Its impact stretches far beyond changes to model methodology, and will be felt well beyond risk, with front office, finance, and it all heavily affected. Post the 2008 financial crisis, there were multiple regulations issued by the regulatory bodies t. A liquidity horizon is defined as the time required to execute. The basel committee on banking supervision designed the framework to remove supposed deficiencies in the previous market risk framework which. This paper introduces frtb sba, discusses its definition of the delta and vega sensitivities, and illustrates how aad can be used to compute them. Frtb has recommended stricter guidelines for banks to switch from a banking book to a trading book and vice versa. In addition to above, banks will have to consider existing volcker desk structure when thinking about trading desk structure under frtb to ensure ongoing compliance with the volcker rule and the optimal capital outcome. It must fit the definition of a trading instrument. Trading desk definitions under frtb and volcker accenture. One of the most visible updates to the trading book regime is the revised trading banking book boundary. The final release of frtb introduces various changes to basel 2. Basel committee on banking supervision consultative document. A frtb product list flag for the banking and trading book based on the current presumptive list defined by bcbs crr ii needs to be stored in the systems. Draft technical standards on the ima under the frtb.
Basel iv revised trading and banking book boundary for. How frtb impacts the volcker regime trading desk structure. Strict rulebased definition for the tradingbanking book boundary to minimize regulatory capital arbitrage by imposing strict limits in internal risk transfer irt and neutralizing. Cfp is driven by and dedicated to high quality and reliable primary market research. Financial instruments in a trading book are purchased or sold for several reasons. Revised trading and banking book boundary for market risk 7 frtb still builds on the intent based criteria for tradingbanking book assignment but supplements it with essential prescriptive rules in order to provide more objectiveness.
Under volcker, therefore, trading accounts are not identified as such if the account aligns with the trading book or banking book within the bank. Nov 28, 2016 frtb frtb demands a clear segregation of banking book and trading book instruments. A revised market risk framework the trading bookbanking book boundary the committee believes that the definition of the regulatory boundary between the trading book and banking book has been a source of weakness in. Frtb is a regulation issued by the basel committee on banking supervision bcbs, a committee of banking supervisory authorities established in 1974.
So far, the banks have been deciding if a book was a trading book or a banking book, and there was an incentive to arbitrage. Break the model approval process into smaller steps. Close the loop hole of capital arbitrage between the trading book and the banking book calculate the capital for the trading book and the banking book as if the banks are in stressed market conditions calculate capital using the continue reading trading book and banking book. The center for financial professionals is an international research organization and the focal point for financial risk professionals to advance through renowned thoughtleadership, knowledge sharing, unparalleled networking, industry solutions and lead generation. The frtb rules, which represent a key postcrisis banking reform in the. These can include equities, debt, commodities, foreign exchange, derivatives and other financial contracts. This is defined as a financial instrument, foreign exchange, or commodity trade where there is.
Banking and trading books are essentially accounting definitions which a banks assets are categorised under. Frtb, however, defines a boundary that governs trading book instruments, purpose and interaction between a regulatory trading account and the banking book. A clear definition for the differentiation between trading and banking book positions shall help prevent regulatory arbitrage regarding capital charges. A frtb product list flag for the banking and trading book based on the current presumptive list defined by bcbs crr ii needs to be stored in the system s. Finalised in january 2016 as the minimum capital requirements for market risk, it aims to address a. There has been a lot of discussion on how frtb will define whether a book is a banking book. There are five critical steps banks should take to prepare. In january 2016, the basel committee on banking supervision published its standards for minimum capital requirements for market risk. Frtb requires that business be allocated to either the trading or banking book, and not jump the boundary in an arbitrary way. Strict rulebased definition for the tradingbanking book boundary to minimize regulatory capital arbitrage by imposing strict limits in. The frtb was subsequently devised to tackle a number of structural flaws in the framework that were not addressed by basel 2. Frtb could have farreaching impact on banks, and their. Frtb requires banks to prove their intent to move an asset to the trading book as the assets in the trading book are there with an intent to trade and the banks are.
Strict rulebased definition for the tradingbanking book boundary to minimize regulatory capital arbitrage by. A trading book is the portfolio of financial instruments held by a brokerage or bank. The new market risk paradigm 3 the principal elements of frtb final rule along with the regulatory rationale are described below. Basel committee on banking supervision consultative. For an instrument or portfolio to qualify for trading book treatment under frtb, it will need to pass four strict criteria. Set of quantitative tools to measure the performance of models. What you need to know about the new trading boundary. Frtb requires banks to prove their intent to move an asset to the trading book as the assets in the trading book are there with an intent to trade and the banks are required to physically manage. This final rule, along with many others that are anticipated to be finalized in the coming months, is expected to have farreaching impacts for financial. There is a clear criterion for assigning instruments to the trading book with the objective of ensuring only traded instruments are included in capital calculations and that regulatory arbitrage is minimized.
For example, the definition of banking and trading books are more prescriptive, with tighter restrictions on tradingbanking book reclassifications designed to reduce regulatory arbitrage. Frtb introduces a stricter definition of the instruments categorisation to the banking or trading book. Calculate capital using the standardized approach, even though trading desks calculate the capital charge using internal models approach for the trading book what are the issues with the classification of the trading book and banking book boundary. The portfolio of financial instruments in the trading book may be resold to benefit from shortterm price fluctuations, used for hedging or traded to fulfil the firms or clients needs. Frtb frtb demands a clear segregation of banking book and trading book instruments. This final rule, along with many others that are anticipated to be finalized in the coming months, is expected to have farreaching impacts for financial institutions in the areas of. 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. Trading book and banking book treatment in frtb can be summarized in three lines as follows. Frtb removes nearly all of a firms ability to move assets between the banking book and trading book.
The new boundary between the trading book and banking book which will limit the potential for regulatory arbitrage. Market risk can be defined as the risk of losses in on and offbalance sheet positions arising from adverse movements in market prices. May 09, 2017 frtb is a regulation issued by the basel committee on banking supervision bcbs, a committee of banking supervisory authorities established in 1974. From a regulatory perspective, market risk stems from all the positions included in banks trading book as well as from commodity and foreign exchange risk positions in the whole balance sheet. Frtb, the new market risk rule frtb in a snapshot the principal elements of frtb final rule along with the regulatory rationale are described below. The frtb framework promulgated by the basel committee on banking supervision to improve trading book capital requirements will necessitate rapid and potentially drastic change for all banks with a trading presence. However, the requirement of firms implementing ima having to run their models in advance for a year and receiving regulatory approval puts a mid2020 as a key deadline for their implementation. Mar 14, 2017 frtb requires that business be allocated to either the trading or banking book, and not jump the boundary in an arbitrary way. Trading book and banking book boundary banks could decide which was the trading book and which was the banking book and this created incentives to profit from the arbitrage from this determination. Reassignments are more difficult, so it is critical that banks get it right the first time. Its impact stretches far beyond changes to model methodology, and will be felt well beyond risk. Its impact stretches far beyond changes to model methodology, and will be felt well. Its impact stretches far beyond changes to model methodology. A revised market risk framework the trading book banking book boundary the committee believes that the definition of the regulatory boundary between the trading book and banking book has been a source of weakness in the design of the current regime.
Trading desk definitions also differ under frtb and volcker. National supervisors are expected to finalize implementation of the revised market risk standard by january 2019 and to require their banks to report under the new standards by 2020. A financial institutions trading book comprises assets intended for active trading. Jun 28, 2017 the final release of frtb introduces various changes to basel 2. The revised requirements will lead to increased demands on the availability of. A mapping of the frtb products product categories on the bcbs crr ii presumptive list to a banks product list via a gui needs to be implemented. Jun 07, 2019 frtb requires banks to prove their intent to move an asset to the trading book as the assets in the trading book are there with an intent to trade and the banks are required to physically manage. Oct 11, 2019 frtb introduces a stricter definition of the instruments categorisation to the banking or trading book.
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