Fundamental Review of the Trading Book (FRTB)
  • Wednesday, 16 January 2019

Fundamental Review of the Trading Book (FRTB)

Under the name of FRTB, the minimum capital requirements for market risk replaces an earlier version of the standard, published in January 2016.

The standard has been revised to address issues that the Basel Committee identified during monitoring the implementation and impact of the framework. This final standard incorporates changes that were proposed in a March 2018 consultative document and has been informed by a quantitative impact based on data as of end-December 2017.

As in the January 2016 framework, the core features of the standard include:

  • a clearly defined boundary between the trading book and the banking book;
  • an internal models approach that relies upon the use of expected shortfall models and sets out separate capital requirements for risk factors that are deemed non-modellable; and
  • a standardized approach that is risk-sensitive and is designed and calibrated to serve as a credible fallback to the internal models approach.

Revisions to the January 2016 framework include the following key changes:

  • a simplified standardized approach for use by banks that have small or non-complex trading portfolios;
  • clarifications on the scope of exposures that are subject to market risk capital requirements;
  • refined standardized approach treatments of foreign exchange risk and index instruments;
  • revised standardized approach risk weights applicable to general interest rate risk, foreign exchange and certain exposures subject to credit spread risk;
  • revisions to the assessment process to determine whether a bank’s internal risk management models appropriately reflect the risks of individual trading desks; and
  • revisions to the requirements for identification of risk factors that are eligible for internal modelling.

This revised standard comes into effect on 1 January 2022.

The Basel Committee has published an accompanying explanatory note to provide a non-technical description of the overall market risk framework, the changes that have been incorporated into in this version of the framework and impact of the framework. The note also sets out some worked examples to illustrate the application of the framework’s standardized approach.