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FRM Part II · FRM Exam Part II · Solvency, Liquidity and Other Regulation After the Global Financial Crisis

A dealer bank's desk holds a large inventory of corporate bonds and says it is exempt from the Volcker Rule's proprietary trading ban under the market-making exemption. Which evidence would most strongly support that claim?

The strongest support is that the desk's inventory is sized to the reasonably expected near-term demand of clients and is controlled by limits and monitoring linked to that demand. Profit levels, directional long-term views or funding choices do not demonstrate market-making and may point to proprietary trading.

  1. AThe inventory is sized to the reasonably expected near-term demand of clients, with limits and monitoring tied to that demandCorrect
  2. BThe desk's trading profits have consistently exceeded the bank's cost of equity
  3. CThe positions are held mainly to profit from expected long-term price appreciation
  4. DThe positions are financed entirely with long-term wholesale debt

Explanation

The market-making exemption requires that inventory be designed not to exceed the reasonably expected near-term demand of clients, customers or counterparties, supported by limits and controls. Profitability, directional long-term views and funding structure do not show client-demand orientation; directional views suggest proprietary trading.

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