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Ambitious and controversial

Daniel Mayer examines the complex intricacies of the fundamental review of the trading book.

The Fundamental review of the trading book (FRTB), published in January, is the biggest overhaul of regulators’ approach to market risk since the introduction of advanced models based on value at risk (VaR). It is the culmination of a process that began at the G20 summit in the immediate aftermath of the 2008 financial crisis and follows the current so-called Basel 2.5 rules that emerged then.The final rules were published earlier this year, and they have proved as controversial as they are ambitious. With a number of points still heavily contested by the industry and a glossarythat contradicts the appendix, it is clear that the final rules will be supplemented with a series of FAQ documents and clarifications. The overall framework, however, is unlikely to change significantly, and most banks have begun their implementation efforts. They aim to begin a parallel run in 2018 and be ready for the go-live date in January 2020. Marketwide trading book capital requirements could increase by about 40%.

The FRTB is very much a response to the last crisis, an attempt to answer the critics of VaR and a sign of regulators’ increasing distrust of banks’ internal models. The new internal models approach (IMA) rules are far more prescriptive, aiming to reduce model variability across banks and make risk numbers more reliable. The table below identifies some of the key changes following the crisis.