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One Year On: Banks Resume Prioritization of FRTB, but Same Challenges Persist

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By: Essan Soobratty, Regulatory Product Manager, and Eugene Stern, Head of Market Risk Product, Bloomberg.

One year on from the start of the global pandemic which sent global markets into turmoil and prompted regulators to introduce a range of emergency measures to support the financial system and the broader economy, banks are continuing their return to business as usual.

The same goes for FRTB implementation. That was the verdict from a recent online event hosted by Bloomberg LP in London, ‘FRTB – Nearing the Finishing Line’.

The flexibility provided by global regulators which included extension in the timeline for FRTB was welcomed by the industry, but since January banks have resumed their prioritization of work towards achieving the necessary milestones required for an effective implementation.

As a recent Bloomberg poll of clients revealed there was a slowdown by most banks in progress made in 2020 as they redirected resources to the more immediate priorities of managing risk in the face of pandemic related volatility.

FRTB – a priority again, with work to do

The slowdown was short-lived with banks now returning to their pre-crisis focus on FRTB implementation:  They have resumed discussions with their regulators; they are continuing to work closely with their technology and data partners; and internally too for many banks there is a pick-up in cross-department activity especially between the groups most impacted by FRTB: front-office, risk and valuations. Alignment between these groups is still seen as critical for effective implementation, especially for those desks working towards adoption of the more challenging Internal Models Approach.

With just a few months remaining until the start of reporting for FRTB Standardized Approach in Europe under CRR-II which takes effect in September 2021, and less than 2 years to Basel’s January 2023 deadline for global implementation, banks continue to grapple with the same challenges they faced a year ago:

  • Acquiring, managing and aligning large amounts of data;
  • Making enhancements to risk models, the analytics produced, and the risk systems themselves;
  • Operational and technology challenges relating to achieving the necessary data and model alignments in a way that is automated;
  • Decision-making relating to IMA implementation: To what extent will IMA be sought for different desks and what will the timing of that application be?
  • Governance implications associated with implementing processes, and then reporting to regulators based on a complex set of rules.

Unresolved questions

Banks also continue to plan and implement against a backdrop of uncertainties relating to potential regional differences in implementation including staggered timelines and a number of regulatory ambiguities that banks say remain unresolved.

With Basel’s global framework now considered to be finalized, and with a framework based on multiple rounds of industry input, any remaining questions relating to specific implementation nuances needing clarification, will likely only be discussed within the industry and with local regulators over the coming year.  Very little scope or appetite is seen for making changes to the global framework, but at the same time alignment and consensus will be critical in order to minimize regional differences and therefore maintain the global consistency that the regulation seeks to achieve.

One area which banks have identified as needing additional discussion and clarification relates to the treatment of funds and specifically Collective Investment Undertakings in Europe given that EU reporting begins later this year.  While the prescribed guidelines under the finalized rules may be less onerous than those initially proposed there are some remaining ambiguities and challenges relating to both look-through and the alternative approaches permitted under the Standardized Approach.  Other areas include specific nuances relating to implementation of requirements in the Internal Models Approach such as Risk Factor Eligibility Test, and Modellability more broadly.

Lessons learned

One more significant theme for discussions in the year ahead is what the industry has learned from last year’s unprecedented market events. Banks and their regulators will discuss how banks managed risk, and protected capital in response to both the market and operational disruptions.

These insights and perhaps any lessons learned could influence how local rules are written that take into account local market nuances while at the same time maintaining consistency with the regulatory intentions captured in the globally agreed framework. Banks will need to be aware of decisions by their regulators and respond nimbly to local requirements, as the FRTB framework finally crystallizes ahead of the rapidly approaching global deadlines.

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