Delegated Regulation on temporary FRTB relief and adjustments

The European Commission’s (EC) draft Delegated Regulation introduces temporary amendments to the market risk framework resulting from the Fundamental Review of the Trading Book (FRTB), with the aim of mitigating its impact on European institutions in a context of uneven international implementation. These measures seek to preserve a level playing field at the international level by reducing both the operational burden and the impact on capital.

Delegated Regulation on temporary FRTB relief and adjustments

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Executive Summary

The document introduces a set of temporary measures aimed at preserving balanced competitive conditions of European banks at the international level. These measures are structured around three main pillars: the introduction of a global multiplier to limit the increase in market risk capital requirements; adjustments to the Internal Models Approach (IMA) to improve operational effectiveness; and modifications to the Alternative Standard Approach (ASA) aimed at reducing the impact on capital and improving alignment with institutions’ risk management practices.

The draft is currently in the public consultation phase. Once adopted, the Delegated Regulation will enter into force on the day following its publication in the Official Journal of the European Union (OJEU) and will apply for a transitional period of three years, during which its impact will be assessed by benchmarking it against the progress of FRTB implementation in other jurisdictions.

Main Content

The draft Delegated Regulation introduces the following measures within the FRTB framework:

• Global multiplier. An optional mechanism is established (subject to prior notification to competent authority and compliance with certain conditions) that allows increases in capital requirements to be limited where the new framework is more stringent than the previous one. This multiplier is institution-specific, calculated as the ratio between requirements under Basel 2.5 and under the FRTB, and must be recalibrated periodically. Institutions that choose to apply the multiplier must maintain regulatory reporting and Pillar 3 disclosures under both frameworks and, should they cease to apply it, may not   subsequently reapply it.
• Adjustments to the IMA. Measures are introduced to improve its practical applicability, including the use of the Profit and Loss Attribution Test (PLAT) as a monitoring tool with no direct impact on capital, the relaxation of non-modelable risk factors (NMRFs) through reduced data requirements and pro-rata treatment for recent instruments, as well as  reducing the frequency of calculation of key metrics and   simplifying the treatment of exposures to collective investment undertakings (CIUs).
• Changes to the ASA. Measures are introduced to reduce the impact on capital and improve consistency with risk management, such as the application of multipliers in the sensitivity-based method (SBM), the neutralization of certain residual risk add-ons (RRAO) where they do not adequately reflect economic risk, and improvements in the recognition of hedges and the treatment of certain exposures, including adjustments to parameters and greater flexibility in how these parameters are calculated.
• Other measures. Additional measures are introduced to reduce operational complexity and strengthen proportionality, including the possibility for institutions with low trading activity to apply the simplified standardized approach to certain exposures, as well as simplifications in the treatment of complex positions and in the application of certain methodologies.

Download the technical note on the Delegated Regulation on temporary FRTB relief and adjustments.