Regulation of the National Bank of Belgium of 1 April 2014 on proprietary trading activity

Title

2014A03191

1 APRIL 2014. - Regulation of the National Bank of Belgium on proprietary trading activity (NOTE: Consultation of previous versions from 07-05-2014 and update as of 01-09-2022)

Source: Finances

Publication: 7 May 2014

Number: 2014A03191

page: 36996

Case Number: 2014-04-01/05

Entry into force: 7 May 2014

1 archived version

2 implementation decisions

Section 1. - Definitions
Art. 1-3
Section 2. - Transactions with clients, transactions executed as market maker and hedging operations Art. 4-7 Section 3. - High-risk transactions Art. 8 Section 4. - Governance and compliance program Art. 9-13 Section 5. - Reporting Art. 14-17

Text

Section 1. - Definitions

Article 1st.§ 1. Unless otherwise stated, the terms used in this regulation have the same definitions as those provided by Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012.

§ 2. For the purposes of this regulation, the following shall be understood:

1) Law: the Law of 25 April 2014 on the status and supervision of credit institutions.

2) Regulation 575/2013: Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012.

[1 2bis) SSM Regulation: Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.]1

3) Trading activities: all positions in financial instruments held for trading purposes or to hedge elements of the trading book. These activities include:

the sale and purchase of debt or equity securities, or other claims, issued or not by the institution,
the purchase and sale of currencies and commodities,
the conclusion of derivative contracts,
the firm commitment to financial instruments and the placement of financial instruments with firm commitment.

4) Material trading activities: a counterparty is presumed to engage in material trading activities when:

i. Trading activities based on the average of the last three published annual accounts exceed 50 billion euros. Trading activities are estimated based on the sum of trading assets and liabilities divided by two. This sum is calculated based on the consolidated situation when the counterparty publishes consolidated annual accounts;

ii. The counterparty is a market maker who offers bid and ask prices for financial instruments and acts as counterparty to these prices for minimum quantities in order to provide liquidity to the relevant instruments. In this case, the counterparty is considered to have material trading activities only for the financial instruments in question.

5) Trading unit: a trading desk of an institution that is responsible for one or more trading activities.

6) Derivatives: derivative contracts referred to in points 4 to 10 of Section C of Annex I of European Directive 2004/39/EC.

7) Trading assets: the sum of net trading assets and 80% of derivatives held for trading purposes, as defined by the accounting standards used by the institution to verify compliance with the solvency standards defined by Regulation 575/2013, where

net trading assets are defined as the sum of, on the one hand, assets held for trading purposes less derivatives held for trading purposes on the asset side, and, on the other hand, short positions in the trading book of securities and negotiable instruments;
derivatives held for trading purposes are defined as the arithmetic mean between derivatives held for trading purposes on the asset side and derivatives held for trading purposes on the liability side.

8) Market risk capital requirements: the capital requirements applicable to the trading book calculated in accordance with Title IV of Regulation 575/2013, excluding the requirement for exchange rate risk.

Balance sheet management: management of market and structural credit risks related to the commercial activity of granting loans and collecting deposits.

(1)<AR 2022-04-12/01, art. 1, 002; In force: 11-09-2022>

Art. 2. § 1st. In accordance with Article 119 of the Law, and without prejudice to Article 121 of the Law, proprietary trading activities are prohibited.

§ 2. Unless the institution demonstrates that they are carried out in accordance with the framework measures and limits set out in this regulation, transactions deliberately executed with a view to short-term resale and/or with the intention of profiting from short-term differences, actual or anticipated, between bid and ask prices or other variations in market prices, are presumed to be carried out for proprietary trading purposes. This is particularly the case when:

i. The institution does not intend to hold the position or financial instrument for more than six months; or

ii. When the position or financial instrument is included in trading assets and liabilities based on applicable accounting rules, unless the institution can demonstrate that these transactions are used to hedge risks resulting from transactions outside the trading book; or

iii. When these transactions result in one or more short positions (not offset by a long position) in a debt or equity security or other financial instruments whose underlying assets are debt or equity securities.

Art. 3. § 1st. In accordance with Article 121, § 1st, 5° of the Law, transactions in financial instruments carried out within the framework of the investment portfolio or, more generally, balance sheet management, are not covered by the prohibition in Article 119 of the Law, provided that the institution must have the firm intention to hold the securities and other financial instruments in the investment portfolio on a durable basis, in principle until their maturity date.

§ 2. The institution must also demonstrate:

i. In particular with regard to the investment portfolio, that it has the necessary funding capacity to hold the securities on a durable basis;

ii. That investment transactions have the objective and effect of ensuring the reinvestment of available funding collected in the form of deposits or issuance of securities by the institution while awaiting their reinvestment in the form of loans, or to contribute to the formation of a portfolio of liquid assets in accordance with the institution's liquidity risk management strategy;

iii. That transactions have the objective and effect of essentially generating a stable income stream for the institution, in the form of an interest margin or dividends on shares;

iv. That hedging transactions, in particular interest rate and exchange rate derivatives, have the objective and effect of stabilizing income flows and the impact, on the result or equity, of variations in market prices, of a deterioration in credit risk, or the default of a counterparty of the institution.

It is for the institution to demonstrate that the above conditions are met and that the transactions are not carried out for proprietary trading purposes within the meaning of Article 2.

In order not to be considered as proprietary trading transactions, the transactions concerned cannot be carried out by trading units responsible for managing trading book transactions or under the hierarchical responsibility of the head of the relevant trading units. A hierarchical separation must exist between the trading units and the departments responsible for managing the institution's centralized balance sheet position. The structure put in place, including the remuneration arrangements for the managers of the institution's structural market risk position, must not incentivize risk-taking that is excessive or carried out with a view to short-term results.

§ 3. In accordance with Article 121, § 1st, 4° of the Law, an institution is authorized to carry out transactions in financial instruments for the purpose of managing its liquidity position and its stock of liquid assets, provided that these transactions are in accordance with the strategy defined by the institution regarding liquidity management, in particular because they are necessary to ensure compliance with the regulatory provisions on liquidity resulting from Regulation 575/2013.

This strategy must in particular:

i. Formally define the nature, amount, and risks associated with the financial instruments used for liquidity management and the circumstances in which financial instruments may be used. Financial instruments acquired or sold under this framework must be highly liquid so that the institution should not reasonably expect to be able to profit from short-term price differences; and

ii. Ensure that each acquisition or sale of financial instruments is carried out primarily to ensure and manage the institution's liquidity and is in accordance with the liquidity strategy, and not to realize a profit by executing a short-term sale or profiting from short-term price differences.

The acquisition or sale of securities or other assets by an institution resulting from a repo or reverse repo transaction, as well as the acquisition or sale of securities or other assets by an institution within the framework of a temporary securities lending and borrowing operation, are also not considered as trading activities when carried out within the framework of the institution's liquidity management.

In order not to be considered as proprietary trading transactions, the transactions concerned cannot be carried out by trading units responsible for managing trading book transactions or under the hierarchical responsibility of the head of the relevant trading units. A hierarchical separation must exist between the trading units and the departments responsible for managing the institution's liquidity position. The structure put in place, including the remuneration arrangements for the managers of the structural market risk position, must not incentivize risk-taking that is excessive or carried out with a view to short-term results.

§ 4. Furthermore, the following transactions are not considered as proprietary trading activities:

i. The purchase and sale of financial instruments provided that the transaction is carried out to ensure an existing delivery obligation, in particular to prevent a delivery default, within the framework of a clearing or settlement activity;

ii. The purchase and sale of financial instruments carried out in a fiduciary capacity by the institution on behalf of a counterparty and in which the institution bears no counterparty or market risk;

iii. The holding and sale of securities or assets received in representation of doubtful or non-performing claims, as well as the sale of securities or financial assets serving as security for doubtful or non-performing claims;

iv. Transactions carried out to hedge market or credit risks resulting from transactions referred to in points i. to iii. or resulting from the commercial activity of granting loans and collecting deposits.

Section 2. - Transactions with clients, transactions executed as market maker and hedging operations

Art. 4. § 1st. For the purposes of Article 121, § 1st, 1°, the term "client" includes any counterparty having the status of an individual, business, authority, or public administration, as well as other counterparties who carry out transactions with the institution's trading room, directly or through the commercial network, provided that these counterparties are not themselves trading entities within the meaning of the Law or professional clients referred to in Annex II, first paragraph, I, point 1 of Directive 2004/39/EC, who engage in material trading activities.

Without prejudice to Articles 120, 129, and 130 of the Law, trading entities within the meaning of the Law or professional clients engaging in material trading activities may nevertheless be considered as clients for all or some of their services if the institution can demonstrate that it provides these services on a continuous basis to counterparties and is ready to respond to their requests by acting as counterparty for reasonable amounts considering the liquidity, maturity, and market depth of the relevant financial products.

§ 2. The institution must document in detail to what extent the counterparties for the relevant services, where applicable by category or type of counterparty, meet the above conditions.

Art. 5. § 1st. For each of the trading units concerned within the institution, the institution must formally define the nature of the services and financial products that will be offered to clients. These trading units must provide these services on a continuous basis to clients and be ready to respond to their requests by acting as counterparty for reasonable amounts considering the liquidity, maturity, and market depth of the relevant financial products.

§ 2. For each of the trading units, the amount, types, and risks associated with financial instruments must be formally limited taking into account client needs and sound risk management. The institution must base its policy on an assessment of the current and future needs of the clientele at each trading unit.

On this basis, the institution is authorized to hold stocks of securities or positions in financial instruments to optimally respond to the expected short-term demand from clients. It may carry out transactions on the markets in order to guarantee an optimal price to clients, provided that transactions initiated by clients and associated hedging transactions remain predominant.

§ 3. In accordance with Articles 10 and following, the institution has put in place, and applies continuously, a compliance program to ensure compliance with the Law and this regulation. This system includes written policies, procedures for monitoring compliance with them, and analyses of activities carried out within trading units. This includes in particular:

i. A definition of the types of financial products that each trading unit may offer to clients. These financial products must be defined with regard to the current and expected needs of clients.

ii. A framework of limits for the activities of each trading unit and applicable at the level of each of them, adapted to the nature and volume of client activity handled by the units in question, which provides in particular:

a. for securities, limits by type of instrument and by amount of positions held by the institution;

b. limits in terms of risk factors resulting from financial instruments handled by trading units.

iii. The definition of the strategy that trading units must adopt to reduce or limit risks related to transactions with clients, including the definition of products, instruments, and hedging techniques that trading units may use in this framework.

iv. The definition of the process put in place and the assignment of responsibilities to ensure that actions taken by trading units to limit risks related to their activities are effective.

v. The establishment of independent control ensuring monitoring and analysis, for each trading unit, of compliance with the limits specific to each activity. In the event that one of the defined limits is exceeded, the trading unit must take the necessary measures to comply with the limit again as soon as possible. These breaches must be subject to relevant analysis, independent of the trading units, considering in particular client demand or the liquidity and market depth of the relevant financial instruments or hedging instruments.

Art. 6. § 1st. Subject to § 2, the rules referred to in Articles 4 and 5 apply mutatis mutandis to market maker activities covered by Article 121, § 1st, 2° of the Law.

§ 2. For transactions carried out within the framework of Article 121, § 1st, 2° of the Law, trading entities within the meaning of the Law or professional clients with material trading activities may be treated as clients without the institution having to demonstrate that the conditions referred to in Article 4, § 1st, al. 2 are met.

Art. 7. § 1st. For the application of Article 121, § 1st, 3° of the Law, institutions may carry out all transactions necessary to hedge risks resulting from transactions with clients and market makers, as well as to limit market and credit risks related to their commercial activity of granting loans and collecting deposits, their investment portfolio, and their liquidity management, provided that they meet the conditions provided by this article.

Transactions carried out under this framework may have as counterparties trading entities within the meaning of the Law or professional clients with material trading activities.

§ 2. The institution puts in place, and applies continuously, an internal control system to ensure compliance with the Law and this regulation regarding hedging activities. This system includes in particular:

i. Written policies, procedures for identifying and measuring risk positions, and hedging strategies envisaged, which must be adapted to the positions and financial instruments handled by trading units;

ii. A system for monitoring compliance with these policies and procedures, with an appropriate internal notification procedure in the event of non-compliance;

iii. A procedure for analyzing the adequacy of hedging strategies, including an independent analysis of the correlation between risks associated with the elements to be hedged and the hedges, which ensures that the strategies put in place effectively reduce the risks that are the subject of the hedging.

§ 3. The institution must be able to demonstrate, on a documented basis and, where applicable, on an aggregated basis at each trading unit:

i. That transactions made as hedging are carried out within the framework of the policies and procedures referred to in paragraph 2. Continuous monitoring of compliance with these policies and procedures must be ensured;

ii. That hedging transactions are designed to eliminate or significantly reduce one or more identifiable risks borne by the institution, including market, credit, or counterparty risks, exchange rate risks, interest rate risks, commodity risks, spread risks, or basis risks, resulting from open positions related to transactions with clients or market makers. The institution must be able to demonstrate, by risk factors, the risk-reducing nature of hedging transactions by comparing the risk position with and without the hedging transactions;

iii. That monitoring of the efficiency of transactions in reducing risk is ensured and, where applicable, that hedging transactions are adapted, in particular to reduce new risks that may have arisen in the meantime;

iv. That transactions made as hedging do not create, at the conclusion of the transaction, significant additional risks that would not themselves be subject to adequate hedging, limitation, or framework.

§ 4. The institution may carry out global hedging transactions, i.e., for sets of transactions or by market or credit risk factor, in particular by centralizing, where applicable via internal contracts, the management of each risk factor in specific trading units.

Section 3. - High-risk transactions

Article 7

§ 1. Transactions in financial instruments, including for investment purposes, from which a material position vis-à-vis highly risky assets or risky trading strategies would result directly or indirectly, are considered as proprietary trading activities prohibited within the meaning of Article 119 of the Law.

§ 2. Assets or trading strategies are qualified as highly risky if, when held or pursued by the institution, they significantly increase the probability that the institution will suffer material losses or affect the stability of the institution.

§ 3. The following are presumed to be covered by the definitions in paragraph 2:

i. Proprietary operations and commitments, not secured by adequate collateral, vis-à-vis investment undertakings referred to in Article 120, paragraph 1, a) of the Law. Collateral may be considered adequate insofar as they are financial collateral that meet the eligibility conditions and limits of Title III, Chapter 4 of Regulation 575/2013.

ii. Proprietary operations and commitments, not secured by adequate collateral, vis-à-vis investment undertakings referred to in Article 120, paragraph 1, b) of the Law, whose assets are composed of more than 10% of exposures vis-à-vis collective investment undertakings referred to in point a) of the same article. The 10% ratio may be exceeded if the relevant exposures are secured by adequate collateral in accordance with point i above.

iii. Exposures on tranches of securitization whose underlying assets are not exclusively loans or debt securities and include in particular:

other securitization tranches;
derivatives other than on exchange rates and/or interest rates used to reduce the exchange rate and interest rate risks generated by the underlying assets.

iv. Exposures arising from correlation trading portfolios within the meaning of Regulation 575/2013.

§ 4. The NBB may, on an individual basis, extend the list of so-called highly risky activities based on the analysis of the products and strategies processed by institutions, and in particular include:

i. Exposures on financial instruments valued at market value that involve significant leverage, are considered complex, or for which there is no liquid market allowing for rapid hedging and sufficiently reliable valuation of positions based on market prices or available market indicators;

ii. Exposures or strategies, in particular in derivatives, which could generate excessive and uncontrollable outflows of liquidity from the institution due to applicable margin calls.

In this analysis, the NBB takes into consideration the extent to which potential liquidity outflows are already covered by applicable provisions on liquidity standards, in particular those provided for in Article 423 of Regulation 575/2013.

Section 4. - Governance and Compliance Program

Article 8

§ 1. Institutions organize their trading activities in such a way as to ensure a separation between activities carried out for trading purposes and other activities. A trading unit may not simultaneously be in charge of trading activities and activities that are not carried out for this purpose, in particular liquidity management or investment portfolio activities referred to in Article 3 of this Regulation.

They put in place internal control measures that ensure compliance with the Law and this Regulation, in particular by providing procedures allowing for the identification of authorized transactions in accordance with Article 121 of the Law and the risks associated with them, and of transactions that are not authorized and are therefore subject to the threshold referred to in Article 123 of the Law.

§ 2. The remuneration policy for staff authorized to carry out transactions involving risk working in trading units is defined in accordance with Section V of the Law. These persons are considered to have a significant impact on the risk profile of the institution within the meaning of Article 67 of the Law.

§ 3. Furthermore, the following principles apply:

i. The board of directors defines the general policy and the acceptable level of risk in terms of trading activities;

ii. The organization provides that each trading activity is assigned to a trading unit within the trading room and that for each trading unit, a written policy and procedures regulate the activity of the unit. These policies and procedures include the elements described in Articles 9 and following, and are consistent with the general policy and acceptable level of risk defined by the board of directors;

iii. A separation of hierarchical lines exists between, on the one hand, the units in charge of carrying out market operations and, on the other hand, the units responsible for ensuring their administrative processing, controlling their risks, measuring their results, and valuing their positions;

iv. In accordance with Article 3, §§ 2 and 3, institutions create within themselves one or more balance sheet management and liquidity management functions that are independent of the trading units. They are responsible for managing the investment portfolio, the structural market and credit risk position resulting from credit and deposit-taking activity, short-term and long-term cash management, including the institution's funding strategy. The structure put in place, including the remuneration terms for the heads of these functions, must not encourage excessive risk-taking or risk-taking with a view to short-term results.

These independent functions may, where appropriate, use the services of trading units, in particular through internal contracts, to carry out transactions necessary for managing structural positions in market and credit risks resulting from investment activity, balance sheet management, and liquidity management. However, trading units should place these internal contracts on the market as soon as possible, and if this is not done systematically, it should be prohibited to hold significant or long-term positions via these contracts.

The NBB may authorize derogations from these principles to take into account the size and nature of a credit institution's activities and its trading room.

Article 9

§ 1. Each institution must develop, and provide to the NBB, a compliance program to ensure compliance with the prohibition of proprietary trading activity provided for by the Law and, for authorized trading activity, the restrictions provided for by this Regulation. The compliance program is adapted to the nature and scale of the trading activities developed by the institution. This program applies to trading activity, including with regard to intraday transactions.

It must include a detailed description of the controls put in place to ensure that these activities are conducted in accordance with the requirements and limitations applicable under the Law and this Regulation. An appropriate review of the compliance program must be planned periodically and before any expansion of trading activities.

§ 2. The compliance program must include at least:

i. written policies and procedures that document, describe, and define the monitoring and limitation measures for trading activities covered by this regulation, including the definition of the nature of these activities within the institution;

ii. an internal control system to ensure compliance with the provisions of the Law and this Regulation and to prevent the development of activities that would not be authorized by the Law and this regulation;

iii. a management framework that clearly assigns responsibilities within the institution regarding compliance with the provisions of the Law and this Regulation and includes appropriate monitoring, in particular of limits on trading activity, strategies developed, hedging operations, and remuneration terms for trading room participants;

iv. a process for periodic independent monitoring and assessment of the adequacy of the compliance program and its application, effectively involving internal audit, compliance, and risk management functions;

v. an appropriate training program for staff responsible for trading activity or its control to ensure that they are appropriately informed about the compliance program and the legal restrictions applicable to trading activity;

vi. sufficient documentation on activities conducted and transactions carried out to demonstrate compliance with the Law and this regulation. At the request of the NBB, the institution must be able to provide, as soon as possible, any documentation on transactions carried out. Said documentation must be kept for a period of at least five years.

Article 10

§ 1. In order to comply with Article 10, the institution must define policies and procedures specifying and regulating the activity of each of the trading units. This includes at least:

i. A description of the process for the identification, authorization, and documentation of financial instruments, and trading strategies and activities, that each trading unit may process. The process put in place must ensure that trading units cannot decide alone on the types of financial instruments and trading strategies they can use and develop. The nature of trading activities and the strategy in this regard must be approved by the management bodies of the institution;

ii. A description of the organizational structure allowing for the identification, for each trading unit, who is responsible for which activity and who is involved in its administration and control. The structure put in place must ensure a separation of hierarchical lines between, on the one hand, the units in charge of carrying out market operations and, on the other hand, the units responsible for ensuring their administrative processing, controlling their risks, measuring their results, and valuing their positions, and ensuring that the activities developed correspond to what has been authorized by the management bodies;

iii. For each trading unit, a description of the missions (in particular type of authorized trading activities and nature of clients), authorized trading and hedging strategies, and types of financial instruments sold, purchased, or used for hedging purposes. The missions must be defined with regard to the different categories referred to in Article 121 of the Law to allow for the identification of activities that are authorized under this article and those that are subject to the threshold set in Article 123. These missions must be justified by the analysis of client needs;

iv. A description of the nature and amount (i.e., limits) of risks and positions that each trading unit is authorized to take;

v. A description of the methodologies used to measure risks and the justification of their adequacy;

vi. A justification of the appropriateness of the limits imposed on authorized activities and risks, in particular with regard to the nature of the activities, the possibility of efficiently covering risks, and the solvency of the institution;

vii. A monitoring of the period of time during which financial instruments, essentially trading securities inventories, are held. The monitoring must ensure that trading units cannot maintain open positions or inventories of financial instruments for a long duration that could be considered as unjustifiable directional positions with regard to client needs;

viii. A description of the process for identifying, documenting, and approving new products and new trading or hedging strategies;

ix. A description of the nature or type of clients or counterparties with which each trading unit is authorized to deal and the process for determining them;

x. A description of the remuneration terms for staff responsible for trading activity.

§ 2. The compliance program must also provide for a risk management process for trading activity that allows concluding that these risks are limited and that the activity remains confined to what is authorized by the Law and this Regulation. The program includes in this regard:

i. A description of the process for monitoring the risks of each activity and trading unit;

ii. A description of the process for the development, documentation, validation, approval, and revision of models used to measure, identify, and monitor the risks of trading activity, including the process for independent validation of the reliability and accuracy of the relevant models;

iii. A description of the process put in place to define, document, test, approve, and review the limits of each of the trading units;

iv. For each trading unit and type of transaction, a description of the process put in place to ensure that transactions carried out in the context of liquidity management or for investment purposes as defined in Article 3 are consistent with the institution's liquidity and investment management strategy;

v. A description of the process put in place, including authorization at an appropriate hierarchical level, to manage cases of non-compliance with limits by trading units.

§ 3. The institution must formally provide for a policy and procedures regarding the use of hedging instruments or strategies that define at minimum:

i. The instruments and strategies that each trading unit may use to cover risks related to its positions. The instruments and strategies used must be adapted according to the activities of the trading units and be justified with regard to the conditions of Article 7;

ii. The methodology used to measure and identify risks resulting from transactions that must be covered, individually or on an aggregated basis, and ensure that these risks have been correctly identified and covered;

iii. The organization put in place for hedging activity and in particular the description of the role of each of the relevant trading units;

iv. The methodology put in place to monitor hedging activities and their overall efficiency, as well as the persons responsible for this monitoring. Monitoring must be ensured by a control function independent of the trading units, which must also rule on the adequacy of hedging instruments and strategies with regard to the Law and this regulation;

v. The processes put in place to control and limit residual or uncovered risks;

vi. The processes for defining, documenting, validating, approving, and reviewing hedging transactions as well as the hedging techniques and strategies authorized at the level of each trading unit.

§ 4. The institution must define the role of and allocate the necessary resources to the control functions, namely internal audit, the compliance function, the risk management function, and other competent departments (such as back office and middle office), in the context of independent monitoring of the activities of trading units.

These control functions must, within the scope of their competence, carry out systematic quantitative and qualitative analyses of trading activities to ensure that these activities are conducted in conformity with the institution's internal policy and with legal and regulatory provisions, in particular to avoid that activities not authorized by the Law are carried out. They must develop relevant indicators for this purpose. These analyses and indicators relate in particular:

i. To the origin of the results of trading units. In this regard, it is expected that the institution be able to analyze, for each trading unit, the origin of results by distinguishing the part of the result coming from variations in market factors (position taking) from that resulting from pure intermediation activity (customer margin). For authorized trading activity with clients under Article 121, § 1, 1° of the Law, it is expected that the institution be able to demonstrate that the profitability of the activity is globally justified by the result of intermediation (or "spread") or by the remuneration for services paid by clients;

ii. On compliance with internal limits related to risks;

iii. On compliance with limits related to the volume of inventories and positions in trading securities;

iv. On the nature and volume of risks related to the activities of trading units. In this regard, the institution must evaluate whether the limit system and risk measurement methodologies are adapted to the nature and volume of risks and, if necessary, proceed to a revision thereof;

v. On breaches of internal limits and compliance with procedures put in place to manage and monitor these cases of breach;

vi. On the effectiveness of the risk-reducing nature of hedging operations. The institution must be able to demonstrate that, for each risk factor concerned, hedging transactions reduce the volume of risks to which the institution is exposed;

vii. The effectiveness of the institution's compliance program with regard to non-compliance with legal, regulatory, and internal provisions on trading activities.

Article 12

§ 1. Within the framework of Article 123 of the Law, the compliance program referred to in Article 10 and the measures governing authorized trading activities, including the definition of these activities and the main limits to which they are subject, must be approved by the legal administrative body.

This program, as well as the governing measures decided by the legal administrative body, are implemented under the responsibility of the management committee or the persons in charge of effective management.

This program and the governing measures are subject to an internal evaluation by the establishment, validated by the internal audit function, regarding their adequacy with respect to the Law and this Regulation. Necessary corrective measures are taken following this evaluation. The management committee or the persons in charge of the effective management of the establishment report to the NBB, on an annual basis, the conclusions of this evaluation and the measures taken as a result.

§ 2. The internal limit system that must be approved by the board of directors, in accordance with paragraph 1, must be determined taking into account the nature of the activities. It must not allow for risk-taking that cannot be justified by customer needs or by the market-making activities referred to in Article 121 of the Law.

The limit system must ensure that the establishment cannot, within the framework of its trading activities as defined in Article 121, § 1, 1° and 2° of the Law, including hedging operations allocated to these activities, lose on a 1-day horizon more than 0.25% of its Tier 1 capital as defined by Regulation 575/2013 due to a movement in the market factors to which the establishment is exposed. A higher limit may nevertheless be adopted if the establishment can demonstrate that this is necessary based on the nature and volume of activities developed with customers or as a market maker within the meaning of Article 121.

In accordance with Article 124 of the Law, this limit may exclude portfolios of financial instruments in run-off subject to prior authorization from the NBB. Authorization can only be granted if the establishment demonstrates that it takes appropriate measures to limit loss risks on these portfolios and based on a plan aimed at ensuring the orderly reduction of the activities concerned.

When the establishment is subject to consolidated supervision, this limit is calculated based on consolidated or, where applicable, sub-consolidated capital. Limits are nevertheless defined at the level of each entity, taking into account a balanced allocation of these limits based on the nature of the activities and the solvency level of the entities concerned.

The establishment must demonstrate that its limit system allows for compliance with the principles defined in paragraph 2 based on:

i. Risk limits calculated based on an internal market risk model that is effectively used for monitoring market risks. The model must be at least calibrated in accordance with the standards defined in Article 365, paragraph 1 of Regulation 575/2013 regarding market risk models; and,

ii. Limits based on the sensitivity of the portfolio positions' values taking into account historical variations in market prices.

§ 3. In addition to the limitation system referred to in paragraph 2, the establishment defines so-called stop-loss limits for each trading unit. These limits must be defined with regard to the solvency and profitability of the establishment such that it can be ensured that the trading activity cannot generate, on an annual basis, losses materially affecting the establishment's profitability level.

Organizational measures must provide for independent monitoring of the results generated by the trading activity. They must also provide that, if cumulative losses on positions in financial instruments of one or more trading units exceed a predetermined amount, a decision must be taken at an appropriate level regarding the hedging or maintenance of the positions concerned. The appropriate level is defined based on stop-loss limits but should involve not only the head of the trading activity within the establishment, but also an independent head of the trading activity and a risk management officer.

§ 4. Furthermore, the establishment must ensure that the trading activity is not the predominant activity by limiting the volumes of trading assets and the capital requirements related to market risks of the trading portfolio as defined by Regulation 575/2013.

In this regard, trading activities are considered excessive if either of the following two thresholds is exceeded:

Sum of trading assets > 15% of assets
Sum of capital requirements for market risk > 10% of capital requirements

In the event of exceeding these thresholds, the NBB will require the establishment, in application of Article 149 of the Law, to hold capital in an amount higher than that provided for by Regulation 575/2013 and other provisions of the Law. The additional required amount will be equal to the highest of the following two amounts:

1° (Trading assets - 15% of total assets);
2° (Sum of capital requirements for market risk - 10% of the sum of capital requirements) * 3.

Only positive amounts resulting from points 1° and 2° are taken into consideration.

The establishment may calculate these amounts based on the average of the situation as of the end of the month and the two preceding months, provided it uses this methodology consistently over time. The establishment informs the NBB of the method used.

The NBB may, on a case-by-case basis, authorize a credit institution to exclude derivatives or government securities of a Member State of the European Union for the purposes of the calculations referred to in paragraph 1 if the establishment can demonstrate:

i. That they are used for hedging purposes for its non-trading portfolio operations, possibly carried out within its subsidiaries. The NBB takes into account the implementation measures of the Royal Decree of 23 September 1992 regarding the annual accounts of credit institutions to assess the qualification of a hedging operation; or

ii. That they are linked and necessary to the market-making activity in government securities of a Member State of the European Union.

The additional requirement and the aforementioned thresholds are determined on a solo and consolidated or, where applicable, sub-consolidated basis.

Article 13

§ 1. Without prejudice to compliance with the limitations provided for in Article 12 and in accordance with Article 123 of the Law, the authorized trading activities referred to in Article 121 that do not fully meet the requirements of this Regulation cannot generate a market risk capital requirement exceeding the threshold set by Article 123 of the Law.

§ 2. The capital requirement will be calculated based on the provisions of Regulation 575/2013. Until 31 December 2017, establishments may use internal market risk models as authorized under Part Three, Title IV, Chapter 5 of Regulation 575/2013. From 1 January 2018, establishments must use the standardized market risk method as defined in Part Three, Title IV, Chapters 1 to 4 of Regulation 575/2013 or as modified following the publication by the Basel Committee of a new standardized market risk method.

It will be calculated based on the establishment's solo situation and on a consolidated or sub-consolidated basis, in accordance with the modalities provided by Regulation 575/2013.

§ 3. Transactions subject to this requirement include in particular:

i. Trading activities carried out within the framework of the activities provided for in Article 121 of the Law that the establishment has identified as not fully meeting the conditions of this regulation;

ii. Investment activities that are not carried out in accordance with Article 3 of this Regulation or the establishment's investment strategy;

iii. Activities carried out within the framework of liquidity management that are not carried out in accordance with Article 3 of this Regulation or the liquidity management strategy defined by the establishment;

iv. Transactions or activities that result in an exceedance of the risk limit referred to in Article 12, § 2. Occasional and non-repetitive exceedances of the risk limit or those resulting from a sudden increase in financial market volatility may be excluded, subject to NBB review and reasonable measures taken by the establishment to comply with this limit as soon as possible.

§ 4. Based on the examination of activities conducted by the establishment, via or outside its trading units, the NBB may decide to subject certain of these activities to the threshold of Article 123 if it finds:

i. That they do not fully meet the governing measures and limits provided by this Regulation;

ii. That the organization put in place by the establishment is not in compliance with the provisions of this Regulation and does not ensure that the trading activities conducted respect the provisions of the Law and this Regulation and present limited risk for the establishment;

iii. That the establishment is developing trading activities not identified as such.

§ 5. When it is found that an activity conducted by the establishment only partially meets the conditions set by the Law or this Regulation so as not to be subject to the threshold set by Article 123, all transactions related to the identified activity are subject to the threshold of Article 123 of the Law unless the establishment can isolate the non-compliant transactions.

§ 6. The threshold can only be used based on an authorization from the NBB which will take into account the nature of the activities concerned and the risks associated with them. The NBB sets a specific threshold for these activities which cannot exceed the maximum threshold set by Article 123 of the Law. The NBB takes into account the following elements to set the threshold:

i. The nature of the trading activities subject to the threshold and the risks associated with them.

In application of this principle, the threshold applicable to highly risky trading assets and strategies referred to in Article 8 will be reduced compared to the maximum limit of Article 123 of the Law.

The threshold may in certain cases be maintained at the maximum level provided by the Law in the following cases:

When the establishment can demonstrate that the activities concerned generate little risk. This will be the case notably when the activity consists mainly of the simultaneous purchase/sale of financial instruments for which liquidity and credit risks are adequately covered;
When the activity concerned remains partially compliant with the conditions of the Law and this Regulation, and the risks it generates remain limited. This will be the case for trading activities that serve customers but whose nature and volume of financial instruments traded or positions held, taking into account hedging operations, cannot be fully justified in accordance with Article 5.

The threshold will be set to zero for trading activities that do not meet the criteria of Article 121 of the Law, in particular position-taking activities not linked to customer needs and exposures covered by Article 120 of the Law.

ii. The quality of the compliance program put in place by the establishment.

§ 7. The establishment may also submit a reasoned request to the NBB to:

1° obtain authorization to exclude from the calculation of the aforementioned ratio the capital requirements generated by intra-group transactions aimed at centralizing market risk management at the level of the credit institution.

The credit institution must demonstrate that these transactions do not create additional risk at the group level and, in particular, serve to cover market risks of the group entities concerned resulting from their own activities. The exclusion is applicable only for the calculation of the requirement referred to in paragraph 1 on a solo basis and not on a consolidated basis.

2° grant a deadline to regularize its situation in the event of exceptional circumstances that are partly beyond its control. Exceptional circumstances must be justified with respect to external developments to the establishment such as:

The default or near-default of a significant counterparty of the establishment resulting in a significant loss and/or an open market risk position;
A modification of correlations between market risk factors that significantly reduces the effectiveness of hedging operations following unusual tensions in the financial market.

Section 5. - Reporting

Article 14

§ 1. The establishment must inform the NBB on an annual basis, and upon significant modification, of the content of the compliance plan referred to in Articles 9 and following. A modification of internal limits, as well as of the activity and risk profile of the trading desk, must be submitted to prior examination by the NBB to ensure that risks and activity remain circumscribed and that the development of activities remains compatible with legal and regulatory provisions.

§ 2. This annual notification includes at least:

i. A description of mandates (type of products, nature of transactions and clients, trading and hedging strategy) for each of the trading units;

ii. A description of the risk limitation system and authorized hedging strategies;

iii. A description of internal control measures carried out to ensure that the provisions of the Law and this Regulation have been respected;

iv. The results of the qualitative and quantitative analyses referred to in Article 10, § 4 and the conclusions drawn therefrom.

§ 3. By way of derogation from paragraph 1 and without prejudice to the obligation to inform in the event of a modification referred to in that paragraph, the establishment that is not subject, in application of Article 6, paragraph 4 or paragraph 5, point b) of the SSM Regulation, to the direct supervision of the European Central Bank, is required to inform the NBB of the content of the compliance plan every two years. The NBB may, however, when circumstances require, request more frequent reporting of the content of the compliance plan. This may be the case, for example, if an establishment is subject to specific events such as a significant change in its activities or when trading activity is material.

Article 15

For each trading unit and for the set of trading units, the establishment transmits on a quarterly basis to the NBB, quantitative information regarding:

Daily positions by risk factor and the sensitivity of the value of these positions to market price variations;
For establishments with an internal market risk model approved by the NBB, the risk amount measured by the internal model;
Daily results achieved and the analysis thereof;
The volume of transactions carried out during the quarter;
The effectiveness of hedging operations with regard to risk reduction.

Article 16

For the application of this Regulation, the NBB will apply a principle of proportionality and will take into account in particular the fact that trading activity is material within the establishment compared to non-trading portfolio activity.

Article 17

This Regulation enters into force when Article 119 of the Law of 25 April 2014 regarding the status and control of credit institutions takes effect, with the exception of Article 12, § 4 which enters into force on the day of publication of this Regulation in the Belgian Monitor.

Signature

Given in Brussels, on 1 April 2014.
The Governor,
L. COENE

Preamble

The National Bank of Belgium,
Having regard to Article 12bis of the Law of 22 February 1998 fixing the organic statute of the National Bank of Belgium; Considering that Article 119 of the Law of 25 April 2014 regarding the status and control of credit institutions prohibits any credit institution from exercising proprietary trading activities, whether directly or through Belgian or foreign subsidiaries; Considering that, in accordance with Article 121 of the Law of 25 April 2014, and subject to the following, operations on financial instruments that are part of the following categories of activities are not considered as prohibited proprietary trading activities:

1° the provision to clients of investment services and ancillary services, as defined in Article 46, 1°, points 1, 2 and 4 to 8, and 2°, of the Law of 6 April 1995 regarding the status and control of investment firms, aimed at meeting the financing, hedging or investment needs of clients;

2° market-making activities consisting of the regular and continuous presence, on a regulated market or in a multilateral trading system of which it is a member, of an operator who offers firm buy and sell prices for financial instruments, accompanied by an undertaking on its part to act as counterparty to these prices on minimum quantities, for the purpose of providing liquidity to the market concerned, provided that this operator is certified as a market maker by the market operator or investment firm operating the market or multilateral trading system in question;

3° hedging activities for the own risks of the credit institution or its subsidiaries, including risks related to the activities referred to in 1°, 2°, 4° and 5°;

4° the sound and prudent management of the liquidity of the credit institution and its subsidiaries;

5° the purchase and sale of financial instruments acquired with the intention of holding them on a long-term basis.

Considering that, in order not to be considered as prohibited proprietary trading activities, operations forming part of one of the five aforementioned categories of activities must meet the following conditions:

1° they must be carried out within risk limits and in compliance with the governing measures fixed by this Regulation;

2° with regard to transactions carried out within the framework of the activities referred to in paragraph 1, 1° to 3, the establishment must demonstrate that they are necessary for it to fulfill its role as intermediary for its clients;

3° with regard to transactions carried out within the framework of the activities referred to in paragraph 1, 4° and 5°, the establishment must demonstrate that they are necessary for the sound and prudent management of liquidity or investments;

Having regard to the consultation of credit institutions represented by their professional association,

Decrees:

Amendment(s)

Royal Decree of 12-04-2022 published on 01-09-2022

Articles modified:
1; 14

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