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FRTB compliance: No time for banks to waste

Jacob Rank-Broadley
Jacob Rank-Broadley
Head of LIBOR Transition, B&I

The Fundamental Review of the Trading Book (FRTB) is not due for implementation until January 2022, but banks might soon be in a race against time to meet the market risk rules. What are the milestones they need to know about for FRTB compliance?

  1. A Refinitiv on-demand webinar offers a practical implementation guide to FRTB compliance, including the interim milestones banks should be working towards.
  2. Regional divergence and multiple revisions to the global standards set by the Basel Committee on Banking Supervision have impacted implementation.
  3. Banks will need to scale up their FRTB compliance programs at the earliest opportunity if they are to implement their Internal Model Approach on time.

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The Fundamental Review of the Trading Book (FRTB) has been many years in the making.

Since being “finalized” in 2016, it has faced multiple amendments both to the substance of the regulation, as well as to the timeline.

For some, the current FRTB deadline of January 2022 feels like a point so far in the future that it’s barely visible on the horizon. In this article, we revisit our November webinar and explore why the FRTB implementation marathon might now turn into a sprint to the finish line.

In November, we were lucky enough to have David Lynch (Federal Reserve Board), Ged Dover (Nomura), and David Kelly (Quant Foundry) join us for a webinar to debate the timelines, regional divergence and practical implementation issues of the FRTB’s Risk Factor Eligibility Test (RFET).

Each participant joined the webinar in a personal capacity and shared their own views.

FRTB compliance deadlines

Despite the huge strategic overhaul FRTB will bring to managing market risk, many programs have recently struggled to get the prioritization they deserve.

This is largely due to multiple revisions in the global standards, leading people to question whether further changes are coming prior to implementation.

This problem has been exacerbated by the EU diverging from the Basel Committee on Banking Supervision (BCBS) deadlines, and banks in other jurisdictions lacking local requirements with which they must comply.

The sluggish pace of FRTB implementation may be about to change, particularly in the United States.

In our November webinar, David Lynch indicated a desire to target the BCBS implementation timeline of January 2022, and advised that a Notice of Proposed Rulemaking (NPR) release is penciled in for Q1 2020.

Completing the approval process

Guidance on the FRTB timeline and the release of the NPR is significant for U.S. banks in particular, and is likely to lead to more focus on FRTB compliance programs, both in the U.S. and elsewhere.

The 2022 deadline is ambitious given the volume of work required to ensure compliance.

David outlined that to meet the implementation timeline, preparedness exams will be conducted from H2 2020. Among other things, these would cover topics such as the Standardized Approach, RFET and Profit & Loss Attribution.

Following this, model approval is expected to take place during 2021.

David anticipates that it will take most of 2021 to complete the approval process at desk level. As noted by Ged, in early 2021, banks expect to provide their Internal Model Approach (IMA) submission notifications to regulators.

By anyone’s standards to go from no local rules to full implementation in less than two years is a huge ask.

Regional divergence

Despite many banks already doing significant work on their IMA business case, we believe they will need to get ahead of the NPR and start scaling up their FRTB compliance programs at the earliest opportunity if they are to successfully implement IMA on time.

So, how can banks implement efficiently with such a tight implementation timeline on the table?

David recognizes that each jurisdiction has markets that are unusual compared to the rest of the world and therefore warrant different rules. However, from a U.S. perspective, any allowances for these markets will take place within the framework outlined by the BCBS.

For example, we may see differences between the U.S. and EU in relation to large bid offer spreads for RFET — where the EU has proposed to introduce checks, the U.S. remains more cautious about trying to define such a requirement.

Notwithstanding these differences, at a high level both the EU and U.S. are taking an approach that’s consistent with the global BCBS standards. Such consistency is critical. As Ged comments, regional divergence would introduce additional complexity and operational risk.

Sign up for the on-demand FRTB risk factor modelability webinar to learn more about future regulation

“Real” price observations

Finally, David indicates that for RFET, internally sourced “real” price observations will be treated differently from observation data supplied by vendors.

It’s likely that the U.S. supervisors may rely to a significant extent on data audits in order to get comfortable with vendor data, while for internal bank data there will be some examination of the bank’s own systems.

How can Refinitiv support you in preparing for FRTB and the risk factor eligibility test?

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When is the FRTB implementation date?

The Fundamental Review of the Trading Book (FRTB) is not due for implementation until January 2022, but banks might soon be in a race against time to meet the market risk rules. For further details, download the report — Fundamental Review of the Trading Book (FRTB)