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Banks urged to take action as FRTB implementation nears

Banks urged to take action as FRTB implementation nears

While the Fundamental Review of the Trading Book (FRTB) has been a long time in the making, and implementation guidance remains sparse in some jurisdictions, banks cannot afford further delays in deciding their market risk model approach and putting the necessary infrastructure and data management measures in place

With implementation less than two years away, it is imperative jurisdictions finalise local interpretation of FRTB rules, and banks take action to address the many remaining challenges to ensure full compliance. 

Europe is the most advanced region in its preparation for FRTB implementation, including interpretation of the rules and the provision of guidelines to banks. But, outside of Europe – especially in jurisdictions such as the US – there have been few official statements on rule interpretation. 

“It is urgent that jurisdictions outside of Europe finalise the interpretation of the [FRTB] rules, given the fast-approaching global deadline. Now is the time banks have to take action – specifically if they decide to put some desks on the internal models approach (IMA),” says Fausto Marseglia, head of product management, FRTB and regulatory propositions at Refinitiv.

The decision on which desks will adopt the IMA will have implications on the type of data banks need for passing the risk factor eligibility test (RFET) – which is required for desks eligible for the IMA – and how data will be sourced. 

Most big banks will use their own market risk models for some of their trading desks, and many have begun work analysing and identifying which desks will adopt the IMA and which will adopt the standardised approach. Marseglia expects most banks to finalise their decisions between the end of 2021 and early 2022. 

Risk factors assessed as non-modellable are critical in determining which desks will adopt the IMA, as they will be excluded from the desk’s internal models and charged separately with higher capital under the FRTB rules. 

While the Basel Committee on Banking Supervision has set January 1, 2023, as the global implementation deadline for FRTB, local jurisdictions have opportunities to tweak the rules and decide the implementation timeline to better reflect local market requirements, Marseglia says. In Europe, for instance, FRTB is implemented under the Capital Requirements Regulation (CRR), and regulators have split the IMA implementation into two phases, with the reporting requirements likely to commence in late 2024, and capital requirements expected to follow one year later in 2025.


The RFET, one of the biggest challenges to banks, will require market risk departments to source a huge number of trades and committed quotes to be included in the test. This will require sophisticated, and often cloud-based, tools to store, process and analyse very large datasets, according to Marseglia. 

“Regulators were concerned about the quality of the input prices hitting banks’ market risk models and wanted to make sure that underlying risk factors were showing sufficient trading activity. The RFET is a liquidity test at risk factor level to check there are sufficient executed trades or intentions to trade for the underlying financial instruments. Risk factors that will pass the RFET will be considered modellable and could be included in their own risk models, whereas those that aren’t modellable will be excluded and subject to a punitive capital charge,” Marseglia says. 

Many banks will probably use internal data as their primary source for the liquidity test, but the trading activities carried out at banks are insufficient to consistently pass the RFET, according to Marseglia. For the first time, banks will be forced to source trades and quote data from the external world, and they will need to source additional data from vendors that can offer comprehensive, cross-asset-class historical data.

The difficulty and time-consuming process of extracting trades from often siloed internal systems presents a further challenge to banks. “There’s a lot of work banks should do. The amount of data they have to source is huge since there can be tens of thousands of risk factors for a large bank,” he says.

Data challenges  

Sourcing huge amounts of data from different external sources requires banks to put in place the right data management tools and infrastructure, as well as data models to ensure consistency. The task is especially daunting, given banks typically need to source data from different data vendors for different asset classes. 

Furthermore, sourced data needs to be consolidated into a standardised data model to allow aggregation based on instrument attributes. This requires complex rule-mapping to align inconsistent data models across many sources and products, Marseglia says. 

But the state of readiness among banks in terms of data infrastructure varies, with larger banks typically more prepared than others.

Uncertainty in FRTB rules 

Uncertainty in some aspects of the FRTB rules poses further data challenges. For example, committed quotes as defined by the Basel Committee under the regulation refer to a price at which the provider of the quote must buy or sell a financial instrument, whereas the European Banking Authority takes a more restrictive approach, requiring valid committed quotes to have both a bid and ask leg to be eligible for the RFET.  

“Our view is that the interpretation of a committed quote as providing both a bid and ask price would be too restrictive and would materially limit the number of eligible quotes,” Marseglia says.

“In many bond and derivatives markets – particularly those based on a request-for-quote trading protocol – firm quotes consist of only a bid or an offer. Also, where such quotes are made public under the revised Markets in Financial Instruments Directive (Mifid II), the obligation for pre-trade transparency does not mandate quotes to include both legs,” Marseglia added. 

“As of now, no other jurisdictions have published formal documents on how to interpret committed quotes, so this remains an element of uncertainty that can potentially trigger local divergencies of the rules. As a consequence, many customers have decided not to use quotes for the RFET assessment,” Marseglia says.

Market transparency 

The challenges in passing the eligibility test are further compounded by instruments traded in opaque markets such as over-the-counter (OTC) versus those traded on regulated markets and exchanges. Most of the issues banks face in passing the RFET have to do with illiquid and exotic OTC derivatives products, as related trade data is rarely available to the public, according to Marseglia.

“While initiatives such as Mifid II in Europe can help provide transparency for OTC products, there is much less transparency for these products in markets outside of Europe. Banks have to rely on data coming from their internal trading activity or, more likely, source data from external vendors. There is much work involved in collecting the data,” Marseglia added.

About the author

Fausto Marseglia, Refinitiv

Fausto Marseglia, head of product management, FRTB and regulatory propositions, Refinitiv, an LSEG business

Fausto Marseglia leads the product management function for a number of regulatory propositions, including the Fundamental Review of the Trading Book. He is responsible for defining and building new and innovative business propositions around financial regulations and compliance. Marseglia has more than 20 years of experience in the financial services and capital markets industry. He joined Thomson Reuters in 2002 as head of Reuters Consulting, Italy/Greece. Since then, he has covered different regional and global roles in consulting, professional services and industry solutions functions. Marseglia has a degree in computer science.

Read more

Further information on Refinitiv’s take on FRTB

About Refinitiv

Refinitiv, an LSEG (London Stock Exchange Group) business, is one of the world’s largest providers of financial markets data and infrastructure. With $6.25 billion in revenue, more than 40,000 customers and 400,000 end-users across 190 countries, Refinitiv is powering participants across the global financial marketplace. It provides information, insights and technology that enable customers to execute critical investing, trading and risk decisions with confidence. By combining a unique open platform with best-in-class data and expertise, Refinitiv connects people to choice and opportunity – driving performance, innovation and growth for customers and partners.


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