The Fundamental Review of the Trading Book (FRTB) is a comprehensive suite of capital rules developed by the Basel Committee on Banking Supervision (BCBS) as part of Basel III, intended to be applied to banks’ wholesale trading activities. Finalised in January 2016 as the Minimum Capital Requirements for Market Risk, it aims to address a number of identified shortcomings in the existing Basel II.5 framework. Originally, the revised framework was scheduled to be implemented as final rules under domestic legislation on 1 January 2019, with regulatory reporting under the framework becoming a requirement from 31 December 2019. However, on 7 December 2017, the Basel’s Committee oversight body, Group of Central Bank Governors and Heads of Supervision (GHOS), announced a delay in its implementation until 2022. In the EU, FRTB will be implemented as part of the Revised Capital Requirements Regulation (CRR II), published in November 2016.

While FRTB was not intended to increase banks’ capital costs beyond those imposed by Basel II.5, it is clear from both BCBS and industry analysis that banks will see significant increases in their cost of capital, in particular to support their trading activities. Given the potential impacts for secondary bond market efficiency and liquidity, the final calibration and implementation of FRTB are key priorities of ICMA’s Secondary Market Practices Committee (SMPC). 

January 2019

At its meeting in Basel on Monday 14 January 2019, the Basel Committee's oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), endorsed a set of revisions to the market risk framework intended to enhance its design and calibration by:

• introducing a simplified standardised approach for banks with small or non-complex trading portfolios;
• clarifying the scope of exposures that are subject to market risk capital requirements;
• enhancing the risk sensitivity of the standardised approach by revising the treatment of foreign exchange risk, index instruments and options;
• revising the standardised approach risk weights applicable to general interest rate risk, foreign exchange risk and selected credit spread risk exposures;
• revamping the assessment process to determine whether a bank's internal risk management models appropriately reflect the risks of individual trading desks (the so-called profit and loss attribution test); and
• revising the requirements for identifying risk factors that are eligible for internal modelling and the capital requirement applicable to risk factors that are deemed non-modellable.

These revisions were informed by the Committee's quantitative impact analyses. Once implemented, the revised framework is estimated to result in a weighted average increase of about 22% in total market risk capital requirements relative to the Basel 2.5 framework. By contrast, the framework issued in 2016 would have resulted in a weighted average increase of about 40%. The share of risk-weighted assets (RWAs) attributable to market risk remains low, at around 5% of total RWAs.

The revised market risk framework will take effect as of 1 January 2022, concurrent with the implementation of the Basel III reforms endorsed by the GHOS in December 2017. A description of the background, objectives and overall impact of the market risk framework is set out in an accompanying explanatory note.

September 2018

ECB publishes the three risk-type-specific chapters of its guide to internal models for consultation. These chapters, on credit risk, market risk and counterparty credit risk, are intended to ensure a common and consistent approach to the most relevant aspects of the applicable regulations on internal models for banks directly supervised by the ECB. The consultation ends on 7 November 2018.

March 2018

The Basel Committee on Banking Supervision (BCBS) has published a Consultative Document on proposed revisions to the minimum capital requirements for market risk (also known as the “Fundamental Review of the Trading Book”). This proposal largely aim to address industry concerns and recommendations arising from the 2016 framework, Minimum capital requirements for market risk.

Among the various proposed revisions being consulted on are:

• A more sensitive floor for the ‘low correlation’ scenario to reflect more realistically market conditions in the standardized sensitivity based approach (SBA)
• A number of modifications to the (internal model approach) P&L attribution test, including:
  • Better data alignment between the ‘hypothetical P&L’ and ‘risk-theoretical P&L’
  • Quarterly rather than monthly test frequency
  • An observation period of 12 months (rather than 1 month)
  • A ‘traffic light’ approach to the penalty capital function
• A number of modifications to the IMA process for non-modellable risk factors (NMRFs), including:
  • Acknowledgment of the usefulness of data pooling
  • Allowing banks to use their own quotes
• A revision of what constitutes a trading desk
• A proposal for a (more conservative) simplified SA (for smaller banks)

The deadline for consultation responses was 20 June 2018


Briefing notes and resources

January 2019
BCBS: Minimum capital requirements for market risk

September 2018
ECB guide to internal models: Risk-type-specific chapters

June 2018
Industry response to BCBS consultation on revisions to the minimum capital requirements for market risk

March 2018
BCBS Consultative Document: Revisions to the minimum capital requirements for market risk (March 2018)

February 2018
Fundamental Review of The Trading Book - The road to IMA, a presentation by Eduardo Epperlein of Nomura for the ICMA Secondary Market Practices Committee

January 2018
An ICMA briefing note on implementation challenges of FRTB for secondary bond markets

December 2017
Basel Committee announces delay to FRTB implementation until 2022 (Dec 2017)
BCBS: Basel III Monitoring Report (Dec 2017)
EBA Discussion Paper: Implementation in the European Union of the revised market risk and counterparty credit risk frameworks (Dec 2017)

May 2017
IHS Markit/Oliver Wyman, FRTB Markit Modelability Model: preliminary results (May 2017)

January 2017
BCBS: Frequently asked questions on market risk capital requirements (Jan 2017)

November 2016
European Commission: Proposed regulation amending the Capital Requirements Regulation (CRR II) (Nov 2016)

January 2016
BCBS: Minimum capital requirements for market risk (Jan 2016)

November 2015
ISDA/GFMA/IIF: FRTB QIS Analysis (Nov 2015)
An ICMA briefing note on the Fundamental Review of the Trading Book