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Leveraging compliance: the looming challenges of the post-FRTB paradigm

Leveraging compliance: the looming challenges of the post-FRTB paradigm

The deferral of Basel III implementation in response to the Covid-19 pandemic has ended. Within the next two years, Fundamental Review of the Trading Book (FRTB) guidelines will be implemented across a wide section of the global financial industry and will introduce a mountain of complexity to risk management standards and practices. Roger Coroas, head of business development, North America at ActiveViam, describes his vision for the post-FRTB paradigm

Roger Coroas, ActiveViam
Roger Coroas, ActiveViam

To mitigate risk, the capital level that banks will be required to maintain will increase, particularly if significant assets are highly illiquid or difficult to model. They will also face robust regulatory mandates that will further stress resources and personnel.

Risk management is getting more granular, and every trade is a potential pain point.

The FRTB framework defines two approaches that firms can implement: the standardised approach (SA) or the internal model approach (IMA). The SA set forth in Basel III will be required of all banks and will likely be the only methodology for demonstrating compliance. Some firms may also opt to implement the IMA. While this is cost-effective from a capital standpoint, the benefits may be diminished by the need for more rigorous standards for transparency and modelling.

Regardless of an institution’s approach to FRTB regulations, what is assured across the industry – and indeed, worldwide ­– is an imminent need to deploy better and more complete solutions to address the data and implementation challenges it represents. Whether adopting the SA or IMA, banks will need to be well prepared to meet the demands of increased capital, the challenges of implementation and regulatory compliance.

FRTB implementation status

Elements of FRTB have been adopted either wholly or in part by some of the largest economies in the world in North America, Europe and Asia-Pacific (Apac). Participants face unique challenges for finalising regulatory architecture. Although the industry is recommending improvements across a few areas, there is broad consensus on a 2025 convergence for the FRTB guidelines.

North America

The US
The Federal Reserve reporting guidelines are pending as of April 4, 2023, and compliance is tentatively expected in 2025.

The Office of the Superintendent of Financial Institutions released compliance guidelines in 2023, with implementation scheduled for January 2024. Banks are proactively utilising FRTB-compliant book-keeping.


European Union
SA reporting guidelines were finalised in September 2021, with implementation scheduled for January 2025. Banks are proactively utilising FRTB-compliant book-keeping.

The UK
Prudential Regulation Authority guidelines were published in 2021, with implementation scheduled for January 2025. Banks are proactively utilising FRTB-compliant book-keeping.


Implementation scheduled for March 2024.

Hong Kong
Implementation scheduled for July 2023.

Implementation scheduled for July 2025.

Enabling FRTB compliance

Banks worldwide are already facing FRTB’s implementation challenges. As 2025 approaches, financial institutions will need to implement solutions for data management, modelling and transparency in the reporting process to be compliant and keep up with peers.

While some banks may adopt the IMA for regulatory compliance, the additional requirements to maintain the designation may make this strategy prohibitive. The SA will probably become the reporting approach adopted by most financial institutions and the methodology targeted by most technology firms.

A mountain of data

FRTB regulations require banks to collect and analyse larger, more complex and complete datasets than ever before. Not only will considerable resources be required to meet regulatory obligations, but new strategies and architectures will need to be deployed as well.

Some institutions will also face inter-jurisdictional hurdles, as region-dependent variations in reporting requirements demand several layers of compliance. Finally, firms that select the IMA for some desks will be required to meet more rigorous regulatory standards than those implementing the SA. They will need to preserve the integrity and consistency of data along with backtesting, profit-and-loss attribution and risk factor eligibility tests to remain IMA-approved.

Leveraging technology

Employing the right technical solutions to meet the FRTB regulatory requirements will determine the ability of a firm to adapt to refinements or changes introduced over time.

Risk management platforms will need to perform multidimensional and non-linear analysis of huge datasets and analysis on a granular scale for drill down and attribution, provide dynamic bucketing for jurisdictional variance and assure SA or IMA compliance while being flexible and adaptable.

Solutions that can manage both the SA and IMA under the same environment will become invaluable as the regulation regimes are well established and firms start to devise capital optimisation strategies.

FRTB beyond regulatory reporting

FRTB reporting provides valuable criteria for reporting to management and risk management analysis. Banks can utilise FRTB standards and practices to generate sound predictive modelling for limits management, stress-testing and market risk management.

Firms using the SA to satisfy regulatory requirements may still use the IMA methodology for internal reports or to determine if capital savings are significant enough to justify seeking IMA approval from the regulator.

For better or worse, FRTB will soon be the new norm. The modelling requirements will be profoundly complex and data integrity will need to be maintained with precision and speed. Regulators may demand banks show the full top-down lineage of their capital calculations. Banks may want to perform bottom-up analysis to determine the capital impact of new trades or novation of portfolios.

Dominating the markets of tomorrow will demand the inspiration and adaptability, not just discipline to grind out compliance reports. To tackle the challenge, management will need to equip their teams with the tools to execute the regulatory reports efficiently. Such tools should also allow teams to execute beyond regulatory compliance and discover insights that will give them an edge over the competition.

That is the vision for the FRTB post-implementation paradigm.

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