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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 trading desk holds an inventory of corporate bonds and says its positions are market making. Under the Volcker Rule's market-making exemption, which feature would most strongly support this claim?

Positions sized to reasonably expected near-term client demand, with revenue mainly from bid-ask spreads and fees, best support a market-making claim under the Volcker Rule. Inventory exceeding client needs or profit from price appreciation indicates proprietary trading rather than the permitted client-facilitating activity.

  1. APositions are sized to the reasonably expected near-term demand of clients, with revenue mainly from bid-ask spreads and feesCorrect
  2. BPositions are held to profit from expected medium-term price appreciation, with revenue from price changes
  3. CInventory is much larger than client demand so the desk can take directional views on credit spreads
  4. DThe desk trades only with other banks and never with clients

Explanation

The exemption requires inventory limited to reasonably expected near-term client demand, with income mainly from spreads, fees and commissions rather than appreciation. Directional positions beyond client demand look like proprietary trading. Trading only with other banks does not show client-facilitating activity.

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