Appendix A to Part 255 - Reporting and Recordkeeping Requirements for Covered Trading Activities
17:4.0.1.1.15.6.128.1.4 : Appendix A
Appendix A to Part 255 - Reporting and Recordkeeping Requirements
for Covered Trading Activities I. Purpose
a. This appendix sets forth reporting and recordkeeping
requirements that certain banking entities must satisfy in
connection with the restrictions on proprietary trading set forth
in subpart B (“proprietary trading restrictions”). Pursuant to §
255.20(d), this appendix applies to a banking entity that, together
with its affiliates and subsidiaries, has significant trading
assets and liabilities. These entities are required to (i) furnish
periodic reports to the SEC regarding a variety of quantitative
measurements of their covered trading activities, which vary
depending on the scope and size of covered trading activities, and
(ii) create and maintain records documenting the preparation and
content of these reports. The requirements of this appendix must be
incorporated into the banking entity's internal compliance program
under § 255.20.
b. The purpose of this appendix is to assist banking entities
and the SEC in:
(1) Better understanding and evaluating the scope, type, and
profile of the banking entity's covered trading activities;
(2) Monitoring the banking entity's covered trading
activities;
(3) Identifying covered trading activities that warrant further
review or examination by the banking entity to verify compliance
with the proprietary trading restrictions;
(4) Evaluating whether the covered trading activities of trading
desks engaged in market making-related activities subject to §
255.4(b) are consistent with the requirements governing permitted
market making-related activities;
(5) Evaluating whether the covered trading activities of trading
desks that are engaged in permitted trading activity subject to §
255.4, § 255.5, or § 255.6(a) and (b) (i.e., underwriting
and market making-related activity, risk-mitigating hedging, or
trading in certain government obligations) are consistent with the
requirement that such activity not result, directly or indirectly,
in a material exposure to high-risk assets or high-risk trading
strategies;
(6) Identifying the profile of particular covered trading
activities of the banking entity, and the individual trading desks
of the banking entity, to help establish the appropriate frequency
and scope of examination by SEC of such activities; and
(7) Assessing and addressing the risks associated with the
banking entity's covered trading activities.
c. Information that must be furnished pursuant to this appendix
is not intended to serve as a dispositive tool for the
identification of permissible or impermissible activities.
d. In addition to the quantitative measurements required in this
appendix, a banking entity may need to develop and implement other
quantitative measurements in order to effectively monitor its
covered trading activities for compliance with section 13 of the
BHC Act and this part and to have an effective compliance program,
as required by § 255.20. The effectiveness of particular
quantitative measurements may differ based on the profile of the
banking entity's businesses in general and, more specifically, of
the particular trading desk, including types of instruments traded,
trading activities and strategies, and history and experience
(e.g., whether the trading desk is an established, successful
market maker or a new entrant to a competitive market). In all
cases, banking entities must ensure that they have robust measures
in place to identify and monitor the risks taken in their trading
activities, to ensure that the activities are within risk
tolerances established by the banking entity, and to monitor and
examine for compliance with the proprietary trading restrictions in
this part.
e. On an ongoing basis, banking entities must carefully monitor,
review, and evaluate all furnished quantitative measurements, as
well as any others that they choose to utilize in order to maintain
compliance with section 13 of the BHC Act and this part. All
measurement results that indicate a heightened risk of
impermissible proprietary trading, including with respect to
otherwise-permitted activities under §§ 255.4 through 255.6(a) and
(b), or that result in a material exposure to high-risk assets or
high-risk trading strategies, must be escalated within the banking
entity for review, further analysis, explanation to SEC, and
remediation, where appropriate. The quantitative measurements
discussed in this appendix should be helpful to banking entities in
identifying and managing the risks related to their covered trading
activities.
II. Definitions
The terms used in this appendix have the same meanings as set
forth in §§ 255.2 and 255.3. In addition, for purposes of this
appendix, the following definitions apply:
Applicability identifies the trading desks for which a
banking entity is required to calculate and report a particular
quantitative measurement based on the type of covered trading
activity conducted by the trading desk.
Calculation period means the period of time for which a
particular quantitative measurement must be calculated.
Comprehensive profit and loss means the net profit or
loss of a trading desk's material sources of trading revenue over a
specific period of time, including, for example, any increase or
decrease in the market value of a trading desk's holdings, dividend
income, and interest income and expense.
Covered trading activity means trading conducted by a
trading desk under § 255.4, § 255.5, § 255.6(a), or § 255.6(b). A
banking entity may include in its covered trading activity trading
conducted under § 255.3(d), § 255.6(c), § 255.6(d), or §
255.6(e).
Measurement frequency means the frequency with which a
particular quantitative metric must be calculated and recorded.
Trading day means a calendar day on which a trading desk
is open for trading.
III. Reporting and Recordkeeping a. Scope of Required Reporting
1. Quantitative measurements. Each banking entity made subject
to this appendix by § 255.20 must furnish the following
quantitative measurements, as applicable, for each trading desk of
the banking entity engaged in covered trading activities and
calculate these quantitative measurements in accordance with this
appendix:
i. Internal Limits and Usage;
ii. Value-at-Risk;
iii. Comprehensive Profit and Loss Attribution;
iv. Positions; and
v. Transaction Volumes.
2. Trading desk information. Each banking entity made subject to
this appendix by § 255.20 must provide certain descriptive
information, as further described in this appendix, regarding each
trading desk engaged in covered trading activities.
3. Quantitative measurements identifying information. Each
banking entity made subject to this appendix by § 255.20 must
provide certain identifying and descriptive information, as further
described in this appendix, regarding its quantitative
measurements.
4. Narrative statement. Each banking entity made subject to this
appendix by § 255.20 may provide an optional narrative statement,
as further described in this appendix.
5. File identifying information. Each banking entity made
subject to this appendix by § 255.20 must provide file identifying
information in each submission to the SEC pursuant to this
appendix, including the name of the banking entity, the RSSD ID
assigned to the top-tier banking entity by the Board, and
identification of the reporting period and creation date and
time.
b. Trading Desk Information
1. Each banking entity must provide descriptive information
regarding each trading desk engaged in covered trading activities,
including:
i. Name of the trading desk used internally by the banking
entity and a unique identification label for the trading desk;
ii. Identification of each type of covered trading activity in
which the trading desk is engaged;
iii. Brief description of the general strategy of the trading
desk;
v. A list identifying each Agency receiving the submission of
the trading desk;
2. Indication of whether each calendar date is a trading day or
not a trading day for the trading desk; and
3. Currency reported and daily currency conversion rate.
c. Quantitative Measurements Identifying Information
Each banking entity must provide the following information
regarding the quantitative measurements:
1. An Internal Limits Information Schedule that provides
identifying and descriptive information for each limit reported
pursuant to the Internal Limits and Usage quantitative measurement,
including the name of the limit, a unique identification label for
the limit, a description of the limit, the unit of measurement for
the limit, the type of limit, and identification of the
corresponding risk factor attribution in the particular case that
the limit type is a limit on a risk factor sensitivity and profit
and loss attribution to the same risk factor is reported; and
2. A Risk Factor Attribution Information Schedule that provides
identifying and descriptive information for each risk factor
attribution reported pursuant to the Comprehensive Profit and Loss
Attribution quantitative measurement, including the name of the
risk factor or other factor, a unique identification label for the
risk factor or other factor, a description of the risk factor or
other factor, and the risk factor or other factor's change
unit.
d. Narrative Statement
Each banking entity made subject to this appendix by § 255.20
may submit in a separate electronic document a Narrative Statement
to the SEC with any information the banking entity views as
relevant for assessing the information reported. The Narrative
Statement may include further description of or changes to
calculation methods, identification of material events, description
of and reasons for changes in the banking entity's trading desk
structure or trading desk strategies, and when any such changes
occurred.
e. Frequency and Method of Required Calculation and Reporting
A banking entity must calculate any applicable quantitative
measurement for each trading day. A banking entity must report the
Trading Desk Information, the Quantitative Measurements Identifying
Information, and each applicable quantitative measurement
electronically to the SEC on the reporting schedule established in
§ 255.20 unless otherwise requested by the SEC. A banking entity
must report the Trading Desk Information, the Quantitative
Measurements Identifying Information, and each applicable
quantitative measurement to the SEC in accordance with the XML
Schema specified and published on the SEC's website.
f. Recordkeeping
A banking entity must, for any quantitative measurement
furnished to the SEC pursuant to this appendix and § 255.20(d),
create and maintain records documenting the preparation and content
of these reports, as well as such information as is necessary to
permit the SEC to verify the accuracy of such reports, for a period
of five years from the end of the calendar year for which the
measurement was taken. A banking entity must retain the Narrative
Statement, the Trading Desk Information, and the Quantitative
Measurements Identifying Information for a period of five years
from the end of the calendar year for which the information was
reported to the SEC.
IV. Quantitative Measurements a. Risk-Management Measurements 1.
Internal Limits and Usage
i. Description: For purposes of this appendix, Internal
Limits are the constraints that define the amount of risk and the
positions that a trading desk is permitted to take at a point in
time, as defined by the banking entity for a specific trading desk.
Usage represents the value of the trading desk's risk or positions
that are accounted for by the current activity of the desk.
Internal limits and their usage are key compliance and risk
management tools used to control and monitor risk taking and
include, but are not limited to, the limits set out in §§ 255.4 and
255.5. A trading desk's risk limits, commonly including a limit on
“Value-at-Risk,” are useful in the broader context of the trading
desk's overall activities, particularly for the market making
activities under § 255.4(b) and hedging activity under § 255.5.
Accordingly, the limits required under §§ 255.4(b)(2)(iii)(C) and
255.5(b)(1)(i)(A) must meet the applicable requirements under §§
255.4(b)(2)(iii)(C) and 255.5(b)(1)(i)(A) and also must include
appropriate metrics for the trading desk limits including, at a
minimum, “Value-at-Risk” except to the extent the “Value-at-Risk”
metric is demonstrably ineffective for measuring and monitoring the
risks of a trading desk based on the types of positions traded by,
and risk exposures of, that desk.
A. A banking entity must provide the following information for
each limit reported pursuant to this quantitative measurement: The
unique identification label for the limit reported in the Internal
Limits Information Schedule, the limit size (distinguishing between
an upper and a lower limit), and the value of usage of the
limit.
ii. Calculation Period: One trading day.
iii. Measurement Frequency: Daily.
iv. Applicability: All trading desks engaged in covered
trading activities.
2. Value-at-Risk
i. Description: For purposes of this appendix,
Value-at-Risk (“VaR”) is the measurement of the risk of future
financial loss in the value of a trading desk's aggregated
positions at the ninety-nine percent confidence level over a
one-day period, based on current market conditions.
ii. Calculation Period: One trading day.
iii. Measurement Frequency: Daily.
iv. Applicability: All trading desks engaged in covered
trading activities.
b. Source-of-Revenue Measurements 1. Comprehensive Profit and Loss
Attribution
i. Description: For purposes of this appendix,
Comprehensive Profit and Loss Attribution is an analysis that
attributes the daily fluctuation in the value of a trading desk's
positions to various sources. First, the daily profit and loss of
the aggregated positions is divided into two categories: (i) Profit
and loss attributable to a trading desk's existing positions that
were also positions held by the trading desk as of the end of the
prior day (“existing positions”); and (ii) profit and loss
attributable to new positions resulting from the current day's
trading activity (“new positions”).
A. The comprehensive profit and loss associated with existing
positions must reflect changes in the value of these positions on
the applicable day. The comprehensive profit and loss from existing
positions must be further attributed, as applicable, to (i) changes
in the specific risk factors and other factors that are monitored
and managed as part of the trading desk's overall risk management
policies and procedures; and (ii) any other applicable elements,
such as cash flows, carry, changes in reserves, and the correction,
cancellation, or exercise of a trade.
B. For the attribution of comprehensive profit and loss from
existing positions to specific risk factors and other factors, a
banking entity must provide the following information for the
factors that explain the preponderance of the profit or loss
changes due to risk factor changes: The unique identification label
for the risk factor or other factor listed in the Risk Factor
Attribution Information Schedule, and the profit or loss due to the
risk factor or other factor change.
C. The comprehensive profit and loss attributed to new positions
must reflect commissions and fee income or expense and market gains
or losses associated with transactions executed on the applicable
day. New positions include purchases and sales of financial
instruments and other assets/liabilities and negotiated amendments
to existing positions. The comprehensive profit and loss from new
positions may be reported in the aggregate and does not need to be
further attributed to specific sources.
D. The portion of comprehensive profit and loss from existing
positions that is not attributed to changes in specific risk
factors and other factors must be allocated to a residual category.
Significant unexplained profit and loss must be escalated for
further investigation and analysis.
ii. Calculation Period: One trading day.
iii. Measurement Frequency: Daily.
iv. Applicability: All trading desks engaged in covered
trading activities.
c. Positions and Transaction Volumes Measurements 1. Positions
i. Description: For purposes of this appendix, Positions
is the value of securities and derivatives positions managed by the
trading desk. For purposes of the Positions quantitative
measurement, do not include in the Positions calculation for
“securities” those securities that are also “derivatives,” as those
terms are defined under subpart A; instead, report those securities
that are also derivatives as “derivatives.” 1 A banking entity must
separately report the trading desk's market value of long
securities positions, short securities positions, derivatives
receivables, and derivatives payables.
1 See § 255.2(h), (aa). For example, under this part, a
security-based swap is both a “security” and a “derivative.” For
purposes of the Positions quantitative measurement, security-based
swaps are reported as derivatives rather than securities.
ii. Calculation Period: One trading day.
iii. Measurement Frequency: Daily.
iv. Applicability: All trading desks that rely on §
255.4(a) or (b) to conduct underwriting activity or
market-making-related activity, respectively.
2. Transaction Volumes
i. Description: For purposes of this appendix,
Transaction Volumes measures three exclusive categories of covered
trading activity conducted by a trading desk. A banking entity is
required to report the value and number of security and derivative
transactions conducted by the trading desk with: (i) Customers,
excluding internal transactions; (ii) non-customers, excluding
internal transactions; and (iii) trading desks and other
organizational units where the transaction is booked into either
the same banking entity or an affiliated banking entity. For
securities, value means gross market value. For derivatives, value
means gross notional value. For purposes of calculating the
Transaction Volumes quantitative measurement, do not include in the
Transaction Volumes calculation for “securities” those securities
that are also “derivatives,” as those terms are defined under
subpart A; instead, report those securities that are also
derivatives as “derivatives.” 2 Further, for purposes of the
Transaction Volumes quantitative measurement, a customer of a
trading desk that relies on § 255.4(a) to conduct underwriting
activity is a market participant identified in § 255.4(a)(7), and a
customer of a trading desk that relies on § 255.4(b) to conduct
market making-related activity is a market participant identified
in § 255.4(b)(3).
2 See § 255.2(h), (aa).
ii. Calculation Period: One trading day.
iii. Measurement Frequency: Daily.
iv. Applicability: All trading desks that rely on §
255.4(a) or (b) to conduct underwriting activity or
market-making-related activity, respectively.
[84 FR 62246, Nov. 14, 2019]