Pilot Exercise—Pre-Commitment Approach to Market Risk

Set forth below in Part I is a discussion of the backgroundof the Pilot; in Part II, conclusions arising out of the conductof the Pilot; and in Part III, the Participating Institutions’views as to the next steps. The Pilot left the ParticipatingInstitutions with three core conclusions:• that the Pre-Commitment Approach is a viable alternativeto the internal models approach for establishingthe capital adequacy of a trading business forregulatory purposes. When properly structured andrefined, it should be implemented as an alternative,and not an “add-on,” to existing capital standards;• that, for progress to be made, it is essential that thebank regulatory agencies participate actively withthe banking industry in the effort to refine how thePre-Commitment Approach would be implementedin practice; and• that the most important remaining question requiringan answer is what penalty would result for aninstitution that incurs losses in its trading businessexceeding its pre-committed amount for a relevantperiod.[...]