A trading book is the portfolio of financial instruments held by a brokerage or bank. 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 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. Post the 2008 financial crisis, there were multiple regulations issued by the regulatory bodies t.
Finalised in january 2016 as the minimum capital requirements for market risk, it aims to address a. Operational the operational challenge of running a market risk solution under frtb will increase significantly. Questions to think about how will the trading desk structure under frtb would differ from the existing volcker trading desk structure at banks. 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. Shortfalls, a default risk charge, two backtests, a valueatrisk and a pnl attribution. Trading book definition of the trading book crr 2, art. Cfp is driven by and dedicated to high quality and reliable primary market research. The revised requirements will lead to increased demands on the availability of. Basel iv revised trading and banking book boundary for. 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. The frtb rules, which represent a key postcrisis banking reform in the regulatory landscape, require all banks to implement the revised market risk standards by january 2019. Aug 07, 2016 clear risk management structure including trading mandates, trading limits and risk reporting. 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.
Internal risk transfers from the trading book to the banking book are not recognised under the framework. Under volcker, therefore, trading accounts are not identified as such if the account aligns with the trading book or banking book within the bank. 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. From data strategy and innovation, to finance, risk and regulatory transformation, for over a decade delv has been solving the toughest challenges of many of the worlds largest banks and financial companies, leveraging data warehouses, big data platforms, and fintech and regtech solutions to do so. The requirements of frtb mean that existing basel market risk rules will be substantially altered. Financial services organizations are anticipating a. 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. Frtb also changes the definition of the interest rate and credit spread risk with ir being calculated for the banking book. Financial instruments in a trading book are purchased or sold for reasons including to. The trading book positions are assigned to predefined risk classes general interest rate risk, spread risk, default risk, share price risk, currency.
The basel committee on banking supervision designed the framework to remove supposed deficiencies in the previous market risk framework which came to light during the global financial crisis. Irr in the trading book is subject to pillar i and hence carries a capital charge, whereas interest rate risk in the banking book irrbb is subject to pillar 2 and does not carry a regulatory charge. Switching require approval from senior management as well as regulators. In general, trading book boundary rules restrict banks to transfer instruments between trading and banking book, specially for the regulatory arbitrage purposes. The final release of frtb introduces various changes to basel 2. For example, the definition of banking and trading books are more prescriptive, with tighter restrictions on tradingbanking book reclassifications designed to reduce regulatory arbitrage. Internal risk transfers credit and equity exclusions. Differences between interest rate risk irr in the banking. There has been a lot of discussion on how frtb will define whether a book is a banking 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. Anna holten moller, senior risk analyst, nykredit 15.
The major overhaul of market risk capital regime is. On the other hand, the embedded derivatives from the banking book related to credit or equity risk have to be managed in the trading book. A all trading book positions and b banking book positions with commodity or foreign exchange rate risk. All relevant rfs of a banks trading book portfolio should to be identified in a structured and comprehensive manner on a regular basis for all trading desks eligible for ima based on a common rf definition. A financial institutions trading book comprises assets intended for active trading.
Furthermore, greater flexibility will be required, need to be flexible in order to accommodate the new definition of as the scope of internally approved desks could change at any time. Revised trading and banking book boundary for market risk 7 frtb still builds on the intent based criteria for trading banking book assignment but supplements it with essential prescriptive rules in order to provide more objectiveness. Many banks seem to struggle capturing or even recognizing. Delv is a leader in datadriven solution delivery in finance. Banks must have a clearly defined definition of the trading book and banking book as. Strict rulebased definition for the tradingbanking book boundary to minimize regulatory capital arbitrage by. Its impact stretches far beyond changes to model methodology. These can include equities, debt, commodities, foreign exchange, derivatives and other financial contracts. The standards, approved in january 2016 by the basel committee on banking supervision bcbs and slated for compliance in january 2019, will fundamentally change the way firms calculate, plan for, and manage risk on the trading book. Assessment of default risk in the trading book is a key point in the frtb. The frtb rules pose significant challenges for banks, which will be.
In the bcbss approach, the dependence structure of defaults must be modeled through a systematic factor model with constraints on i the calibration data of the initial correlation matrix and ii the number of factors in the underlying correlation structure. Your existing infrastructure will need updating or augmenting to deliver an effective and efficient solution, particularly in the following areas. Frtb could have farreaching impact on banks, and their. Requirements of the banking book trading book boundary. 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 frtb, a trading desk is defined as a group of traders or trading accounts that implements a well defined business strategy operating within a clear risk management structure but subject to regulatory approval of the supervisor for capital purposes. Draft technical standards on the ima under the frtb. 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.
These analysts produce monthly research reports for our members, and are available to members to further explore issues and questions that may arise. This second blog will tackle the curvature risk charge. Frtb is a regulation issued by the basel committee on banking supervision bcbs, a committee of banking supervisory authorities established in 1974. Frtb makes every point on every curve important, and your data model should support that. Trading book and banking book treatment in frtb can be summarized in three lines as follows. Basel iv revised trading and banking book boundary for market. Trading desk definitions under frtb and volcker accenture. Traditionally, trading book portfolios consisted of liquid. So if specific, very explicit criteria are being met, then instruments need to be put into the trading book. The boundary definition is augmented with a presumptive list of instruments. A new definition of the regulatory boundary between the banking book and trading book. If for example, instruments managed on a trading desk or net short risk positions in equity, well, these must be in the trading 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. 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.
Nov 02, 2016 in january 2016, the basel committee on banking supervision published its standards for minimum capital requirements for market risk. Market risk can be defined as the risk of losses in on and offbalance sheet positions arising from adverse movements in market prices. There are two prescribed approaches to calculate the market risk. While the frtb has been finalized, it is important that the revised framework is fully tested and continuously monitored to ensure the calibrations are appropriate and risk sensitive. The frtb rules, which represent a key postcrisis banking reform in the. 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.