Internal regulations and procedures for financial trading units

Abstract

It is the purpose of this paper to suggest proactive policies and procedures for the adequate management of trading risk exposure within financial operating units. As such, this paper discusses the relevant risks that trading units should deal with and highlights the main obstacles to the launching of successful trading activities in emerging economies, and thereafter provides a number of viable solutions along with recommended internal regulations and procedures. The objective of this paper is to share with financial markets’ participants, regulators and policy makers some of the author's real-world experiences and observations as a derivatives trader and later as a trading risk manager in emerging markets. The endeavour here is to provide several robust guidelines that can assist both emerging and developed markets in the establishment of sound trading units within a prudential framework of rules and policies. The guidelines and internal regulations that are discussed in this work will be of value to financial entities, regulators and policy makers operating mainly within the context of emerging markets. A number of feasible key risk management rules and procedures that should be considered in strengthening trading units are examined and adapted to the specific needs of emerging markets. This is with the objective of setting up a practical framework for trading risk measurement, management and control reports. The suggested viable guidelines and procedures can be implemented in almost all emerging economies, if they are adapted to correspond to each market's initial level of sophistication. The main contribution of this paper is in the introduction of practical trading risk management internal regulations and procedures. The trading risk management internal rules that are discussed in this work will aid financial markets’ participants, regulators and policy makers in founding sound and up-to-date policies to handle trading risk exposures with special emphasis on foreign exchange trading activities. Although a substantial literature has examined the statistical and economic meaning of trading risk models, this paper provides pragmatic guidelines and internal regulations that can be applied for trading risk management in financial markets. This paper fills a gap in the risk management literature by providing a practitioner's views on how to set-up sound and effective trading units, particularly from the perspective of emerging markets. This paper will be of value to those interested in founding a successful and sound trading environment of cash securities and derivative products in emerging and developed markets.