We have an interesting question from one of our members.

     

"We usually perform OTC FX transactions with clients backed-to-back on the market (with Banks). Now we are going to perform a FX swap (i.e. Spot + forward) JPY/EUR for the Bank account for 1 week at the longest. The purpose is to get EUR place @ CB for LCR compliance purpose (no trading purposes).

Bank's Management think that this should be considered as a trading position and therefore be classified within the Bank's trading book. I'm not an expert of trading book but at first sight I'm not willing to classify this transaction within the TB."

Could you please share your thoughts on this subject? I really appreciate any kind of contribution.

Thanks.

Boris Agranovich

Global Risk Community, Founder

 

You need to be a member of Global Risk Community to add comments!

Join Global Risk Community

Votes: 0
Email me when people reply –

Replies

  • To answer properly needs somewhat more details how will the swap be closed out. If the purpose relate to a reporting compliance on a temporary basis without automatic close from an already unrecoverable commitment the transaction may be classified as suggested by Laurence.

    In other cases it must be classified as a trading book transaction

  • I think its more close to trading transaction, however, the following information  clarify the base for financial instrument classifications and the trading and banking books hope that will help 

     

    quote

    The trading book is an accounting term that refers to assets held by a bank that are regularly traded. The trading book is required under Basel II and III to be marked to market daily. The value-at-risk for assets in the trading book is measured on a ten-day time horizont under Basel II.
    The banking book is also an accounting term that refers to assets on a bank's balance sheet that are expected to be held to maturity. Banks are not required to mark these to market. Unless there is reason to believe that the conter-party will default on its obligation, they are held at historical cost.

    If a client wishes to sell debt securities to a bank instead of taking a loan, the asset will now be assigned to the trading book instead. The bank will then keep specific risk capital for the securities as well as market risk capital.

    The main differences are:
    1. Assets that are held for trading are put in the trading book, assets that are held to maturity are held in the banking book
    2. Assets in the trading book are marked-to-market daily, assets in the banking book are held at historic cost
    3. The value-at-risk for assets in the trading book is calculated at a 99% confidence level based on a 10-day time horizon. The value-at-risk for assets in the banking book are calculated at a 99.9% confidence level on a one-year horizon.
    unqoute
    Sources: 
    "Risk Management and Financial Institutions" (John Hull)
    Moreover, 7 and 7.7  in IFRS also will provide more clarification about financial instruments classifications ,
     
  • Is the risk material ? or a single one-off transaction in EUR/JPY?  Trading Book means all positions in financial instruments and commodities held by an institution either with trading intent or in order to hedge positions held with trading intent;  

    Positions held with trading intent means the following in your case: Proprietary positions and positions arising from client servicing and market making.

    You transaction seems to be used for balance sheet and liquidity management. Why not add it to the non-trading books of ALM..relavent sections of FRTB are section 2 Defining the trading book.

This reply was deleted.

[Free COVID-19 Framework] What's the path to recovery look like?

We created a free presentation (attached), which discusses both global and organizational impacts of the COVID-19 pandemic, along with critical actions organizations should take immediately. This presentation introduces a framework that helps regions and organizations navigate a path to recovery via 9 potential scenarios. These scenarios capture outcomes related to GDP impact, public health response, and economic policies. The presentation also breaks down 6 immediate and critical actions…

Read more…
3 Replies · Reply by Boris Agranovich Jan 2
Views: 23

If risk management is about decision making, are current risk management solutions irrelevant?

Now that the updated COSO and ISO risk management standards emphasize a connection to enterprise objectives and decision making, does this mean ERM and GRC solutions focused on risk registers and regulatory compliance are missing the true value of risk management?Will current risk management solutions evolve to integrate more decision support functionality or will standalone prescriptive analytics and other technology solutions take a more prominent role in enabling risk-informed…

Read more…
3 Replies
Views: 11

A question related to classification of instruments between trading and banking book.

We have an interesting question from one of our members.       "We usually perform OTC FX transactions with clients backed-to-back on the market (with Banks). Now we are going to perform a FX swap (i.e. Spot + forward) JPY/EUR for the Bank account for 1 week at the longest. The purpose is to get EUR place @ CB for LCR compliance purpose (no trading purposes). Bank's Management think that this should be considered as a trading position and therefore be classified within the Bank's trading book.…

Read more…
4 Replies
Views: 29

Plunging oil prices: curse or blessing in disguise?

The recent sudden crash of oil prices has had a major impact on the world economy, leading to many troubled faces in the international arena. The Russians fear the effects of yet another powerful hit on their economy, Venezuela seems to be considering default and the Americans are weary of the consequences for its young and emerging shale oil industry. And then you have the Middle East, where the smallest match is enough to ignite the largest fire. But are these worries really justified or…

Read more…
1 Reply
Views: 5

Introducing the Global Risk Series - Book 1 Risk Management How Tos

Dear GlobalRisk Community member, Our community’s mission is to foster business, networking and educational explorations among members. Learn from some of the top experts in the industry as they clearly explain how to approach the most important Risk management concepts. Check out their expert tips and use the link at the end of each article to navigate back to the website to leave your comment or ask a question. Some of the topics include: How do you Explain Risk Appetite?  How to Prepare a…

Read more…
12 Replies
Views: 52

    About Us

    The GlobalRisk Community is a thriving community of risk managers and associated service providers. Our purpose is to foster business, networking and educational explorations among members. Our goal is to be the worlds premier Risk forum and contribute to better understanding of the complex world of risk.

    Business Partners

    For companies wanting to create a greater visibility for their products and services among their prospects in the Risk market: Send your business partnership request by filling in the form here!