RiskTech Forum

Chartis: FRTB in place by 2020? You go first…

Posted: 28 July 2017  |  Author: Jay Vigneswaralingham   |  Source: Chartis


Regulators have had a reality check over the Fundamental Review of the Trading Book (FRTB). Their initial expectations – that banks would have systems in place to address FRTB’s requirements by the end of 2019 – are now looking unrealistic. The banks’ attitude has gone from blind panic to something more measured – and they’ve started to push back. Both sides now seem willing to accept that getting ready for FRTB is going to take more time.

FRTB is called ‘fundamental’ for a reason: for banks, it will be transformational. It will force them to overhaul their systems, and adopt a new internal model-based approach to calculating market risk. And to handle data-driven processes such as model validation, Profit and Loss (P&L) back-testing and risk measures (such as expected shortfall), they will need brand new systems and a re-think of their operational strategy.

But nobody wants an open-ended implementation process. Banks need their systems up and running, for their business and for the regulators’ peace of mind. So a timeline is vital. Regional differences will exacerbate the issues: how soon a bank adapts to FRTB will depend on where in the world it is. So far Europe (apart from Switzerland) is the only regional jurisdiction to have put forward a proposal to transfer FRTB into national law. The European Commission (EC), via its Capital Requirements Directive (CRD V) and Capital Requirements Regulation (CRR II), plans to offer modifications to FRTB requirements that are specific to European institutions. CRD V also establishes a three-year phasing-in period for FRTB from 2019 onward – in the initial timeline 2019 was the final year of implementation.

The EC, after communicating with the Basel Committee, has developed a set of realistic standards that advise banks on how to respond to FRTB, without creating unrealistic expectations. This sensible approach can give other regional regulators a useful benchmark. And instead of rushing through tactical changes to their existing technology solutions, banks will increasingly develop a more strategic approach to overhauling their systems with vendors adapting appropriately.

The picture for global implementation is still murky, however. In the US, the Trump administration is threatening its own pushback against regulation, and FRTB is one of its targets. US regulators are unlikely to follow the EC’s lead, creating competitive mismatches on both sides of the Atlantic. The Australians, meanwhile, have stated that the earliest they can confirm the new standards will be 2020. This is likely to cause anxiety for European banks and regulators, if significant progress in implementation (or at least statements about it) are not made in the next 12 months.

What is certain is that the global picture will look very different in a year’s time; the big question will be whether we see progress or retreat. Inevitably the lengthened timelines will create uncertainty for vendors and how they respond to banks’ FRTB requirements. Will banks want a staggered approach, or a complete solution they can implement in the medium term? Critically, vendors will need to engage in even closer collaboration with the banks to understand their timelines and long-term strategy towards eventually complying with FRTB.

For more analysis on FRTB and its impacts on banks and technology vendors, see the Chartis Report FRTB Solutions 2017. (login or sign up to download free executive summary)