Control without limits: Why the ‘Fundamental Review of Trading Books’ is a good step forward and how it could go further

Abstract

Setting up a coherent and thorough market risk framework for trading books is a complex task. So far, regulatory texts have been constraining such frameworks but have been of little help in their genesis. The ‘Fundamental Review of Trading Books’ largely corrects this situation. Drawing from experience, the author highlights some important points that should be included in a coherent risk framework and shows how the ‘Fundamental Review of Trading Books’ addresses these precise points. The author discusses in particular liquidity and hedging treatments, two concepts extensively discussed in the ‘Fundamental Review of Trading Books’. He then shows how the logic of systematic desk reporting can be extended to go beyond local supervisory and can be leveraged to address global issues in the financial system.