French regulator voices doubts on Europe’s FRTB timeline

Federal Reserve warns EU delay would force US to reconsider 2022 implementation

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The need for political negotiations and internal model reviews could result in the European Union overshooting the Basel Committee’s 2022 deadline for implementing new market risk capital rules, according to a leading French regulator.

Speaking at a conference in Brussels yesterday (June 26), the Autorité de Contrôle Prudentiel et de Résolution’s (ACPR) director of international affairs, Frederic Hervo, said “plan A” should be for the EU to implement Fundamental Review of the Trading Book (FRTB) rules in line with the Basel schedule, but pointed out potential obstacles to a speedy adoption.

“2022 still seems like the time horizon, but if we consider how difficult and complex implementation could be, and there I am thinking about the review of the internal models, which the ECB [European Central Bank] is responsible for in the banking union… there is more uncertainty,” he said.

The ECB is carrying out a targeted review of internal models, which it expects to finish in 2019.

The Basel Committee agreed in December last year that FRTB implementation would be delayed by three years, from 2019 to 2022. This gave regulators more time to launch a consultation paper in March this year, which would revise key elements of the FRTB, including internal model tests and the regulator-set standardised approach – known as the sensitivities-based approach.

Regulators from France, Germany, the UK and US represented at the June 26 conference – organised by the International Swaps and Derivatives Association – all agreed they are hopeful the Basel changes to FRTB will be finalised by the end of this year, with a key Basel meeting scheduled for November 28-29 in Abu Dhabi.

The European implementation of FRTB was originally contained in the second Capital Requirements Regulation package (CRR II), which is currently under negotiation after being proposed by the European Commission in November 2016. But European Council finance ministers (Ecofin) recently proposed that CRR II should only introduce a reporting requirement for FRTB, with capital charges waiting until the final Basel rules can be included in fresh legislation after the European parliamentary elections in April 2019.

By contrast, in June, the European Parliament reached a compromise that proposed implementing Basel’s existing version of FRTB, including capital charges, but phased in from 2022, with Basel’s changes being introduced when ready.

It’s still a long journey, because in Europe the 2016 FRTB was part of the CRR II review, but, of course, there is this difficulty of taking into account the final Basel framework
Frederic Hervo, ACPR

Hervo said disagreement between the European Council and Parliament could also contribute to delays. The two bodies will now negotiate the final version of CRR II with the EC in a series of trilogue sessions, due to start on July 5.

“It’s still a long journey, because in Europe the 2016 FRTB was part of the CRR II review, but, of course, there is this difficulty of taking into account the final Basel framework, which will not be fully stabilised before the end of the year,” said Hervo.  

“We also see the institutional solutions from the Ecofin and Parliament are not completely aligned. I’m not sure this will be a real difficulty for the trilogues, but nevertheless this has to be sorted in order to have the timing we have talked about,” he added.

By contrast, Karlheinz Walch, deputy director for general banking and financial supervision at Deutsche Bundesbank, told the conference he was hoping EU legislators will be able to maintain a commitment to implementing FRTB in 2022.

A regulatory consultant, who did not want to be named, told Risk.net on the sidelines of the conference that EU implementation of FRTB implementation in 2022 was almost impossible. He said he expected the rules to come into force about two years later, in 2024, considering the EU’s track record on implementing financial regulation. This is in line with suggestions made in the Ecofin discussions on FRTB.

Difficult position for US

Speaking at the same conference, Norah Barger, a senior policy adviser at the Federal Reserve, said the US would probably need to emulate the European timeline and might have to consider an extended reporting period if the EU delays its implementation.

“I think [an EU delay] would put everyone in a difficult position. This is one standard where the simultaneous implementation dates across jurisdictions are extremely important [in order] to avoid things like pricing distortions. It’s a bit different in the credit book – lending is a bit jurisdiction-specific – but [market risk] is a global market, so we would hope that we would manage to go together,” said Barger, who is a former co-chair of Basel’s trading book group, now known as the market risk group.

Japanese bankers and regulators have expressed similar concerns about a level playing field in recent weeks, due to signs of European delay.

There had been uncertainty about whether US regulators under President Donald Trump’s administration would be willing to implement the FRTB at all, despite signing up to the final Basel III package of reforms in December 2017.

Earlier at the conference, Rebekah Jurata, deputy assistant secretary for international financial markets at the US Treasury, said the US was fully committed to implementing FRTB. She said the actions of US regulators have proved false the rumours that US agencies would be disengaging from global rule-making under President Trump.

The Brexit effect

Asked at the Isda conference if the UK will implement FRTB on schedule in 2022 after Brexit, even if the EU27 does not, Jonathan Ward, technical head of department at the Prudential Regulation Authority (PRA) said he did not know, but this would be the lowest-cost option for the UK regulator.

Ward said firms should be implementing FRTB now, and that UK-based firms were meeting with the PRA on a quarterly basis to discuss its impact. He added that because UK-based firms have been required to hold extra Pillar 2 capital for market risk, the rise in capital requirements under FRTB might be smaller than some banks had feared. Banks have previously sought to debunk this claim.

“I know there’s a lot of uncertainty on the impact on some of the things Basel are focusing on – most notably the P&L attribution test, as well as the scope of the non-modellable risk factors – but what we can’t have is a situation where the uncertainty of the impact is used as a reason to postpone,” said Ward.

A regulatory expert at a non-EU bank told Risk.net the French position seemed to be welcoming a delay, and that if the plan is to undertake extensive internal model reviews before FRTB enforcement, implementation might be as late as 2026 or 2027. He contrasted this with their approach to Brexit.

“What I find funny is that the comments from the French side on FRTB are completely at odds with what they are saying on Brexit. On Brexit it’s ‘relocate, do it now, don’t wait’, whereas on FRTB the approach is ‘we’ll take our time’,” the regulatory expert said.

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