Part A covered MAR12, the basic definition of a trading desk, the supervisory approval process, and the first key attribute — an unambiguously defined group of traders with clear reporting lines. This part covers the remaining two key attributes: a documented business strategy, and a clear risk management structure. It closes with the additional reports every desk must maintain, and one specific rule for FX and commodity risk that technically sits in the banking book.
Attribute 2: A Well-Defined, Documented Business Strategy
A trading desk must have a well-defined and documented business strategy, and that documentation must include, at minimum, an annual budget and regular management information reports covering revenue, costs, and risk-weighted assets.
The standard breaks the business strategy documentation down into three specific questions a bank must be able to answer clearly for each desk:
| Question | What It’s Really Asking |
| (i) Economics | What is the economics behind the strategy — for example, trading on the shape of the yield curve? How much of the desk’s activity is customer-driven? Does the desk do trade origination and structuring, execution services, or both? |
| (ii) Primary activities | What is the list of permissible instruments for this desk, and out of that list, which ones are actually traded most frequently? |
| (iii) Trading and hedging strategies | How would these instruments be hedged? What are the expected slippages and mismatches between a position and its hedge? What is the expected holding period for positions on this desk? |
Beyond describing the strategy itself, the desk’s management team — starting from the head trader — must have a clear annual plan covering the desk’s budgeting and staffing. And the documented business strategy must include regular management information reports, covering revenue, costs, and risk-weighted assets for the trading desk specifically, not just at the bank-wide level.
Sourced from MAR12.4(2), in full, including sub-points (a) through (c).
https://www.bis.org/basel_framework/chapter/MAR/12.htm?inforce=20230101&published=20200327
Attribute 3: A Clear Risk Management Structure
The third and final key attribute is a clear risk management structure, built on three components: defined responsibilities, defined limits, and regular reporting.
Risk Management Responsibilities
The bank must identify the key groups and personnel responsible for overseeing the risk-taking activities at each trading desk — risk oversight cannot be a vague, shared responsibility with no named owner.
Trading Limits
Each trading desk must have clearly defined trading limits, based on the desk’s own business strategy, and senior management at the bank must review these limits at least annually. In setting these limits, a desk must have both of the following in place:
- Well-defined trading limits or directional exposures at the desk level, based on an appropriate market risk metric — for example, sensitivity to credit spread risk and jump-to-default risk for a credit trading desk — or, alternatively, simple overall notional limits.
- Well-defined trader mandates.
Weekly Risk Management Reports
Every trading desk must produce appropriate risk management reports at least weekly. At minimum, these must include:
- Profit and loss reports, which are periodically reviewed, validated, and modified if necessary by Product Control.
- Internal and regulatory risk measure reports, including the trading desk’s VaR and Expected Shortfall figures, the desk’s VaR/ES sensitivities to its risk factors, backtesting results, and the associated p-value.
| Connecting This Back to Our Glossary Articles The VaR, Expected Shortfall, backtesting and sensitivity terms in this weekly reporting requirement are exactly the terms we defined in Articles 4A and 4B. This is a good example of why that glossary groundwork mattered: MAR12’s reporting requirements read as a fairly dense checklist unless you already know what a p-value from backtesting or a VaR sensitivity report actually represents. |
Sourced from MAR12.4(3), in full, including sub-points (a) through (c).
https://www.bis.org/basel_framework/chapter/MAR/12.htm?inforce=20230101&published=20200327
Additional Documentation Every Desk Must Keep on Hand
Separate from the three key attributes above, the standard requires banks to prepare, evaluate, and make available to supervisors a further set of reports for every trading desk:
| # | Report |
| 1 | Inventory ageing reports. |
| 2 | Daily limit reports, including exposures, limit breaches, and the follow-up action taken. |
| 3 | Reports on intraday limits and their respective utilisation and breaches, for banks with active intraday trading. |
| 4 | Reports on the assessment of market liquidity. |
Sourced from MAR12.5.
The Special Case: Notional Trading Desks for Banking Book FX and Commodity Risk
This final rule connects directly back to Article 5A. Any foreign exchange or commodity positions held in the banking book must still be included in the market risk capital requirement, per MAR11.1 — recall that FX and commodity risk are the two risk types that follow an instrument into market risk capital regardless of which book it technically sits in.
MAR12.6 tells us exactly how that gets operationalised for the trading desk framework: for regulatory capital calculation purposes, these banking book FX and commodity positions are treated as if they were held on notional trading desks within the trading book. The positions themselves never leave the banking book — RBC25’s classification rules from Article 2 are not being overridden here — but for the specific purpose of running them through the Standardised Approach’s desk-based capital machinery, the standard fictionally assigns them to a notional desk.
| Why “Notional” Desks Are Necessary Every mechanism we have covered in this article — head traders, business strategy documentation, weekly risk reports — assumes a real, staffed trading desk. Banking book FX and commodity risk does not sit behind an actual trading desk in that sense; it is simply an exposure the bank happens to carry. A notional trading desk is the standard’s way of giving that exposure a home inside the Standardised Approach’s calculation structure, without pretending the banking book itself has somehow become a trading operation. |
Sourced from MAR12.6.
https://www.bis.org/basel_framework/chapter/MAR/12.htm?inforce=20230101&published=20200327
The Complete MAR12 Picture
| Requirement Area | Key Elements | Covered In |
| Definition and approval | Basic definition, bank proposes/supervisor approves, operational subdesks | Part A (MAR12.1–12.3) |
| Attribute 1: People | Trading accounts, head trader rules, one-desk presumption, reporting lines, compensation | Part A (MAR12.4(1)) |
| Attribute 2: Business strategy | Economics, activities, hedging approach, budgeting, MI reports | Part B (MAR12.4(2)) |
| Attribute 3: Risk management | Responsibilities, trading limits, weekly reports | Part B (MAR12.4(3)) |
| Additional reporting | Inventory ageing, daily/intraday limits, market liquidity | Part B (MAR12.5) |
| Notional desks | Banking book FX/commodity risk treated as a notional trading desk | Part B (MAR12.6) |
Looking Ahead
With RBC25, MAR10, MAR11, and now MAR12 fully covered, every foundational chapter of the standard is behind us. The next article finally begins the Standardised Approach itself: MAR20 sets out the three-component structure — the Sensitivities-Based Method, the Default Risk Capital requirement, and the Residual Risk Add-On — that every remaining article in this series builds on.
Frequently Asked Questions
What must a trading desk’s weekly risk report include?
At minimum, profit and loss reports reviewed by Product Control, plus internal and regulatory risk measure reports covering VaR/Expected Shortfall, sensitivities to risk factors, backtesting results, and the backtesting p-value.
How often must a desk’s trading limits be reviewed?
At least annually, by senior management at the bank, based on well-defined trading limits or directional exposures and clear trader mandates.
What is a notional trading desk?
A fictional desk assignment used purely for capital calculation purposes, applied to foreign exchange or commodity positions that sit in the banking book. It lets these positions run through the Standardised Approach’s desk-based structure without actually being managed by a real trading desk.