On 14 January 2016 the BCBS published the FRTB rules which aim to standardise the treatment of market risk internationally and impose stricter global capital requirements. The key objectives of FRTB include the following:
- The new boundary between the trading book and banking book which will limit the potential for regulatory arbitrage
- A revamp of the Standardised Approach (SA) calculation to make it more risk-sensitive and explicitly capture default and other residual risks
- A new Internal Models Approach (IMA) (Expected Shortfall) to focus on tail risk, varying liquidity horizons with constrained diversification and increased risk factor observability standards
- Internal models will attract further regulatory scrutiny – Stringent trading desk-level IMA approval processes, including new profit and loss (P&L) attribution and tests
- More granular liquidity horizons for the internal model-based approach
- Increased load on stress testing and backtesting infrastructure
The current adoption deadline is set at 1 January 2019 with a fully compliant reporting deadline of 31 December 2019. While these deadlines could move forward depending on national supervisory and CRD5 agendas; at the moment, these dates are fixed.
To learn more about the impact and timeline of FRTB implementation and how to restructure your trading desk, download our guide below.