2. Bank’s Book Structure in Context of Market Risk Management
The Bank maintains an intention-based book structure which drives many processes, including the management of market risk. The book structure reflects what kind of market risk is expected and acceptable in different parts of the Bank and where market risk should be internally transferred/hedged within the Bank. Specifically, books are categorized based on intention as “trading” (positions taken in expectation of short-term financial gain from market movements) or “banking” (all other positions). A high-level view of the Bank’s book structure is as follows:
|___ Trading Books
|___ Banking Books
|___ Commercial Banking Books
|___ Bank Treasury Banking Books
These are Financial Markets (“FM”) books: FX, FX Options and Interest Rate Trading. These books include positions held intentionally for short-term resale and/or with the intent of benefiting from actual or expected short-term price movements or to lock in arbitrage profits, and include, for example, proprietary positions, positions arising from client servicing and/or market making. The market risks of open positions in trading books are limited by various Value-at-Risk and positions/sensitivities limits.
Commercial Banking Books
These are Retail and Wholesale Banking books containing commercial loans and deposits. The risk of these positions is internally hedged as well as possible to Bank Treasury Banking books via internal contracts, which ensures that these books do not contain material levels of economic market risk. However, as described later in more detail, the short-term financial results of these books are sensitive to changes in market rates. The commercial activities of the subsidiaries belong to the commercial banking books.
Bank Treasury Banking Books
These are Liquidity Management & Funding and ALM books. Their primary responsibility is the liquidity risk management of the Bank as a whole and interest rate risk management of the positions of Commercial Banking Books in particular. Open positions are allowed within approved market risk limits, e.g. VaR or position/sensitivity limits. Like in Commercial Banking Books, there is usually a difference between the sensitivity of economic and financial results to changes in market rates.