US will implement FRTB, insists Fed official

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A Federal Reserve official has sought to dismiss concerns the US will not follow through on a radical overhaul of trading book capital standards.

International regulators have been working on the Fundamental Review of the Trading Book since 2012. The rules had been expected to produce a significant jump in capital for big dealers, but proposals issued in March could lessen the impact.

“Internationally, when I talk to people, probably the second most frequent question I get is ‘Is the US going to implement FRTB?’, and I want to make sure people know we are, because it is such a common question. I don’t know why people doubt that we are, but there is a serious doubt in some people’s minds. So: we are,” said David Lynch, deputy associate director with the Fed.

Lynch was speaking on a panel discussion at the annual meeting of the International Swaps and Derivatives Association in Miami on April 26.

Questions about US commitment to the FRTB emerged in the months after the election of President Trump. In February 2017, the president called for the US Department of the Treasury to report on whether the country’s existing financial regulatory system promoted a set of core principles, including the competitiveness of US financial institutions.

The first instalment of that report appeared in June last year, advising US regulators to postpone implementation of FRTB until it could be “appropriately calibrated”. In December, the Basel Committee on Banking Supervision voted to delay the rules internationally until 2022 – its new proposals were issued in March.

Delivering a keynote speech at last week’s Isda event, Craig Phillips, Counselor to the Secretary at the US Treasury, struck a cool note on FRTB.

We do support adoption in principle, but [the rules] have to be thoughtfully implemented on top of capital and liquidity regimes we already have here in US

Craig Phillips, Counselor to the Secretary at the US Treasury

Phillips praised President Trump for “brilliantly issuing” his February 2017 executive order, and welcomed the Basel Committee’s decision to postpone implementation.

He added: “We do support adoption in principle, but [the rules] have to be thoughtfully implemented on top of capital and liquidity regimes we already have here in US.”

The Fed’s Lynch said he did not anticipate any delays in US adoption of the rules. The Basel Committee plans to complete its March consultation and finalise the rules this year, he said, clearing the way for the Fed and its fellow US bank regulators to propose their own version of the rules and gather feedback.

“That will probably take most of next year, so I think we’re looking at 2019-ish – I hate to give very definitive dates on this of course, but I think this is where we get final rules in the US. That’s important because it does give people enough time to complete their implementation before 2022,” he said.

Lynch conceded the original version of the FRTB would have generated too big a capital hit. He attributed this to the data provided by banks during studies of the regime’s impact.

“As people got better at doing the calculations, we saw they had missed some of the risks in their books; they didn’t recognise some elements of it. Over time they got better at that, and as a result we recognised we had over-calibrated,” he said. 

This could be seen as a vindication of one industry claim: during the drafting of the rules, banks complained repeatedly that some of the details were unclear or incomplete, and argued regulators would be collecting poor-quality data as a result.