An institution operates a trading desk, without having sought or having been approved for the operation of an alternative internal model for the purposes of its market risk capital requirement. Article 104b(1) CRR clearly provides that the obligation to establish trading desks only arises in the context of approved alternative internal models. However, there is doubt as to whether the application of the conditions for operating trading desks, as set out in Article 104b(2) apply, in circumstances where an institution is not required to establish trading desks because it does not operate an alternative internal model (thus deriving a potential capital benefit), but notwithstanding this chooses to operate trading desks in the ordinary course of business.

On the basis of a plain-meaning review of the text, there are two issues which have the potential to suggest that Article 104b(2) conditions could apply to trading desks generally:

- the definition of “trading desk”, as set out above, is a qualitative definition and not linked to the internal model requirements; and

- the Article 104b(2) conditions do not explicitly (within its own text) link to the Article 104b(1) establishment obligation, such that, in circumstances where a “trading desk” within the meaning of Article 4(1)(144) is established (irrespective of any obligation to do so), the conditions in (2) appear to attach to it.

Notwithstanding the above, there are in our view, more and better reasons to believe these conditions should only apply in circumstances where an internal model is approved. In this respect:

- While Article 104b(2) does not reference Article 104b(1), Article 104b(1) does reference Article 104b(2), wherein it provides that: “Trading book positions shall be attributed to the same trading desk only where they… are consistently managed and monitored in accordance with paragraph 2 of this Article”. Sequentially, a relevant institution must apply for and be approved to operate an alternative internal model, must therefore establish one or more trading desks and then ensure that (to the extent it is attributing trading book positions to such a trading desk) it complies with the conditions in subsection (2).

- Recent changes to the trading book governance provisions set out in Article 103(2)(b) of the CRR appear to have been made to delineate between trading institutions that run trading desks and ones that do not. Given the conditional obligation to establish trading desks only in particular circumstances, it may be that this is designed to delineate between those institutions running internal models and not.

- Outside the context of Article 104b, the only references in the CRR to “trading desks” arise in the following places:

(a) Article 102(4) (where an explicit link is drawn to internal model reporting requirements);

(b) Article 103 (as set out above);

(c) Article 430b (3) and (4) which set out the aforementioned reporting requirements to which Article 102(4) and 104b(1) are linked; and

(d) the following range of Articles which all sit within Chapter 1b of Title IV to the CRR (entitled “Alternative internal model approach”):

(i) Article 325az Alternative internal model approach and permission to use alternative internal models;
(ii) Article 325ba Own funds requirements when using alternative internal models;
(iii) Article 325bc Partial expected shortfall calculations;
(iv) Article 325bd Liquidity horizons;
(v) Article 325be Assessment of the modellability of risk factors;
(vi) Article 325bf Regulatory back-testing requirements and multiplication factors;
(vii) Article 325bg Profit and loss attribution requirement;
(viii) Article 325bl Scope of the internal default risk model; and
(ix) Article 325bm Permission to use an internal default risk model.

- the Basel III standards appear to indicate that these conditions should only apply in circumstances where an internal model is approved. In this respect:
 

(a) The “Calculation of RWA for market risk” standard 12 (“MAR12”), sets out in its subheading “This chapter defines a trading desk, which is the level at which model approval is granted”.
 

(b) MAR 12.2 (3) further provides that:

“Supervisors will treat the definition of the trading desk as part of the initial model approval for the trading desk, as well as ongoing approval:

(a) Supervisors may determine, based on the size of the bank’s overall trading operations, whether the proposed trading desk definitions are sufficiently granular.

(b) Supervisors should check that the bank’s proposed definition of trading desk meets the criteria (listed in key elements set out in MAR12.4)…”

(c) MAR 12.4, in turn, provides for many of the same conditions as those listed in Article 104b(2).

- It appears, therefore, that the Basel standards which underlie much of the CRR requirements are established in such a manner as to put controls around trading desks for the purposes of internal models and that, when read in a wider context, the obligations in respect of trading desks in the CRR are all, in one way or another, tied to the operation of internal models.