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FRTB concerns send blood pressures soaring

How’s your blood pressure? Another upcoming regulation is the Fundamental Review of the Trading Book (FRTB), which comes out of the Basel Committee’s overhaul to market risk capital requirements. As with most regulations originating from Basel, it’s subject to continuous updates but this makes it difficult to etch in stone certain implementation dates. That’s just one reason why this regulation may raise some people’s blood pressure. For more, read on.

Updates are perhaps more likely with FRTB because it is entering the regulatory world at a time when the impetus for continued regulation is in decline and countries fear losing out on business due to regulatory arbitrage. Countries are expected to finalise implementation of the FRTB framework on 1 January 2019, but reporting under the new framework won’t commence until the end of 2019.

The main thing to know about FRTB is that it will change the methodology used by banks to assess market risk capital. It will also reduce the variability of market risk-weighted assets across jurisdictions. The Committee will revise the Trading Book to have more explicit requirements for what can be included. And it will have limitations on reclassifications, to reduce the scope for discrepancies.

Plus it will feature more stringent models for evaluating risk, and include new tests to assess the impact of the differences in risk factors used for modelling. Overall, these will reduce implementation interpretations and promote consistency globally.

The final component, and one that is subject to updates, is the requirement to identify whether risk factors are modellable or non-modellable. This would force banks to classify risks using strict criteria. We expect it to result in many risk factors that are currently classified as ‘liquid’ to be reclassified as a non-modellable risk factor (NMRF).

In conversations with our clients, they have expressed concern over NMRF. Based on preliminary reviews, they expect an increase of 30% to their total market risk-weighted assets. With all that worrying information, the Basel Committee met in February to discuss a revision to the identification and capitalisation of non-modellable risk factors. This could result in changes to NMRF modelling and/or the introduction of a scale for NMRFs.

So, if FRTB raises your blood pressure, then get in touch with SKT Consulting to help lower it. We have a proven track record of ensuring clients are compliant, built over the course of over 100 successful engagements.

Get in touch for an initial discussion.