Minutes of the Trading Book Standing Group meeting held on 16 ...

<strong>Minutes</strong>
<strong>Minutes</strong> <strong>of</strong> <strong>the</strong> <strong>meeting</strong> <strong>of</strong> <strong>the</strong>
TRADING BOOK STANDING GROUP
Held on 16 November 2007 - 1pm to 3pm
At FSA, Conference Room G
Present: FSA
Moyna Mondal (Chair)
Dean Buckner
Gary Dunn
Ian Jack
John Jenkins
Andrea Usai
Apologies:
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Industry
Haakon Skaane Credit Suisse
Horst Kausch HSBC
David Stoten HSBC
June Corpuz Lehmans
Barry Jones Lehmans
Alex Morrall Merrill Lynch
Ralph Rettke-Grover Nomura
Noel Clarken Standard Chartered
Martin E<strong>the</strong>ridge (FSA)
1. Update from last <strong>Standing</strong> <strong>Group</strong>
There were no comments from industry on <strong>the</strong> minutes <strong>of</strong> <strong>the</strong> last
<strong>meeting</strong> in April 2006.
2. <strong>Trading</strong> <strong>Book</strong> <strong>Standing</strong> <strong>Group</strong> web page
JJ presented key issues on: access; web page details; links to minutes
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<strong>of</strong> past <strong>meeting</strong>s and papers available for viewing.
MM asked for feedback on our group sites generally. No members
present at <strong>the</strong> <strong>Trading</strong> <strong>Book</strong> <strong>Standing</strong> <strong>Group</strong> used <strong>the</strong> website. The
FSA sought industry's views on how <strong>the</strong> site could be improved.
Industry suggested:
· Inclusion <strong>of</strong> more useful papers
· Links to o<strong>the</strong>r useful websites
· <strong>Minutes</strong> to be published within 3 weeks <strong>of</strong> <strong>meeting</strong>s
· Use <strong>of</strong> issues log
· Emails to group members when an update to <strong>the</strong> site has been
made.
3. Interest Rate Risk in <strong>the</strong> Non <strong>Trading</strong> <strong>Book</strong>
JJ presented key issues: access to web page covering waiver <strong>of</strong> report
FSA017; content <strong>of</strong> <strong>the</strong> web pages; overview <strong>of</strong> our expectations
regarding waivers.
4. Counterparty Credit Risk (CPCR) – Standard Approach for non
linear products without CAD model approval.
MM presented an issue raised at <strong>the</strong> Credit Risk <strong>Standing</strong> <strong>Group</strong> for
reference only to <strong>the</strong> <strong>Trading</strong> <strong>Book</strong> <strong>Standing</strong> <strong>Group</strong>. The paper,
attached at <strong>the</strong> end <strong>of</strong> <strong>the</strong> minutes, proposes how firms who have no
market risk but only counterparty risk can utilise <strong>the</strong> standardised
approach to credit risk when <strong>the</strong>ir portfolios have a lot <strong>of</strong> non linear
risk factors without gaining CAD1 or CAD2 model approval.
The FSA at present feels that <strong>the</strong>re are only a handful <strong>of</strong> firms who will
want to use this approach, but we seek guidance from industry as to
whe<strong>the</strong>r our assumption is correct.
This paper will be discussed fur<strong>the</strong>r at <strong>the</strong> Credit Risk <strong>Standing</strong> <strong>Group</strong>
in <strong>the</strong> first week <strong>of</strong> December. The final decision on whe<strong>the</strong>r and how
firms can utilise <strong>the</strong> standardised approach without CAD model
approval will reside with <strong>the</strong> Credit Risk <strong>Standing</strong> <strong>Group</strong>. We will
update <strong>the</strong> <strong>Trading</strong> <strong>Book</strong> <strong>Standing</strong> <strong>Group</strong> on <strong>the</strong> discussion and <strong>the</strong>
decision reached.
Points raised by <strong>the</strong> <strong>Trading</strong> <strong>Book</strong> <strong>Standing</strong> <strong>Group</strong> to be forwarded to
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<strong>the</strong> Credit Risk <strong>Standing</strong> <strong>Group</strong>:
· There would be a need for common standards
· There may be many firms who have no market risk yet very
significant non linear risks in counterparty credit risk. These
firms should be assessed just as stringently as for CAD model
recognition. If <strong>of</strong>f <strong>the</strong> shelf models are used <strong>the</strong>ir methodology
should not just be approved as standard "black box" technology
that works, but <strong>the</strong> model should be validated to ensure it
captures all <strong>the</strong> risks needed to calculate counterparty credit
risk.
5. VAR Models IDRC update and discussion
GD explained that <strong>the</strong> final draft guidelines had been published on <strong>the</strong>
BIS website in October. In addition BIS have also issued <strong>the</strong>ir own
impact study which will cover IDRC and EPE modelling. The impact
study questionnaire is not on <strong>the</strong> public BIS website, but has been sent
to supervisors to invite <strong>the</strong>ir regulated firms to take part. They have
requested IDRC data to be calculated for 31 Oct 2007, and <strong>the</strong> final
data submission date is <strong>the</strong> end <strong>of</strong> January 2008.
Firms had been asked to produce IDRC charges using <strong>the</strong>ir current
IDRC models and VaR with <strong>the</strong> additional request that <strong>the</strong>y use <strong>the</strong>
adjusted approach set out in <strong>the</strong> documentation if possible. The data
sought relates to <strong>the</strong> top 500 holdings by issuer toge<strong>the</strong>r with all <strong>the</strong>
longs and shorts for that position aggregated, regardless <strong>of</strong> maturities
and o<strong>the</strong>r details.
Portfolio information and assumptions for each firm's IDRC is to be
sent to Basel for analysis. BIS plans to run <strong>the</strong> portfolio on one or more
"assessment models" using <strong>the</strong> firms' assumptions and also Basel
assumptions.
Industry pointed out that banks not invited to participate have not had
access to <strong>the</strong> questionnaire and <strong>the</strong> instructions. GD is to establish
whe<strong>the</strong>r <strong>the</strong> document can be published on <strong>the</strong> BIS website.
We explained that BIS wanted to have <strong>the</strong> guidance as open as possible
so that all types <strong>of</strong> models could incorporate <strong>the</strong> guidelines, and that
<strong>the</strong> impact study would be a good test <strong>of</strong> this approach. We added that
<strong>the</strong> BIS had set an end <strong>of</strong> January 2008 deadline, however, UK banks
had been asked to return <strong>the</strong> IDRC impact study data by end-December
if possible. The current aim was to publish guidelines by mid 2008.
Industry asked how <strong>the</strong> guidelines would be turned into Handbook text.
We explained that Policy would look at <strong>the</strong> question <strong>of</strong> incorporation
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into <strong>the</strong> CRD.
Industry was interested that fur<strong>the</strong>r consideration be given to
transitional guidelines and <strong>the</strong> potential overlap <strong>of</strong> IDRC and Large
Exposure charges which it felt led to double counting.
GD said that issues such as concentration floors have attracted some
discussion between regulators and firms. They were introduced in <strong>the</strong>
FSA interim approach, and <strong>the</strong> draft guidelines for consultation as a
reasonableness test <strong>of</strong> model output. We added that when <strong>the</strong>
guidelines were finalised <strong>the</strong>y should rectify this aspect.
Industry said that timing was important and that a website entry would
be useful.
6. Update on hypo<strong>the</strong>tical P&L
DB explained <strong>the</strong> background <strong>of</strong> a new rule and reporting standard and
acknowledged <strong>the</strong> burden on firms.
In April FSA wrote to all CAD 2 firms and all those proposing to move
to CAD 2 setting out our requirement and how <strong>the</strong> hypo<strong>the</strong>tical P&L
should be computed, toge<strong>the</strong>r with specific questions.
Discussions had now been <strong>held</strong> with some <strong>of</strong> <strong>the</strong> firms that had
responded.
Our expectation is that within <strong>the</strong> next two weeks an open letter will be
published on <strong>the</strong> website. It should include:
· Our main findings, including <strong>the</strong> wide differences between
firms
· Comment on <strong>the</strong> questions we raised.
DB explained that we see <strong>the</strong> exercise as valuable feedback and a
strong test <strong>of</strong> <strong>the</strong> consistency, or o<strong>the</strong>rwise, amongst firms.
Two responses were consistent relating to:
· Using historic or product centred prices.
· Trades opened on <strong>the</strong> day after a VaR portfolio has been
defined for that day, must not be included.
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There were significant differences in responses to <strong>the</strong> o<strong>the</strong>r questions
including:
· Handling <strong>of</strong> amended trades, refixes and resets.
· Option <strong>the</strong>ta should be included where significant
· Hypo<strong>the</strong>tical calculation should correctly include any closed
trades in VaR at T (i.e. must include p&l from close <strong>of</strong> business
at T, to close <strong>of</strong> business at T+1).
· Reserve valuation adjustments.
7. Any O<strong>the</strong>r business
One group member raised an issue regarding <strong>the</strong> multipliers in BIPRU
7.11. MM reminded <strong>the</strong> group that <strong>the</strong> Credit Risk Mitigation <strong>Standing</strong>
<strong>Group</strong> was <strong>the</strong> best forum for this, but since <strong>the</strong>re had been no <strong>meeting</strong>
<strong>of</strong> this forum for a while, we would be prepared to listen to <strong>the</strong> issue at
<strong>the</strong> <strong>Trading</strong> <strong>Book</strong> <strong>Standing</strong> <strong>Group</strong>.
The group member raised concerns that <strong>the</strong> multiplier in standard rules
was *2*3 (for VaR), which was equivalent to *6 multiplier. He
questioned why this had been incorporated into BIPRU without a
consultation process and considered this to be both burdensome to
firms and super-equivalent to CRD. He asked for this to be reassessed
and changed in time for 1 Jan 08 when BIPRU 7.11 comes into force.
We responded by explaining <strong>the</strong> practicalities <strong>of</strong> potential changes to
BIPRU and asked <strong>the</strong> group member to submit a detailed statement on
this issue that we could consider with colleagues handling this part <strong>of</strong>
BIPRU. This is a topic which one member <strong>of</strong> <strong>the</strong> group is keen to
discuss fur<strong>the</strong>r at <strong>the</strong> next standing group and recommended <strong>the</strong>y
reconvene in early December. MM agreed in principal with this timing
subject to receiving a positive response on this from o<strong>the</strong>r members <strong>of</strong>
<strong>the</strong> group. She reminded <strong>the</strong> group that <strong>the</strong> multiplier issue would need
a wider discussion.
Industry expressed <strong>the</strong> view that <strong>the</strong>re should be a <strong>Standing</strong> <strong>Group</strong>
covering liquidity. We will relay this question to our liquidity policy
colleagues.
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