Exploring the current progress within FRTB and discussing the anticipated updates ahead of the final rule and implementation

Exploring the current progress within FRTB and discussing the anticipated updates ahead of the final rule and implementation

By Rochus Herrmann, Manager, d-fine

Could you please tell the risk insights readers a little bit about yourself, your experience and what your current professional focus is?

By education I am a physicist, I studied in Heidelberg, Germany, and Aarhus, Denmark. I focused my research on dosimetry for particle therapy. Directly after my PhD, I joined d-fine. Currently, I am a managing consultant at d-fine in London. Here I am in charge of our service offerings in the area of market risk models and processes.

Most of my professional career I spend on developing and validating internal market risk models. The other part I advised clients in regulatory matters, from advice on achieving compliance with new regulation to support during audits by the supervisors. Here I also temporarily “switched” sides and provided services to supervisors.

What, for you, are the benefits of attending a conference like the FRTB Forum and what can attendees expect to learn from your session?

The FRTB Forum facilitates an informal exchange with experts in the field while the talks highlight the challenges and solutions approaches as seen by the industry. These forums are always an excellent opportunity to widen their own horizon.

In my session, I will try to summarise the open issues and the expected timeline. Being aware of the remaining uncertainties might inspire attendees to have a look at their current project plan and even highlight an issue currently not on their list.

What are your thoughts on the alignment of the Basel rules and European legislation?

The timeline of the Basel committee foresees the publication of the final standard most probably by the end of this year, while the new CRR II is planned to be finalised by the end of this year and published in the first half of 2019. A complete alignment is thus unlikely, as the FRTB part of the CRR II, as currently discussed, is based on the “final” BCBS standards of 2016. The harmonisation of the European legislation with the BCBS standards is however essential and will be not only observed by Basel itself, but also by the legislators in other jurisdictions, especially the US.

It will remain interesting to observe the developments in this area as well.

Do you have any concerns surrounding the regulatory timeline?

While the Basel committee is set on its timeline, it is less clear when it comes to the actual legislation. For the sake of argument, let us assume that the UK and the EU will have same timelines and rulebooks.

The new CRR II will not cover all details of the FRTB rules, as those will be spelt out in EBA RTSs and guidance which will be published in the following years. This time gap will leave room for interpretation and thus uncertainty.

The current options all have their challenges and a “reporting only” period will add additional operational complexity for banks. A new system has to be set up, while the current systems have to be maintained. Calculation, analysis, and reporting will be duplicated, and the interplay between regulatory own fund requirements and the results of the potential “FRTB reporting” system are not apparent. Finally, a potential future recalibration of the standardised approach makes firms’ decisions on the business case of IMA difficult.

On top, there might be an alignment to the other parts of the “Basel III reforms” like credit risk, where we have not seen a CRR draft yet – and the results of the EBA QIS will be considered. The publication is scheduled for mid-2019.

Could you tell our readers a little about the current landscape and progress towards understanding expectations?

The uncertainty in the whole process and the changing timelines led to a very heterogeneous field when looking at the progress of banks. Some banks started a project with the first quantitative impact studies (QIS) and currently do have finished implementation of the current rules running in parallel to their production system. Other banks started at the same time, but delays in the legislative process led to the reprioritisation of projects so that there was no progress since the last consultation paper came out. Some smaller banks and banks that decided against an IMA won’t start with the implementation before the final rules by BCBS and EU are set.

The compliance with the final FRTB rules is only one part of the challenge. There are administrative challenges which both, banks and supervisors face due to the short timeframe left and uncertainties discussed.

What key point would you like to put across to the audience?

2019 will be a decisive year even without any Brexit interference. We expect the final Basel paper by the end of 2018 and by then also clarity on the CRR II timeline from the trilogue. This will allow informed decisions on still open topics, e.g. IMA or not, desk structure, and potential adjustment of their business strategy.

However, be aware, FRTB affects more than only the internal model banks profoundly. The new sensitivity based standardised approach and the charges connected with it require in-depth analysis to understand the ramifications for the individual business areas of each bank.

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