VCLCkLk kULL SCML IAC1S

Chandra S khandrlka
volcker 8ule
osL nanclal crlsls we have wlLnessed a spaLe of regulauon. volcker rule has come lnLo eecL Lhls
year and focuslng on resLralnlng proprleLary Lradlng. 1o do so lL has asked banks Lo gaLher
quanuLauve meLrlcs as evldence Lo supporL Lhelr Lradlng sLraLegles.

ln Lhls arucle l wlll go over how volcker meLrlcs can be undersLood ln Lhls framework.
MarkeL Maklng only - no rop 1radlng
8eporL CuanuLauve MeLrlcs Lo prove markeL maklng
uevelop process Lo esumaLe 8Ln1u (8easonably expecLed near 1erm uemand)
l Lhlnk volcker meLrlc reporung has some pros and cons. ln Lerms of pros, lL wlll creaLe an
envlronmenL of beuer compllance and more overslghL on rlsk Laklng. Cn Lhe oLher hand, lL ls almlng
more on Lhe sympLom of proprleLary Lradlng raLher Lhan worklng Lowards Lhe Lransparency.
l personally belleve, uodd lrank acL requlremenLs Lowards reporung Lradlng acuvlLy aL varlous Swap
deposlLorles ls a greaL sLep Lowards Lransparency. 8egulaLors should analyze Lhls daLa Lo undersLand
Lhe banks raLher Lhan addlng draconlan rules. ln Lhe long run l belleve volcker rule mlghL go away.
MarkeL Maklng only
Secuon 619 of Lhe uodd lrank AcL (also known as Lhe volcker 8ule) lnLroduced a general prohlbluon on proprleLary Lradlng, buL
Lhe regulauons lmplemenung Lhe law proved exLraordlnarlly dlmculL Lo consLrucL ln a manner LhaL accommodaLed Lhe
language and lnLenL of Lhe sLaLuLe - noLably provlslons allowlng banks Lo conunue underwrlung, markeL maklng, and rlsk-
mlugaung hedglng acuvlues.

lor a bank Lo be dened as markeL maklng enuLy volcker rule has provlded some guldance around who ls a cusLomer, 1radlng
desk, uemonsLrable analysls and ArblLrage.

1rad|ng Desk: 1he smallesL dlscreLe unlL of organlzauon of a banklng enuLy LhaL purchases or sells nanclal lnsLrumenLs for Lhe
Lradlng accounL of Lhe banklng enuLy or lLs amllaLes. 1radlng desk does noL capLure muluple levels ln Lhe organlzauon. '

1hls guldance can be consLrued as for lnsLance, a Large bank A makes markeL ln lnLeresL 8aLe derlvauve producLs ln varlous
currencles. 1o be more clear, Lhls bank Lrades, lnLeresL raLe swaps, Swapuons, caps and oors and oLher exouc producLs ln
uSu, Lu8, C8, Lu8 and oLher currencles. ln general 8anks sLrucLure Lhelr Lradlng desks by producL, currency and some umes
maLurlLy of Lhe derlvauve. ln Lhls scenarlo, a bank can and should have muluple desks. 1hen Lhls wlll lead Lo snowballlng of
reporung requlremenLs. 1o prevenL Lhls banks mlghL end up lumplng Lhe desks LogeLher. 1hls wlll lead Lo a slLuauon where Lhe
reporLed CuanuLauve meLrlcs make no sense."

Ak8I1kAGL: A Lradlng desk would noL quallfy for Lhe markeL-maklng exempuon lf lL ls wholly or prlnclpally engaged ln
arblLrage Lradlng or oLher Lradlng LhaL ls noL ln response Lo, or drlven by, Lhe demands of cllenLs, cusLomers or counLerparues.

DLMCNS1kA8LL ANALSIS: uemonsLrable analysls musL cover Lhe followlng facLors: hlsLorlcal cusLomer demand, currenL
lnvenLory of nanclal lnsLrumenLs, and markeL and oLher facLors regardlng Lhe amounL, Lypes and rlsks of or assoclaLed wlLh
nanclal lnsLrumenLs ln whlch Lhe Lradlng desk makes a markeL, lncludlng Lhrough block Lrades.








MarkeL Maklng only
CLlLn1, CuS1CML8 C8 CCun1L8A81?: lor Lhe markeL maklng-relaLed permlued acuvlLy, cllenL, cusLomer or counLerparLy
refers Lo markeL paruclpanLs LhaL make use of Lhe banklng enuLy's markeL maklng-relaLed servlces by obLalnlng such servlces,
respondlng Lo quoLauons, or enLerlng lnLo a conunulng relauonshlp wlLh respecL Lo such servlces
1. A Lradlng desk may engage ln lnLerdealer Lradlng Lo meeL Lhe reasonably expecLed near Lerm demands of lLs cllenLs,
cusLomers or counLerparues, lncludlng currenL demand, unwlnd or sell posluons acqulred from cllenLs, cusLomers or
counLerparues, or engage ln rlsk-mlugaung or lnvenLory managemenL Lransacuons. Powever, a Lradlng desk or oLher
organlzauonal unlL of anoLher banklng enuLy ls noL a cllenL, cusLomer or counLerparLy of Lhe Lradlng desk lf LhaL oLher
enuLy has Lradlng asseLs and llablllues of $30 bllllon or more, unless:
2. 1he Lradlng desk documenLs how and why a parucular Lradlng desk or oLher organlzauonal unlL of Lhe enuLy should be
LreaLed as a cllenL, cusLomer, or counLerparLy of Lhe Lradlng desk for purposes of markeL maklng-relaLed permlued
acuvlLy, or

3. 1he purchase or sale by Lhe Lradlng desk ls conducLed anonymously on an exchange or slmllar Lradlng faclllLy LhaL permlLs
Lradlng on behalf of a broad range of markeL paruclpanLs.

volcker 8ule enforcemenL ls havlng lmpllcauons around how Lradlng desks are organlzed for Lransacung wlLh Lhelr cusLomers.
lnLeresungly, Lraders who are compensaLed for Laklng rlsks for Lhe rm are now allowed Lo do markeL maklng noL rlsk Laklng
and rlsk opumlzlng. 1hls creaLes a slLuauon for Lrader where he has Lo prove vla demonsLrable evldence why and how he ls
carrylng ouL parucular Lransacuon. ln such a scenarlo do you sull need a human Lo Lrade. Shouldn'L'L we sLarL Lhlnklng of
brlnlng 8C8C1S Lo Lhe [ob. 1hey wlll Lake every lnsLrucuon ln leuer and splrlL.


8eporL CuanuLauve MeLrlcs Lo prove markeL maklng

uanntanve Metr|c 8us|ness Un|t re|ated
va8 and SLressed va8 8lsk ManagemenL
8lsk lacLor Sensluvlues 8lsk ManagemenL
8lsk and osluon LlmlLs usage 8lsk ManagemenL
Comprehenslve &L Aurlbuuon llnance
lnvenLory 1urnover Cperauons
lnvenLory Aglng Cperauons
CusLomer laclng 1rade 8auo Cperauons
Lach banklng enuLy dlrecLly supervlsed by Lhe lederal 8eserve LhaL meeLs relevanL Lhresholds specled ln Lhe rule musL
furnlsh Lhe followlng quanuLauve measuremenLs for each of lLs Lradlng desks engaged ln covered Lradlng. lor domesuc
enuues, reporL Lhe LoLal Lradlng asseLs and llablllues on a world-wlde consolldaLed basls. lorelgn enuues should reporL
Lhelr LoLal Lradlng asseLs and llablllues for Lhelr comblned u.S operauons only

lederal 8eserve ls looklng Lo undersLand Lhe naLure of buslness by looklng aL Lhe followlng meLrlcs from each
Lradlng desk. 1hese meLrlcs are dlsLrlbuLed across 8lsk managemenL, llnance and Cperauons groups wlLh ln
each book. l Lhlnk, meLrlcs from operauons group LhaL look aL lnvenLory provlde deLalls of who Lhe Lradlng desk
ls engaged wlLh and L aurlbuuon from nance glves lnslghL Lo how much money ls made and 8lsk measures
from 8lsk ManagemenL provldes lnslghLs Lo Lhe magnlLude of 8lsk and poLenual losses.
Lach of Lhese meLrlcs alone cannoL provlde a plcLure of wheLher a desk ls markeL maklng or rop Lradlng. 8uL
LogeLher Lhey can help ln palnung a coherenL sLory.
CuanuLauve meLrlcs
Metr|c 1: Vak and Stressed Vak. When reporung Lhe va8 and SLress va8, enuues should reecL a
loss ln a Lradlng unlL LhaL ls expecLed Lo be exceeded less Lhan 1 of Lhe ume over a one-day
perlod. 8anklng enuues should compuLe and reporL va8 and SLress va8 conslsLenLly wlLh federal
regulaLory caplLal requlremenLs. lf a Lradlng unlL does noL have a sLandalone va8 or SLress va8
calculauon, buL ls parL of a larger aggregauon of posluons for whlch a va8 or sLress va8
calculauon ls performed, a va8 or SLress va8 calculauon LhaL lncludes only Lhe Lradlng desk's
holdlngs musL be performed conslsLenL wlLh Lhe va8 or SLress va8 model and meLhodology used
for Lhe larger aggregauon of posluons.
volcker rule ls clearly en[olnlng va8 aL Lradlng uesk level raLher Lhan 8uslness unlL level". 1o a
common markeL paruclpanL lL ls very clear why va8 and SLressed va8 are needed. As Lhese Lwo
lndlcaLors glves Lhe magnlLude of loss LhaL a desk can lncur over a 1 day perlod.
8anks wlLh blg Lradlng desks wlll have large va8 and small Lradlng desks wlll have small va8. 1hls
ls pure funcuon of how much rlsk ls reLalned on Lhe poruollo and rlsk appeuLe of Lhe 8uslness.
MarkeL maklng desk should have small va8 noL large slzed va8 as Lhey are golng Lo ouLlay Lhe
rlsks ln Lhe lnLer dealer markeL for faclllLaung cllenL Lrades.
CuanuLauve MeLrlcs
Metr|c 2: k|sk Iactor Sens|nv|ty (kIS) :8eporL Lhe rlsk facLor sensluvlues LhaL are monlLored and managed as parL of Lhe
Lradlng desk's overall rlsk managemenL pollcy. 1he number and Lype of 8lsk lacLor Sensluvlues LhaL are monlLored and
managed by a Lradlng desk wlll depend on Lhe expllclL rlsks assumed by Lhe Lradlng desk. ln general, however, reporLed
8lsk lacLor Sensluvlues musL be sumclenLly granular Lo accounL for a preponderance of Lhe expecLed prlce varlauon ln
Lhe Lradlng desk's holdlngs. 1radlng desks musL Lake lnLo accounL any relevanL facLors ln calculaung 8lsk lacLor
Sensluvlues, lncludlng, for example, Lhe followlng wlLh respecL Lo parucular asseL classes
Commod|ty der|vanve pos|nons: rlsk facLors wlLh respecL Lo Lhe relaLed commodlues seL ouL ln 17 Cl8 20.2, Lhe
maLurlLy of Lhe posluons, volaullLy and/or correlauon sensluvlues (expressed ln a manner LhaL demonsLraLes any
slgnlcanL non-llnearlues), and Lhe maLurlLy prole of Lhe posluons,
Cred|t pos|nons: rlsk facLors wlLh respecL Lo credlL spreads LhaL are sumclenLly granular Lo accounL for speclc credlL
secLors and markeL segmenLs, Lhe maLurlLy prole of Lhe posluons, and rlsk facLors wlLh respecL Lo lnLeresL raLes of all
relevanL maLurlues,
Cred|t-re|ated der|vanve pos|nons: rlsk facLor sensluvlues, for example credlL spreads, shls (parallel and non- parallel)
ln credlL spreads -- volaullLy, and/or correlauon sensluvlues (expressed ln a manner LhaL demonsLraLes any slgnlcanL
non-llnearlues), and Lhe maLurlLy prole of Lhe posluons,
Lqu|ty pos|nons: rlsk facLors for equlLy prlces and rlsk facLors LhaL dlerenuaLe beLween lmporLanL equlLy markeL secLors
and segmenLs, such as a small caplLallzauon equlues and lnLernauonal equlues,
Lqu|ty der|vanve pos|nons: rlsk facLor sensluvlues such as equlLy posluons, volaullLy, and/or correlauon sensluvlues
(expressed ln a manner LhaL demonsLraLes any slgnlcanL non-llnearlues), and Lhe maLurlLy prole of Lhe posluons,
Iore|gn exchange der|vanve pos|nons: rlsk facLors wlLh respecL Lo ma[or currency palrs and maLurlues, exposure Lo
lnLeresL raLes aL relevanL maLurlues, volaullLy, and/or correlauon sensluvlues (expressed ln a manner LhaL demonsLraLes
any slgnlcanL non-llnearlues), as well as Lhe maLurlLy prole of Lhe posluons, and
Interest rate pos|nons, |nc|ud|ng |nterest rate der|vanve pos|nons: rlsk facLors wlLh respecL Lo ma[or lnLeresL raLe
caLegorles and maLurlues and volaullLy and/or correlauon sensluvlues (expressed ln a manner LhaL demonsLraLes any
slgnlcanL non-llnearlues), and shls (parallel and non-parallel) ln Lhe lnLeresL raLe curve, as well as Lhe maLurlLy prole of
Lhe posluons.
8anks should sLarL aggregaung Lhe rlsk facLor sensluvlues llke uelLa, Camma, vega and oLher measures LhaL Lhey
capLure Lo undersLand Lhe Lradlng poruollos.
CuanuLauve MeLrlcs
MeLrlc -3 - 8lsk and osluon LlmlLs and usage - 8lsk and osluon LlmlLs are Lhe consLralnLs LhaL dene Lhe amounL of rlsk
LhaL a Lradlng desk ls permlued Lo Lake aL a polnL ln ume, as dened by Lhe banklng enuLy for a speclc Lradlng desk.
usage represenLs Lhe poruon of Lhe Lradlng desk's llmlLs LhaL are accounLed for by Lhe currenL acuvlLy of Lhe desk.
8anks monlLor va8 and oLher 8lsk posluon llmlLs ( uelLa, vega, Camme eLc).
lnLeresL 8aLe Swap uesk - [ lnLeresL 8aLe uelLa, lnLeresL raLe 8asls ( 1M vs 3M, 3M vs 6M, 3M vs 12M, 3M vs ClS]
lnLeresL 8aLe Cpuons uesk - [ lnLeresL 8aLe uelLa, vega (volaullLy sensluvlLy) and Camma ]
CuanuLauve MeLrlcs
Metr|c 4: roht and Loss (&L) Aur|bunon: volcker 8ule en[olns Lo reporL roL and loss due Lo Lradlng by aurlbuung Lo
varlous facLors llke &L due Lo new posluons, exlsung posluons, resldual proL and loss. Also wanLs Lo explaln proL loss due Lo
8lsk facLor sensluvlues. Also, for each desk provlde L volaullLy for 30, 60 and 90 day lag.
Conslder as an example &L of 260 for an lnLeresL 8aLe opuons book Lo be aurlbuLed as
New pos|nons New Dea|s and
Amendments
100
Lxlsung posluons lnLeresL 8aLe SensluvlLy
facLor (uelLa)
30
Lxlsung posluons

volaullLy SensluvlLy facLor
(vega)
80
&L due Lo Carry and
fundlng
20
Change ln valuauon
Ad[usLmenLs
0
8esldual unexplalned 8esldual unexplalned

10
1oLal 260
L aurlbuuon denlLely helps ln undersLandlng whaL explalns Lhe proL and loss. ln general Lradlng desk faces loL of
lssues wlLh valulng some posluons on Lhe book LhaL are hlghly llllquld and cannoL be Laken of Lhe books ln Lhe lnLerdealer
markeL easlly. 1radlng desk marks Lhese posluons Lo model and Laklng valuauon ad[usLmenLs smooLh Lhe dally L. 1hls
wlll lead Lo a slLuauon where reporLed meLrlcs are noL accuraLe descrlpLors of Lhe Lradlng sLraLegy.
CuanuLauve MeLrlcs
MeLrlc 3: CusLomer-laclng AcuvlLy MeasuremenLs: lnvenLory 1urnover: lnvenLory 1urnover ls a rauo LhaL measures Lhe
Lurnover of a Lradlng desk's lnvenLory. 1he numeraLor of Lhe rauo ls Lhe absoluLe value of all Lransacuons over Lhe
reporung perlod. 1he denomlnaLor of Lhe rauo ls Lhe value of Lhe Lradlng desk's lnvenLory aL Lhe beglnnlng of Lhe
reporung perlod. 1he beglnnlng of Lhe reporung perlod ls consldered a rolllng perlod, where Lhe beglnnlng daLe would
change for each reporLed Lradlng daLe (e.g., for a 30-day perlod, on !uly 1, Lhe beglnnlng of Lhe reporung perlod ls !une 1,
on !uly 2, Lhe beglnnlng of Lhe reporung perlod ls !une 2, eLc).
8eporL Lhe lnvenLory 1urnover rauo over a 30 Lradlng day, 60 Lradlng day and 90 Lradlng day calculauon perlod
lor derlvauves, oLher Lhan opuons and lnLeresL raLe derlvauves, value means gross nouonal value, for opuons, value
means delLa ad[usLed nouonal value, and for lnLeresL raLe derlvauves, value means 10-year bond equlvalenL value.
volcker 8ule en[olns banks Lo aggregaLe gross markeL values, nouonal values and 10? bond equlvalenL values for Cash, lx and
lnLeresL raLe producLs Lo undersLand how a bank ls Lurnlng over Lhe lnvenLory".

1hls ls a very lnLeresung meLrlc whlch every buslness operauon monlLors Lo undersLand Lhe operauonal emclency. lor lnsLance
a Cycle selllng rm can look aL Lhe rauon of sold cycles Lo Lhe exlsung lnvenLory of cycles Lo undersLand how Lo plan for fuLure
perlods of operauon. now how lL can be applled Lo nanclal lnsLrumenLs". 1o Lhe besL of my knowledge and experlence,
llnanclal lndusLry ls no dlerenL when you look aL Lhe Lradlng lnvenLory
lnvenLory rauo = Lndlng perlod lnvenLory / 8eglnnlng perlod lnvenLory.



roduct 8eg|nn|ng
Inventory
Lnd|ng |nventory Inventory 1urnover Comment
Cash 1000 2000 2000/1000 =2 lnvenLory ls growlng over Lhe
reporung perlod
lx producLs 1000,000 300,000 300,000/1000,000
=0.3
lnvenLory ls belng reduced
lnLeresL 8aLe
Swaps
30,000 (uv01 ) 100,000 ( uv01) 100,000/30,000 = 2 lnvenLory ls belng lncreased
CuanuLauve MeLrlcs
MeLrlc 6: CusLomer-laclng AcuvlLy MeasuremenLs: lnvenLory Aglng: lnvenLory Aglng generally descrlbes a schedule of
Lhe Lradlng desk's aggregaLe asseLs and llablllues and Lhe amounL of ume LhaL Lhose asseLs and llablllues have been held.
lnvenLory aglng should measure Lhe age prole of Lhe Lradlng desk's asseLs and llablllues. 8anklng enuues should apply a
llrsL ln, llrsL CuL (lllC) meLhod ln measurlng Lhe age prole.
lnvenLory Aglng lncludes Lwo schedules, an asseL-aglng schedule and a llablllLy-aglng schedule.
lor derlvauves, oLher Lhan opuons and lnLeresL raLe derlvauves, value means gross nouonal value. lor opuons, value
means delLa ad[usLed nouonal value. lor lnLeresL raLe derlvauves, value means 10-year bond equlvalenL value.
volcker 8ule en[olns banks Lo aggregaLe gross markeL values, nouonal values and 10? bond equlvalenL values for Cash, lx and
lnLeresL raLe producLs Lo undersLand how a bank ls Lurnlng over Lhe lnvenLory".

1hls ls a very lnLeresung meLrlc whlch every buslness operauon monlLors Lo undersLand Lhe operauonal emclency. lor lnsLance
a Cycle selllng rm can look aL Lhe rauon of sold cycles Lo Lhe exlsung lnvenLory of cycles Lo undersLand how Lo plan for fuLure
perlods of operauon. now how lL can be applled Lo nanclal lnsLrumenLs". 1o Lhe besL of my knowledge and experlence,
llnanclal lndusLry ls no dlerenL when you look aL Lhe Lradlng lnvenLory
lnvenLory Aglng (asseLs) = Sum of value of asseLs held from Lhe reporung daLe Lo 30 days look back perlod.
lnvenLory Aglng (Llablllues) = Sum of value of llablllues held from Lhe reporung daLe Lo 30 days look back perlod.



roduct Inventory ( 0-31
days)
Inventory ( 31-60
days)

Inventory ( 61-90
days)
Comment
Cash 1000 1300 2000 lnvenLory ls growlng over
Lhe reporung perlod
lx producLs 1000,000 1000,000 1000,000 lnvenLory has nelLher
lncreased or reduced
lnLeresL 8aLe
Swaps
30,000 60,000 70,000 lnvenLory ls belng lncreased
CuanuLauve MeLrlcs
Metr|c 7: Customer-Iac|ng Acnv|ty Measurements: lor purposes of calculaung Lhe CusLomer-laclng 1rade 8auo, a
counLerparLy ls consldered Lo be a cusLomer of Lhe Lradlng desk lf Lhe counLerparLy ls a markeL paruclpanL LhaL makes use
of Lhe banklng enuLy's markeL maklng-relaLed servlces by obLalnlng such servlces, respondlng Lo quoLauons, or enLerlng
lnLo a conunulng relauonshlp wlLh respecL Lo such servlces. Powever, a Lradlng desk or oLher organlzauonal unlL of
anoLher banklng enuLy would noL be a cllenL, cusLomer, or counLerparLy of Lhe Lradlng desk lf Lhe oLher enuLy has Lradlng
asseLs and llablllues of $30 bllllon or more unless Lhe Lradlng desk documenLs how and why a parucular Lradlng desk or
oLher organlzauonal unlL of Lhe enuLy should be LreaLed as a cllenL, cusLomer, or counLerparLy of Lhe Lradlng desk.
1ransacuons conducLed anonymously on an exchange or slmllar Lradlng faclllLy LhaL permlLs Lradlng on behalf of a broad
range of markeL paruclpanLs would be consldered Lransacuons wlLh cusLomers of Lhe Lradlng desk.
1he CusLomer-laclng 1rade 8auo ls a rauo comparlng (l) Lhe Lransacuons lnvolvlng a counLerparLy LhaL ls a cusLomer of
Lhe Lradlng desk Lo (ll) Lhe Lransacuons lnvolvlng a counLerparLy LhaL ls noL a cusLomer of Lhe Lradlng desk. Lnuues should
reporL Lhe followlng rauos glven a 30 calendar day, 60 calendar day and 90 calendar day horlzon.
A Lrade counL based rauo musL be compuLed LhaL records Lhe number of Lransacuons lnvolvlng a counLerparLy LhaL ls a
cusLomer of Lhe Lradlng desk and Lhe number of Lransacuons lnvolvlng a counLerparLy LhaL ls noL a cusLomer of Lhe
Lradlng desk.
A value based rauo musL be compuLed LhaL records Lhe value of Lransacuons lnvolvlng a counLerparLy LhaL ls a cusLomer
of Lhe Lradlng desk and Lhe value of Lransacuons lnvolvlng a counLerparLy LhaL ls noL a cusLomer of Lhe Lradlng desk.
volcker 8ule en[olns banks Lo aggregaLe gross markeL values, nouonal values and 10? bond equlvalenL values for Cash, lx and
lnLeresL raLe producLs Lo undersLand how a bank ls Lurnlng over Lhe lnvenLory".


CuanuLauve MeLrlcs
MeLrlc -7 - CusLomer faclng Lrade rauo - 1rade CounL rauo. ln Lhls bank has Lo ldenufy Lhe Lrades by Lhe counLerparLy Lype and esumaLe
Lhe rauo lndlvldually ( rule says Lo aggregaLe all Lhe producLs)


roduct 1ransacnons w|th
customers
1ransacnons w|th
Non customers
Customer kano Comment
Cash 1000 2000 1000/2000 =0.3 uesk ls execuung more Lrades ln
Lhe lnLerdealer markeL Lhan
wlLh cllenL
lx producLs 1000,000 100,000 1000,000/100,000 =10 uesk faclllLaLes 10 umes more
Lrades Lhan on lnLerdealer
markeL
lnLeresL 8aLe
Swaps
30,000 (dv01) 100,000 (dv01) 30,000/100,000 = 0.3 uesk ls execuung more Lrades ln
Lhe lnLerdealer markeL Lhan
wlLh cllenL
roduct 1ransacnons w|th
customers
1ransacnons w|th
Non customers
Customer kano Comment
Cash 1000 2000 1000/2000 =0.3 uesk ls execuung more Lrades ln
Lhe lnLerdealer markeL Lhan
wlLh cllenL
lx producLs 1000,000 100,000 1000,000/100,000 =10 uesk faclllLaLes 10 umes more
Lrades Lhan on lnLerdealer
markeL
lnLeresL 8aLe
Swaps
30,000 100,000 30,000/100,000 = 0.3 uesk ls execuung more Lrades ln
Lhe lnLerdealer markeL Lhan
wlLh cllenL
MeLrlc -7 - CusLomer faclng Lrade rauo - value rauo. ln Lhls bank has Lo ldenufy Lhe Lrades by Lhe counLerparLy Lype and esumaLe Lhe rauo
lndlvldually by aggregaung Lhe value pof Lhe Lransacuons ( rule says Lo aggregaLe all Lhe producLs)


CuanuLauve MeLrlcs Summary
uanntanve Metr|c Comments
va8 and SLressed va8 1hls meLrlc provldes Lhe magnlLude of Lhe slze of Lhe loss desk mlghL
lncur ln adverse slLuauons. Plgh va8/SLressed va8 means noL a markeL
maklng desk.
8lsk lacLor Sensluvlues 1hls meLrlc provldes Lhe summary of Lhe rlsk posluons on Lhe Lradlng
book. Plgher rlsk facLor sensluvlLy Lhe desk ls noL markeL maklng desk
8lsk and osluon LlmlLs usage 8lsk llmlLs and assoclaLed usage ls very hlgh ls anoLher lndlcaLor of desk
belng a rlsk Laklng unlL
Comprehenslve &L Aurlbuuon L aurlbuuon lf shows desk ls maklng more money on Lhe exlsung
posluons lL mlghL be an lndlcaLor of sklll of Lhe desk and acuve poruollo
hedglng.
lnvenLory 1urnover lnvenLory rauos aL Lhe producL level are less Lhan 1.1hen lL lndlcaLes
lnvenLory ls belng Lurned over qulckly
lnvenLory Aglng lnvenLory aglng prole shows how lnvenLory ls belng accumulaLed and
exlLed.
CusLomer laclng 1rade 8auo 1hls rauo for each producL above 1 suggesL Lhe desk ls cllenL faclng.
8Ln1u - 8easonably esumaLe near Lerm demand
8Ln1u - 8easonably esumaLe near Lerm demand by provldlng demonsLrable evldence and esLabllshlng a process Lo
represenL a desk as a markeL maklng ls mosL challenglng Lask for a bank.
ln general banks, sLarL accumulaung posluons ahead of markeL evenLs Lo faclllLaLe or sLand by Lo Lake cllenL orders. now
real quesuon ls how much of Lhls ls consldered markeL maklng? Are Lhere any llmlLs or meLhods LhaL could be used for
guldance.
CllenL demand ebbs and ows ln Lhe nanclal markeLs ln response Lo varleLy of evenLs. Some of Lhem wlll be ln
anuclpauon Lo geopollucal evenLs, lCMC evenLs, corporaLe acuons and so on. Some umes Lhere wlll be a normal Lradlng
acuvlLy.
8anks accumulaLes seL of lnLeresL raLe swaps ahead of large corporaLe bond lssuance Lo faclllLaLe correspondlng hedglng
by Lhe cllenLs. Some ume Lhls hedglng wlll geL reallzed and someumes noL.
So lL would be noL posslble Lo esLabllsh perfecL guldellnes Lo cllenL demand. 8uL over a 2y Lo 3y Lradlng horlzon, lnvenLory
meLrlcs provlde some guldellnes of how a desk should posluon lLself Lo meeL Lhe cllenL demand
Inventory 1urnover 1rade accumu|anon by trad|ng desks typ|ca||y happens
over a per|od of 1 to 2 months. 1herefore over a per|od
of 3 months |nventory turnover rano for each product
shou|d be stab|||zed and brought under 1. 1h|s way
end|ng |nventory w||| be |ess than beg|nn|ng |nventory.
lnvenLory Aglng lnvenLory aglng should have a down Lrendlng prole
CusLomer laclng 1rade 8auo 1hls rauo should be Lrendlng Loward 1 or above mosL of
Lhe ume.
Slnce lL ls dlmculL Lo esLabllsh exacL levels for near Lerm demand. 1radlng desks should sLarL Lhlnklng of uslng Lhese
lnvenLory meLrlcs Lo resLraln Lhelr Lradlng acuvlLy