Fundamental Review of the Trading Book (FRTB): A Deep Dive into US, UK and EU Rulemaking and Implementation
Abhishek Nagesh
Abhishek Nagesh, Barclays Investment Bank, New York (New York), United States of America (USA).
Manuscript received on 19 February 2025 | First Revised Manuscript received on 07 March 2025 | Second Revised Manuscript received on 19 April 2025 | Manuscript Accepted on 15 May 2025 | Manuscript published on 30 May 2025 | PP: 80-87 | Volume-5 Issue-1, May 2025 | Retrieval Number: 100.1/ijef.A261005010525 | DOI: 10.54105/ijef.A2610.05010525
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© The Authors. Published by Lattice Science Publication (LSP). This is an open-access article under the CC-BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/)
Abstract: The Fundamental Review of the Trading Book (FRTB) is a comprehensive Basel III framework introduced to overhaul market risk capital requirements during the 2007–2009 financial crisis. The framework comprises two main approaches for measuring market risk capital: a more risk-sensitive Internal Models Approach (IMA) for banks that have obtained supervisory approval, and a revised Standardised Approach (SA) that applies granular risk-weighted sensitivities to all banks. This framework has global significance, and its implementation is underway across major jurisdictions. However, the United States, the European Union, and the United Kingdom have taken somewhat divergent paths and timelines in adopting FRTB, reflecting local regulatory priorities and constraints. This document provides a concise analysis of the FRTB framework, comparing the regulatory approaches, methodologies, and model approval processes of the United States, the United Kingdom, and the European Union. It also discusses the anticipated impact on large international banks, including changes in risk-weighted assets and capital requirements. It evaluates whether the benefits of FRTB in risk management and financial stability justify the associated compliance costs. The findings underscore FRTB’s role in strengthening market risk regulation while highlighting the importance of coordinated implementation and fine-tuning to address industry concerns. Key innovations of FRTB include: desk-level model approvals, a rigorous Profit & Loss Attribution (PLAT) test to ensure model accuracy, a Default Risk Charge (DRC) for jump-to-default risks and capital add-ons for NonModellable Risk Factors (NMRFs). Since BCBS finalized FRTB standards (as part of the Basel III “final reforms” in 2017–2019) [5], jurisdictions have moved at different paces to implement them.
Keywords: Financial Crisis, Framework Comparing, DeskLevel Model Approvals.
Scope of the Article: Banking