Events such as the financial crisis of 2008 and ongoing market volatility resulting from the COVID-19 pandemic have emphasised how critical it is for banks to hold adequate capital buffers to protect against unforeseeable adverse market movements. In specific response to the 2008 crisis, the Basel Committee on Banking Supervision (BCBS) undertook a comprehensive review of market risk requirements and introduced a sweeping set of reforms in the form of the Fundamental Review of the Trading Book (FRTB) to address the potential systemic risks arising from such unprecedented levels of market volatility.
FRTB is expected to create a substantial upheaval in capital charge calculation, business strategy and overall risk architecture for global markets organizations. In the lead up to January 2023, banks are required to implement more sophisticated calculations under the revised Standardised Approach (SA). Larger global players that opt to go for the Internal Model Approach (IMA) to optimise capital requirements will also need to ensure compliance with complex internal model requirements, including comprehensive approval processes. In the EU, banks will need to ensure compliance with SA reporting requirements entering into force in September 2021. For UK firms, this deadline is likely to be January 2022. Banks, therefore, need to ensure that their FRTB programs are now a key strategic priority for 2021-22.
This paper provides a brief recap of the revised rules, their impact on the financial services industry and key operational challenges for banks. Given implementation effort is likely to be well underway for a number of in-scope banks, it also outlines some recommendations to help organizations successfully navigate the final stretch of this tumultuous and challenging FRTB journey.
For information about how Capco is supporting clients with FRTB compliance, please contact:
UK Head of Capital Markets
UK Head of Regulatory Consulting