ComplianceFinanceNovember 11, 2015

Fundamental Review of the Trading Book - Impacts on financial institutions in Australia

The Fundamental Review of the Trading Book (FRTB) is a Basel Committee for Banking Supervision (BCBS) revision of trading book capital rules. FRTB aims to strengthen capital standards for market risk by incorporating lessons learned from the G20-endorsed Basel Committee's investigation into the variability of market risk weighted assets, and hones the current Basel measures which were implemented in the aftermath of the financial crisis as a stop gap measure for trading book capital requirement. FRTB advances market risk management and capital charge measurements, and delivers a globally consistent and coherent regulatory framework that can be implemented consistently by supervisors, and which achieves comparable capital assessment across jurisdictions.

The BCBS has outlined a series of proposed measures under FRTB that, if implemented, could force changes in the way firms approach their trading book operations. The changes are so fundamental that they may even cause some financial institutions to reconsider their business strategy. The proposed changes potentially affect a broad swathe of institution types and will likely require significant infrastructure investment in order to comply. While industry consultation on the proposed rules is still pending, much of what is being discussed is expected to make it to the final rule-making, and that may come into effect during 2017.

Budget processes being as they are, much of the planning and building out will need to be completed during 2016, with the bulk of the heavy-lifting in terms of design and implementation taking place during the first half of the year in order to ensure adequate testing time.

As a result, firms need to pay attention to developments around the FRTB and should start planning now for how they will organize themselves and their internal processes to achieve compliance within the tight deadline.

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