FRTB under Basel IV - A Confused and Staggered Global Timeline

Going forward, this series of posts from Risks Explained Limited will cover all key issues on Basel IV and FRTB. These new risk and capital requirements are the most comprehensive transformation package in the history of the Basel regulations and extensive preparatory work will be required by financial services firms.  

Outlined below are a number of key timing issues in the launch of Basel IV and FRTB. However, given the dynamic nature of the roll-out history experienced so far, we note that these timings are subject to change.  

Europe

The first wider EU banking package changes (including the fifth Capital Requirements Directive (CRD5) & revised Capital Requirements Regulation (CRR2), which incorporate portions of Basel IV, goes into effect in January 2023, and includes the requirements of the Fundamental Review of the Trading Book (FRTB) and Market Risk.

FRTB is intended to harmonise the treatment of market risk across national jurisdictions and is anticipated to generally result in higher global capital requirements. Given its size, the Basel IV focus was firstly (and rightly) on Credit Risk and then the next piece in the Basel IV jigsaw was to address the myriad of changes in market risk. This is why it is called the “Fundamental Review”.

A second package, which goes into effect in January 2025, will cover other areas of Basel IV.

UK

On 30 November 2022, the Prudential Regulation Authority (PRA) published its consultation paper (CP16/22) on the UK implementation of Basel IV and FRTB (known as Basel 3.1 in the UK). In addition, HM Treasury is consulting on the technical and legislative changes necessary to facilitate the PRA’s implementation of the final set of Basel reforms, introduced following the financial crisis, known as Basel IV and FRTB (Basel 3.1).

The HMT consultation closes on 31 January 2023.

The PRA CP has proposed that the PRA will adhere closely to the BCBS final framework document necessary to implement the Basel IV reforms.  Although the PRA is still in consultation during 2023, it has indicated that firms should use the proposed 1 January 2025 implementation date as a target for their Basel IV and FRTB implementation programmes to be effective.   

There is much to absorb from the PRA CP and it should be noted that the implementation complexity and challenges will focus on banks Risk, Finance, trading areas, data and technology infrastructure. This, combined with the challenge to the Basel IV and FRTB implementation teams of dual reporting requirement under the differing UK and EU rule books (this will remain unaligned until EU CRD6/CRR3 Banking package legislation is passed), provides a formidable hurdle to overcome. In respect of Market risk, the PRA approach on the Trading Book/Banking Book boundaries are more prescriptive than the BCBS or EU disclosures. This will prompt banks to need most likely to review and change their current positions.

Timing of the application of the P&L attribution tests will not be applicable for the first year following go -live which will impact to banks delivery of their internal model’s approach.

USA

Recent news indicates that the Basel IV proposals might not be released until 2023, which would give banking organisations little time to implement revisions before an expected compliance date in 2025.

Australia

The Australian Prudential Regulatory Authority (APRA) intends to implement FRTB and other Basel IV components (for example, the revised version of the Credit Valuation Adjustment (CVA) risk framework) on 1 January 2025.

 Japan

In Japan, the regulators are proposing to defer implementation by a year to March 2024 for some smaller banks.

Canada

Canada is scheduling to introduce Basel IV/FRTB in early 2024.   

Hong Kong

Hong Kong has announced a July 2023 starting date for Basel IV/FRTB.  

Conclusion

Throughout the world, there are many different scheduled dates for the introduction of Basel IV and FRTB. Financial institutions should discuss these details with their local regulators (home and host, as applicable).

While some of these future dates may appear to be a long way away, financial services firms need to recognise that this is the most wide-raging comprehensive reformation package especially in the context of data management challenges in the history of the Basel regulations and all-encompassing preparatory work will be required for all areas of the financial institution.

By: Mark Dougherty, CPA/CMA