Upper Tribunal Tax and Chancery Chamber

UT (Tax & Chancery) UT-2022-000134 UT-2022-000135 UT-2022-000137 - [2025] UKUT 00214 (TCC)

Fecha: 31-Ene-2025

MHI and the EGB Trading Desk

MHI and the EGB Trading Desk

Volcker Rule and the EGB Desk Mandate

185.

The SOABF [11] records that US legislation known as the “Volcker Rule” prohibits banks from engaging in proprietary trading, ie short-term trading for their own profit and refers to one of the statutory exemptions from this general prohibition for “market making-related activities”.

186.

Under the Volcker Rule, MHI was required to have an internal compliance program designed to ensure compliance with the requirements, including by written policies and procedures and internal controls. This includes policies identifying the instruments in which the trading desk is a market-maker, the actions it will take to “demonstrably reduce or otherwise significantly mitigate promptly the risks of its financial exposure”, including “the products, instruments and exposures each trading desk may use for risk management purposes” and the “techniques and strategies each trading desk may use to manage the risks of its market making-related activities and inventory”. MHI was also required to identify (and enforce compliance with) limits for each trading desk, “based on the nature and amount of the trading desk’s market making-related activities”.

187.

The Desk’s Mandate was prepared in compliance with the requirements of the Volcker Rule. There were two different versions of this mandate in force during the Relevant Period but the differences were very minor. The findings below are based on the Mandate with an effective date of 1 July 2016, and we find that the earlier version of the mandate, which applied during June 2016, had equivalent provisions.

188.

The Mandate identifies the Desk Head as Mr Urra and the Division Trading Head as Mr Heiberg and applied to the EGB Desk (ie both Core and Peripheral EGBs). The Mandate provides that the Desk Head retains ultimate responsibility for the Desk’s adherence to the Mandate, records that the Desk is relying on the market making exemption from the Volcker Rule, and was signed by Mr Urra. The key relevant provisions were:

(1)

“Desk Mission & Strategy” – “To provide a client facilitation trading service in European Government Bonds (EGBs) and associated products. Client facilitation trading includes market-making and active trading to support client business…”

(2)

“Authorised Instruments” – This lists various products and has columns headed “Market Making” and “Hedging”, and detailed footnotes. “Government Bonds & Bills” are listed with a tick in the Market Making column, and “Government Bond futures” are listed with a tick in the Hedging column. This section separately lists Exchange Traded Interest Rate Futures and ticks both Market Making and Hedging, but the footnote sets out that market-making approval for these instruments relates only to block trades in response to client demand.

(3)

“Risk management” – “The Desk’s market making activities give rise to the following principal market risks: interest rate risk, curve risk and basis risk. The Desk may purchase or sell hedging instruments, as set out within this mandate, in order to mitigate these risks.”

(4)

Annex A1 - Authorised Instruments – Overall trading and hedging strategies must be evaluated and approved by the Desk Head and Division Trading Head (after consultation with the Risk Management and Compliance departments). The Desk Head and Division Trading Head must demonstrate that proposed new or amended strategies will not present a high risk to MHI, can be managed within limits, will be appropriately controlled and will comply with the Volcker Rule’s requirements.

(5)

Annex A3 then expands on Risk Management – The Desk must conduct its trading activities within the limits set by the Fixed Income Division Head and by MHI’s Risk Management Department, and they must be monitored on a daily basis. The limits distinguish between market maker inventory and hedging positions, and the MHI limit for hedging positions is that hedges are not to increase market risk. The Desk must manage exposures within these limits either by selling down long or covering short market-making inventory positions, or selling or purchasing authorised hedging instruments. This section then provides:

“Transactions in hedging instruments must not be conducted, where such transactions increase the Desk’s market risk exposures (other than as described below), and hedge positions must be closed out once underlying inventory positions have been unwound.
The Desk may execute transactions in hedging instruments in anticipation of a highly likely near term exposure to risk, where there is a sound risk management rationale for such anticipatory hedging.”

(6)

A4. Market making policy – The Desk “must routinely stand ready” to purchase and sell one or more types of instruments authorised under this Mandate and must be willing and available to quote or transact in these instruments for its own account, in commercially reasonable amounts and throughout market cycles. The size of the Desk’s market making inventory must be designed not to exceed, on an ongoing basis, the reasonably expected near-term demand of market making customers. This assessment must be based on market conditions and a demonstrable analysis of historic customer demand and other relevant factors.