To limit the institutional proprietary trading risks, dealer limits are given, which consist of the following sub-limits :
Overnight limit is the limit of the open position at the end of the working day. It corresponds to the position limit. Depending on the assessment of market risk, the calculation of risk per trader in a scenario analysis is defined.
Intraday Limit is set depending on the qualification and position of the dealer and the market liquidity of the traded instrument. The limit can also be dependent on whether a bank holds a market-making function or not.
Once the specified limit is reached, a trader has the right to request to name a price at which the bank is willing to enter into commercial amounts.
Stop loss limit
Limits the maximum loss that the bank is willing to take on a position. If this limit is reached, the dealer must close his position, even if he still has free position limit. It can also be moved to the overnight limit .
Maturity mismatch limit
This limits the open risks in the individual terms that can be specified in addition to the overall position limit yet.
Risk Management is responsible for establishing the limit, the development and monitoring of internal bank proprietary trading strategies.
Among the supporting functions include the development and operation of information systems, detection / monitoring of business transactions and the monitoring of regulatory requirements .
The user can specify in proprietary trading between three different forms of organization.
The simplest way of proprietary trading offers the “Single Inventory Model”.