The FRTB: A Case for an Early Start

While many banks are still highly focused on MiFID II, it is time to start planning ahead for the upcoming Fundamental Review of the Trading Book (FRTB) regulation. The case for proactive action is simple: the FRTB can result in substantial punitive capital charges and the implementation of the apparatus needed to lessen its effects will require a large effort on the part of the banks.

Most regulations so far have had the dual objective of imbuing transparency into business operations while at the same time interfering as little as possible on the business itself. The stated goal of the FRTB is to reduce the risk that some trading desks may undertake while doing business by adding charges in proportion to the level of transparency with which that business is conducted. Yet the regulation is in a class of its own as it imposes capital charges to trading desks that stand to significantly alter the profitability of lines of businesses.

The earlier the banks start tackling the FRTB, the better. GreySpark has identified some best practice tips that will help banks get a leg up on implementation.

First, it is best to project early if a trading desk business will end up unprofitable as a result of the FRTB by running preliminary risk assessment tests. Banks can then take the necessary measures to limit the impacts.

Second, most banks will likely have to acquire resources from the market to adequately combat the FRTB. A late start will then mean stiffer competition when it will come to securing those resources. As the resources needed are very likely to be highly specialised due to the nature of the regulation itself, any kind of outside help will take longer to locate and on-board. GreySpark recommends identifying market partners and allocating resources as necessary to ensure that if outside help is needed, it is easily accessible.

Lastly and most importantly, a greater level of transparency will only be achieved by accessing cleaner, better quality market data. This usually requires an in-depth review of market data architecture, including historical market data. Often, when such infrastructures are globally distributed, remediation projects end up taking many months to complete. Most banks facing FRTB implementation should expect some level of market data remediation as without it, they would face substantially higher capital charges which could potentially shut down more trading desks than anticipated. Banks that begin surveying their market data sources now will be more strongly positioned and prepared for both FRTB implementation and the regulations that are sure to follow.