NBB Circular NBB_2012_03: CEBS Guidelines of 12 October 2010 on Operational Risk Management Related to Trading Activities

NBB_2012_03 – 10 May 2012 Circular
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Prudential Policy and Financial Stability
Berlaimont Boulevard 14 – BE-1000 Brussels
Tel. +32 2 221 38 12 – Fax + 32 2 221 31 04
Company number: 0203.201.340
Brussels RPM www.bnb.be Circular
Brussels, 10 May 2012
CEBS Guidelines of 12 October 2010 on Operational Risk Management Related to Trading Activities Reference: NBB_2012_03
Page(s): 3
Your contact:
Marc Peters
Tel. +32 2 221 39 96 – Fax +32 2 221 31 04 marc.peters@nbb.be Scope This circular is addressed to financial companies, credit institutions, liquidation bodies, and entities assimilated to liquidation bodies.
Summary/Objectives
This circular aims to transpose the CEBS guidelines of 12 October 2010 on operational risk management related to trading activities into the Belgian prudential framework.
Madam,
Sir,
This circular aims to transpose the guidelines of the Committee of European Banking Supervisors (CEBS)1 of 12 October 2010 on operational risk management related to trading activities into the Belgian prudential framework.
It reproduces the guidelines developed by the CEBS in their entirety. These are developed around three main axes:
(a) Governance mechanisms (cf. principles 1 to 5) The section on governance mechanisms covers (1) the necessary attention of management bodies regarding operational risks affecting trading activities, (2) the dissemination within the trading room of a culture oriented towards mitigating operational risks, (3) the existence of control functions with the necessary competence, required authority, and motivation to exercise critical oversight over traders' activities, and (4) the prevention of any potentially fraudulent activity within trading activities. 1 The CEBS became the European Banking Authority (EBA) on 1 January 2011.

Circular NBB_2012_03 – 10 May 2012
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(b) Internal controls (cf. principles 6 to 15) The section on internal controls covers aspects related to (1) the initiation and conclusion of transactions (including adequate localization and timing), (2) documentation requirements, (3) the nature of relationships between traders and their counterparts, as well as (4) confirmation, settlement, reconciliation, and margin call procedures and processes, and (5) the quality of information systems used in this context. (c) Reporting systems (cf. principles 16 and 17) The section on reporting systems and their implementation criteria emphasizes the importance of producing reports adapted to the needs of recipients, both in terms of quality and relevance of content. Reports should also include an alert system adapted to the detection of incidents and suspicious operations. The NBB will rely on the principles set out in this circular as part of its evaluation of operational risk management related to trading activities. It is however useful to highlight that:

• this circular complements the existing body of rules regarding the organization of trading activities. Reference should be made in particular to Circulars B 82/3 of 25 March 1982 and B 90/1 of 17 April 1990 (adapted by Circulars B 92/5 of 30 November 1992 and D1 2001/10 of 7 December 2001). In case of conflict of rules, the most conservative provisions will be retained2;
• regarding transactions not conforming to market conditions, the NBB will continue to apply the provisions of Circular B 90/1 of 17 April 1990 and not the provisions introduced by the CEBS guidelines. Thus, institutions must ensure that their operations are concluded at conditions representative of the market situation at that time. However, certain roll-over operations at historical rates that are economically justified and occur structurally to meet a specific client need may be subject to an exemption upon prior agreement of the NBB.
  The following elements will be considered in particular when examining the exemption application:
• the limited size of exposures and the number of clients concerned;
• the duration and frequency of roll-overs;
• the economic justification for clients of the transactions considered;
• the transparency of operations from an accounting point of view (for the concerned client and institution);
• the existence of strict internal policies and procedures regarding governance, accounting, and risk management for this type of transaction; and,
• the existence of appropriate review of the activity by internal audit and compliance departments.
  The principle of proportionality will be considered in this context. The NBB therefore expects that operational risk management related to trading activities be, in each institution, adapted to the nature, volume, and complexity of the activities undertaken and the risks incurred. 2 Cases not specifically addressed by the CEBS guidelines are included, such as the prohibition for a trader to act, directly or indirectly, for their own account or the account of other staff members of the institution, and the prohibition to execute operations with retroactive effect (trade date and/or value date).

Circular NBB_2012_03 – 10 May 2012
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The administrative bodies of each institution will ensure the implementation of an adequate risk management system, requiring a set of effective integrated measures, adapted to the organization and functioning of the institution, and compliant with the principle of sound and prudent management. In this framework, institutions will take the necessary measures to comply with the principles of this circular. A copy of this is transmitted to the commissioner(s), approved auditor(s) of your institution. We ask you to accept, Madam, Sir, the expression of our distinguished consideration. Françoise Masai Deputy Governor
Appendix: NBB_2012_03-1 / Guidelines for the Management of Operational Risk Related to Trading Activities