Banks fear fracturing of Asian trading desks by FRTB

Global banks fear they will be forced to break up their emerging market trading desks to comply with new market risk capital rules, according to conference speakers.

Current structures – in which staff dotted across several offices may report in to a single line manager – may have to be replaced by small, country-specific desks, if each national regulator reacts to the Fundamental Review of the Trading Book (FRTB) by wanting to ring-fence trading operations in their jurisdiction.

“For any bank that has a lot of different locations and particularly a lot of subsidiaries, that is a big problem. Anything we can do to work with our regulators to avoid a complete fragmentation, creating lots of little country desks all over the place, would be fantastic,” Philippe Lintern, global head of market risk at Standard Chartered, told the FRTB Implementation Summit on May 23. “There is a balkanisation nightmare scenario.”

Finalised in January 2016, the FRTB requires banks to divide all their market risk operations into individual trading desks. Each desk must have a designated head, and each trader must belong only to one desk.

Other speakers said banks have a wide range of priorities when deciding their desk structure, including which products they see offering the best business opportunities, which risks need closest monitoring, as well as data availability, implementation cost and capital management requirements. The FRTB could trample on these priorities, banks fear, if different national regulators insist each desk has a local head.

“We are lead-regulated by the Prudential Regulation Authority [PRA] in the UK, so from a PRA and group capital perspective, we can take a cross-business and cross-country view quite easily. But we have large subsidiaries in Hong Kong, Korea and China, and I can imagine all of them are going to want their local versions of FRTB with local versions of the desk,” said Lintern.

Etienne Varloot, global head of market risk at French bank Natixis, told the conference the bank is already able to calculate a discrete risk number for expected shortfall under the current Basel 2.5 framework for all activities in a specific office such as Hong Kong, if requested to do so by the local regulator. This would not require creating a separate trading desk. “But it is to be expected that they will ask for an independent desk,” he warned.

We have large subsidiaries in Hong Kong, Korea and China, and I can imagine all of them are going to want their local versions of FRTB with local versions of the desk

Philippe Lintern, Standard Chartered

This could generate a number of difficulties, Varloot said. At the moment, Hong Kong is the head office for the Asia region and therefore currently aggregates risk for smaller offices such as Beijing, Singapore, South Korea and Taiwan. Varloot said he feared having to set up many very small FRTB desks to provide separate expected shortfall computations to each local supervisor.

Another problem is that the FRTB sets out a much brighter line dividing activities between trading and banking books. Where global banks run small Asian trading operations, teams of just a few staff normally work on both client and internal treasury trades – this might be prohibited by the requirement that any trader should only serve on a single desk.

“Can a trader doing FX trading in Singapore at the same time work for the treasury desk on the banking book? It isn’t clear; you can read the text in two different ways. For the time being, we are going for [the answer] ‘yes they can’, because if not, we are going to have to double the human resources in most of our local branches, which would be crazy – hiring people to do sometimes a couple of trades a month. I don’t think the regulator wants us to go out of business in Moscow or Dubai or wherever,” said Varloot.

The European Commission unveiled its proposal to implement FRTB in November 2016, while the US legislation is still pending.