Summary of FRTB
The Fundamental Review of the Trading Book (FRTB) has a wide impact on major financial organisations. Necessitated by the regulatory failings in 2008 and beyond, the Basel Committee on Banking Supervision (BCBS) has since been continually compelling the financial industry to adopt more prudent regulatory risk and capital reporting practices. The Minimum capital requirements for market risk (MCRMR-2016) had been issued by the BCBS in mid-January 2016 and documents the final outcome of the FRTB.
MCRMR-2016 is a set of new requirements defined by BCBS as the framework for the next generation of market risk regulatory capital rules – it is intended primarily for large, internationally active financial institutions. Note that MCRMR-2016 is the first core component of Basel 3.5 which has been mostly defined and agreed – other regulatory changes for inclusion in Basel 3.5 (or Basel IV) are still being reviewed for Credit Risk and Interest Rate Risk in the Banking Book (CSRBB, IRRBB).
The links on the right provide some guidelines as to how MCRMR-2016 is likely to impact your organisation.
The MCRMR-2016 Challenge
Any groupwide solution for MCRMR-2016 clearly requires a thorough understanding of the requirements and the detailed impacts on the target organisation. It is not necessarily only changes to the risk management processes – MCRMR-2016 is likely to have a fundamental impact on risk policies, risk modelling, staff organisation, IT systems and even trading activities, especially if current risk limits are based on VaR and capital usage.
A logical, considered approach would encompass the following: