FRTB final rule

In January 2016, the BCBS published the standard Minimum capital requirements for market risk which was developed to address a number of structural shortcomings in the Basel II market risk framework, and its subsequent revisions. This minimum standard served as a key component of the BCBS's reform of global regulatory standards in response to the global financial crisis.

In this context, following the consultation launched in March 2018, the BCBS has now published a Standard on the minimum capital requirements for market risk which aims at addressing those issues that have been identified in the course of monitoring the implementation and impact of the standard published in 2016. In particular, amendments are introduced to the following aspects: i) scope of application, ii) internal models, iii) standardised approach, and iv) simplified alternative to the standardised approach.

This Technical Note summarises the Standard on the minimum capital requirements for market risk (FRTB final rule).

Executive Summary

This BCBS document on the review of the FRTB framework for market risk, includes amendments on the scope of application, internal models, standardised approach, and simplified alternative to the standardised approach.

Scope of application

Credit institutions.

Main content

This document on the FRTB framework introduces the following amendments:

• Scope of application. The basis for the boundary the trading book and the banking book according to the 2016 market risk framework is kept, although additional amendments are introduced:
  • Additional specification on the appropriate contents of the trading book.
  • Enhanced supervisory oversight.
  • Restrictions on the ability to arbitrage the boundary.
  • Clearer treatment of risk transfers across the boundary.
  • Further refinements and clarifications in certain main areas (e.g. assignment of instruments among regulatory trading book and banking book).
• Internal models. Under the revised market risk framework, the following aspects are enhanced to better address risks:
  • Enhanced model approval process.
  • New type of internal model to capture tail risk and market illiquidity: expected shortfall (ES).
  • Limits on the modelling of illiquid and unobservable risk factors.
  • Revised treatment of default risk.
  • Further amendments (e.g. new PLA test metrics)
• Standardised approach. The January 2019 revisions include the following changes to the sensitivities-based method:
  • FX risk class.
  • Equity risk and the credit spread risk classes.
  • Calculation of curvature risk capital requirements for options.
  • The low correlations scenario.
  • The low correlations scenario.
• Simplified alternative to the standardised approach. The current Basel 2.5 standardised approach will be retained although the revised market risk framework sets out specific scalars.

Download the technical note by  clicking here (documento disponible en inglés).