Volcker, FRTB and dual netting sets

The week on Risk.net, April 14–20 2017

DUAL NETTING SETS face bank pushback

ENERGY industry exploring blockchain

MIFID SI limits could be hardened


COMMENTARY: Trading shots with the Feds

Trading desks remain in the firing lines of regulators – both past and present. This week, Paul Volcker defended his eponymous rule to Risk.net in the face of widespread calls for it to be dismantled.

The former Fed chair tells Risk.net his prop-trading ban has already achieved its aim: “The effort has not been futile. The banks have eliminated their proprietary trading desks – they’re gone.” And he dismisses criticism of the unnecessary intricacy of his rule, asserting that regulators should throw more resources into its operation.

Despite the number and variety of opponents lining up to take pot shots at the rule, rolling it back will not be straightforward. Risk.net spoke with 17 regulatory sources who say outside outright repeal or revision, the most easy-to-obtain relief could be via a softening of its compliance regime.

Regardless of attempts to temper Volcker, trading desks’ structure remains under scrutiny as the Basel Committee on Banking Supervision’s Fundamental review of the trading book (FRTB) looms in 2019. Because of differences in the way trading desks and products are treated under FRTB, banks say they will need to rethink the structure of their businesses, in some cases starting with the trading desks they use to comply with the Volcker rule.

FRTB, of course, has attracted the attentions of its own posse of detractors. Its roll-out could be scuppered as the Trump White House and Republican lawmakers stoke fears that the US will renege on agreements to implement the rules.

Critics are stockpiling their objections to the proposals. Banks claim the impact of the new market risk capital rules is being incorrectly downplayed in regulatory analysis, although they are hoping to get a fresh hearing for their complaints after a change of leadership at the group responsible for the regulation. Dealers have been left frustrated by the Basel Committee’s response to questions on model backtesting and could focus their liquidity provision around commonly used benchmarks.

More recently, mathematical studies have cast further doubt on the FRTB’s profit and loss (P&L) attribution test (which the European Banking Authority plans to reboot). This backs up criticisms made by banks in Risk.net’s own FRTB survey, which put internal model approval at the top of the list of fears around the reform.

In addition, identical foreign exchange portfolios could attract wildly varying capital charges depending on which currency they are reported in – although workarounds are possible, according to research released this week.



Under FRTB, assuming re-accreditation is achieved, the 10% variance of unexplained P&L would leave banks with 25% of their desks banned from using internal models at any one time. The longer the variance, and the longer the re-accreditation delay, the higher the number of banned desks; if variance rises to 15%, only 42% of desks will be using internal models at any one time.



“We do not want Pillar 1 to be reintroduced by the back door, calling it Pillar 2 but keeping many elements of Pillar 1. The reason why Basel actually concluded with the Pillar 2 charge is because you cannot standardise measurement of interest rate risk in the banking book and still make much sense of it” – Denisa Mularova, European Banking Federation

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