EU Regulators Eye Delay for FRTB and Other Key Regulations

EU regulators are considering delaying the implementation of the Fundamental Review of the Trading Book (FRTB) and other delegated acts. This move aims to alleviate the compliance burden on the financial sector, with a decision expected soon. The potential delays come amidst fragmented global timelines for FRTB adoption and ongoing challenges for banks in meeting the complex requirements.

EU Considers Regulatory Relief

The European Commission (EC) is actively exploring options to ease the regulatory load on financial institutions. This includes potential delays to the FRTB and a significant number of other legislative acts.

• Listening Mode: The EC is reportedly in "listening mode," indicating a willingness to consider feedback from banks regarding the feasibility and impact of current regulatory timelines.
• Delegated Acts: A document dated May 15 reveals the EC is reviewing 430 delegated acts, identifying up to 122 that could be postponed without hindering primary legislation. These acts span various regulations, including CRR, Emir, and Mifir.

FRTB Implementation Challenges

The Fundamental Review of the Trading Book (FRTB) has presented numerous hurdles for banks globally, leading to fragmented implementation timelines.

• Global Discrepancies: While Canada is leading the way with a November 2023 live date, other jurisdictions, including the EU, UK, and Asia-Pacific, have varying timelines stretching into 2024 and 2025. The US has yet to publish its timelines.
• Data Granularity: Both the Standardized Approach (SA) and Internal Models Approach (IMA) under FRTB demand highly granular and elaborate reference data, posing significant challenges for banks.
• Risk Factor Eligibility Test (RFET): The RFET is a major concern due to the quantity and quality of data required, as well as divergent regulations across jurisdictions.
• Vendor Data Reliance: Banks will increasingly rely on vendor data for compliance, raising questions about data validity, auditability, and potential over-reliance on single vendors.

Impact on Banks

The ongoing uncertainty and complexity surrounding FRTB implementation have several implications for banks.

• Costly Implementation: Re-engineering processes for IMA, managing vast amounts of new data, and ensuring the right skilled personnel are in place make FRTB implementation very expensive.
• Strategic Decisions: Some banks are opting for the SA initially, with plans to re-evaluate and potentially transition to IMA later, given the high costs and complexities of immediate IMA adoption.
• Market Impact: Uncertainty around FRTB has led to neglect of Value-at-Risk (VaR) models, as banks await clarity on the final regulatory framework.

Path Forward

The EC is expected to make a decision on the FRTB delay within days, or by early June at the latest. This decision will be crucial in providing much-needed clarity and potentially easing the compliance burden on the European financial sector.

Sources

• European Commission in ‘listening mode’ on potential FRTB changes, Risk.net.
• EU edges closer to calming FRTB fund-linked fray, Risk.net.
• EC moots postponing 122 delegated acts to cut compliance costs, Risk.net.
• EC to decide on FRTB delay within ‘days’, Risk.net.
• Challenges still lie ahead as FRTB implementation stalls, Risk.net.