A Risk Professional's Survival Guide: Applied Best Practices in Risk Management

CHAPTER 10 Market Risk

SifiBank reported $180 billion of trading account assets against $72 billion in trading account liabilities last year in their Capital Markets Division (CMD). CMD provides investment services for a variety of corporate and institutional customers serving as a market maker and earning commissions and fees for service. In its capacity as a market maker for its clients, SifiBank seeks to maintain a neutral stance in the market, using a variety of hedge instruments to offset long/short positions for its clients.

In addition, SifiBank maintains a relatively small proprietary trading department, Trading Services Department (TSD) within CMD that trades a variety of financial instruments with the objective of generating an additional source of profits for SifiBank. TSD has been operating since 2010 and is focused on trading fixed-income, equities, U.S. Treasury futures, and options contracts. TSD grew out of a part of CMD that had a proven track record in understanding relative market movements in commercial banking and fixed income markets, particularly during times of market uncertainty as experienced in the years following the financial crisis of 2008–2009. TSD’s trading positions are shown in Table 10.1. The bank realizes that over time it will need to shift its trading focus into areas that will allow it to comply with the Volcker Rule prohibition on proprietary trading. Despite having returned in excess of 20 percent on capital deployed to its activities, ...