The U.K. Financial Services Authority last week published a discussion paper focusing on the prudential requirements for banks and investment firms that engage in trading activities. The paper makes recommendations in three key areas:

  1. Valuation - the FSA recommends an increased regulatory focus on valuing traded positions as an input into capital resources.
  2. Coverage, coherence and the capital framework - a change in the structure of the capital framework is recommended in order to bring greater coherence and reduce the opportunities for structural arbitrage in the banking sector and wider financial system.
  3. Risk management and modelling - the FSA recommends measures intended to improve firms' risk management and modelling standards, and ensuring that they are aligned with regulatory objectives.

The FSA is accepting comments on the discussion paper until November 26 and is expecting to issue feedback in the first half of 2011.