Brief description of the general strategy of the trading desk;
iv. A list identifying
each Agency receiving the submission of the trading desk;
2. Indication of whether
each calendar date is a trading day or not a trading day for the trading
desk; and
3. Currency
reported and daily currency conversion rate.
c. Quantitative Measurements
Identifying Informationt
Each banking entity
must provide the following information regarding the quantitative
measurements:
1. An Internal Limits Information Schedule
that provides identifying and descriptive information for each limit
reported pursuant to the Internal Limits and Usage quantitative measurement,
including the name of the limit, a unique identification label for
the limit, a description of the limit, the unit of measurement for
the limit, the type of limit, and identification of the corresponding
risk factor attribution in the particular case that the limit type
is a limit on a risk factor sensitivity and profit and loss attribution
to the same risk factor is reported; and
2. A Risk Factor Attribution Information
Schedule that provides identifying and descriptive information for
each risk factor attribution reported pursuant to the Comprehensive
Profit and Loss Attribution quantitative measurement, including the
name of the risk factor or other factor, a unique identification label
for the risk factor or other factor, a description of the risk factor
or other factor, and the risk factor or other factor’s change unit.
d. Narrative
Statement
Each banking entity made subject
to this appendix by section 248.20 may submit in a separate electronic
document a Narrative Statement to the Board with any information the
banking entity views as relevant for assessing the information reported.
The Narrative Statement may include further description of or changes
to calculation methods, identification of material events, description
of and reasons for changes in the banking entity’s trading desk structure
or trading desk strategies, and when any such changes occurred.
e. Frequency and Method
of Required Calculation and Reporting
A
banking entity must calculate any applicable quantitative measurement
for each trading day. A banking entity must report the Trading Desk
Information, the Quantitative Measurements Identifying Information,
and each applicable quantitative measurement electronically to the
Board on the reporting schedule established in section 248.20 unless
otherwise requested by the Board. A banking entity must report the
Trading Desk Information, the Quantitative Measurements Identifying
Information, and each applicable quantitative measurement to the Board
in accordance with the XML Schema specified and published on the Board’s
website.
f. Recordkeeping
A banking entity must, for any quantitative
measurement furnished to the Board pursuant to this appendix and section
248.20(d), create and maintain records documenting the preparation
and content of these reports, as well as such information as is necessary
to permit the Board to verify the accuracy of such reports, for a
period of five years from the end of the calendar year for which the
measurement was taken. A banking entity must retain the Narrative
Statement, the Trading Desk Information, and the Quantitative Measurements
Identifying Information for a period of five years from the end of
the calendar year for which the information was reported to the Board.
IV. Quantitative Measurements a. Risk-Management
Measurements
1. Internal Limits and Usage
i. Description: For purposes of this appendix,
Internal Limits are the constraints that define the amount of risk
and the positions that a trading desk is permitted to take at a point
in time, as defined by the banking entity for a specific trading desk.
Usage represents the value of the trading desk’s risk or positions
that are accounted for by the current activity of the desk. Internal
limits and their usage are key compliance and risk management tools
used to control and monitor risk taking and include, but are not limited
to, the limits set out in sections 248.4 and 248.5. A trading desk’s
risk limits, commonly including a limit on “Value-at-Risk,” are useful
in the broader context of the trading desk’s overall activities, particularly
for the market making activities under section 248.4(b) and hedging
activity under section 248.5. Accordingly, the limits required under
sections 248.4(b)(2)(iii)(C) and 248.5(b)(1)(i)(A) must meet the applicable
requirements under sections 248.4(b)(2)(iii)(C) and 248.5(b)(1)(i)(A)
and also must include appropriate metrics for the trading desk limits
including, at a minimum, “Value-at-Risk” except to the extent the
“Value-at-Risk” metric is demonstrably ineffective for measuring and
monitoring the risks of a trading desk based on the types of positions
traded by, and risk exposures of, that desk.
A. A banking entity
must provide the following information for each limit reported pursuant
to this quantitative measurement: The unique identification label
for the limit reported in the Internal Limits Information Schedule,
the limit size (distinguishing between an upper and a lower limit),
and the value of usage of the limit.
ii. Calculation
period: One trading day.
iii. Measurement
frequency: Daily.
iv. Applicability: All trading desks
engaged in covered trading activities.
2. Value-at-Risk
i. Description: For purposes of this appendix,
Value-at-Risk (“VaR”) is the measurement of the risk of future financial
loss in the value of a trading desk’s aggregated positions at the
ninety-nine percent confidence level over a one-day period, based
on current market conditions.
ii. Calculation
period: One trading day.
iii. Measurement
frequency: Daily.
iv. Applicability: All trading desks
engaged in covered trading activities.
b. Source-of-Revenue Measurements
1. Comprehensive Profit and
Loss Attribution
i. Description: For purposes of this appendix, Comprehensive Profit and Loss Attribution
is an analysis that attributes the daily fluctuation in the value
of a trading desk’s positions to various sources. First, the daily
profit and loss of the aggregated positions is divided into two categories:
(i) Profit and loss attributable to a trading desk’s existing positions
that were also positions held by the trading desk as of the end of
the prior day (“existing positions”); and (ii) profit and loss attributable
to new positions resulting from the current day’s trading activity
(“new positions”).
A. The comprehensive profit and loss associated
with existing positions must reflect changes in the value of these
positions on the applicable day. The comprehensive profit and loss
from existing positions must be further attributed, as applicable,
to (i) changes in the specific risk factors and other factors that
are monitored and managed as part of the trading desk’s overall risk
management policies and procedures; and (ii) any other applicable
elements, such as cash flows, carry, changes in reserves, and the
correction, cancellation, or exercise of a trade.
B. For the attribution of comprehensive profit
and loss from existing positions to specific risk factors and other
factors, a banking entity must provide the following information for
the factors that explain the preponderance of the profit or loss changes
due to risk factor changes: The unique identification label for the
risk factor or other factor listed in the Risk Factor Attribution
Information Schedule, and the profit or loss due to the risk factor
or other factor change.
C.
The comprehensive profit and loss attributed to new positions must
reflect commissions and fee income or expense and market gains or
losses associated with transactions executed on the applicable day.
New positions include purchases and sales of financial instruments
and other assets/liabilities and negotiated amendments to existing
positions. The comprehensive profit and loss from new positions may
be reported in the aggregate and does not need to be further attributed
to specific sources.
D.
The portion of comprehensive profit and loss from existing positions
that is not attributed to changes in specific risk factors and other
factors must be allocated to a residual category. Significant unexplained
profit and loss must be escalated for further investigation and analysis.
ii. Calculation period: One trading day.
iii. Measurement frequency: Daily.
iv. Applicability: All trading desks engaged in covered trading
activities.
c. Positions and Transaction Volumes Measurements
1. Positions
i.
Description: For purposes of this appendix,
Positions is the value of securities and derivatives positions managed
by the trading desk. For purposes of the Positions quantitative measurement,
do not include in the Positions calculation for “securities” those
securities that are also “derivatives,” as those terms are defined
under subpart A; instead, report those securities that are also derivatives
as “derivatives.”
1 A banking entity must
separately report the trading desk’s market value of long securities
positions, short securities positions, derivatives receivables, and
derivatives payables.
ii. Calculation period: One trading
day.
iii. Measurement frequency: Daily.
iv. Applicability: All trading desks that rely on section 248.4(a)
or section 248.4(b) to conduct underwriting activity or market-making-related
activity, respectively.
2. Transaction Volumes
i.
Description: For purposes of this appendix,
Transaction Volumes measures three exclusive categories of covered
trading activity conducted by a trading desk. A banking entity is
required to report the value and number of security and derivative
transactions conducted by the trading desk with: (i) Customers, excluding
internal transactions; (ii) non-customers, excluding internal transactions;
and (iii) trading desks and other organizational units where the transaction
is booked into either the same banking entity or an affiliated banking
entity. For securities, value means gross market value. For derivatives,
value means gross notional value. For purposes of calculating the
Transaction Volumes quantitative measurement, do not include in the
Transaction Volumes calculation for “securities” those securities
that are also “derivatives,” as those terms are defined under subpart
A; instead, report those securities that are also derivatives as “derivatives.”
2 Further, for purposes of the Transaction
Volumes quantitative measurement, a customer of a trading desk that
relies on section 248.4(a) to conduct underwriting activity is a market
participant identified in section
248.4(a)(7), and a customer of a
trading desk that relies on section 248.4(b) to conduct market making-related
activity is a market participant identified in section
248.4(b)(3).
ii. Calculation period: One trading day.
iii. Measurement frequency: Daily.
iv. Applicability: All trading desks that rely on section 248.4(a)
or section 248.4(b) to conduct underwriting activity or market-making-related
activity, respectively.
