Big banks take lead in FRTB compliance


Big banks are leading the way in FRTB – or Fundamental Review of the Trading Book - compliance, according to banking and consultancy sources.

"We have excellent engagement from senior stakeholders and directors," said the executive director of a major US bank at a recent FRTB compliance forum. "We are working towards full compliance before the January 2022 deadline."

He added that the US Federal Reserve was "very keen" on FRTB and from a US perspective there was little doubt that implementation should start as soon as possible. "We started implementing a long time ago," said a director at a major European bank speaking at the same event. "Prior uncertainty surrounding the final version of the rules didn't help."

Meanwhile, a third banker at a medium-sized European bank told Practice Insight that the big banks were ahead of the game. Unsurprising, he said, given the larger compliance resources available to bigger banks. The main difference is that big banks are focused on building in-house systems, while medium-sized firms are focused more on outsourcing, according to sources.

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"Both the prescriptiveness and added complexity of FRTB's multiple new requirements lend themselves to outsourcing," Eugene Stern, business manager at Bloomberg's risk management services, told Practice Insight.

Stern, who oversees FRTB compliance solutions, stressed the difference between the types of conversations he was having with large and medium-sized banks. While the big banks are generally looking for partial work flow solutions, the medium-sized banks are considering more complete outsourcing solutions.

Since the final version of the rule was published in January, the market has started to think more seriously about implementation: "We've definitely seen a renewed interest in getting moving with implementation in the market place," Stern said. "The mid-sized banks and large-sized banks with whom we had initial conversations are now coming to us with more serious levels of engagement."

Stern added that momentum behind implementation efforts had previously dropped because of the various revisions to the regulation and a lack of certainty surrounding the final version of the rules.

This time, however, it is unlikely there will be further revisions.

"We recently had a meeting with the Basel committee and one of the things they emphasised is that this was the final version of the rules and that they were not expecting to make more amendments," Stern said.

According to Stern this means that firms should start compliance efforts as soon as possible, adding that, as far as he could see, the smallest firms hadn't really started yet.

Other banking sources speaking to Practice Insight corroborated this view.


  • Big banks are leading the way in FRTB compliance;
  • While big banks are focused on building in-house systems, medium-sized banks are looking to more complete outsourcing solutions;
  • Since the rules were finalised in January, firms have stepped up their compliance efforts;
  • Sources thought that the smallest banks were not yet working on implementation solutions;
  • Only the largest banks are seriously considering internal models;
  • The extra capital requirements remains a chief concern.

Standardised Approach

The FRTB's Standardised Approach (SA) is the first port-of-call for compliance efforts, according to sources. This is because every firm, regardless of size, will need to implement it.

"This isn't a question of cutting and pasting the Basel rule-book," said a banker at a UK bank. "There are big challenges here. On the whole I think SA is much better than Basel 2.5, which is a bit rough and ready," he said, also voicing concerns that the rules could impact liquidity.

The EU based banker too likened the rules to "brand new animals" and stressed the need to approach compliance holistically.

See also: Is regulation making markets less competitive?

"The largest banks have risk platforms in place for Basel 2.5 and those platforms can potentially be extended," said Stern. "Many of them have already built the core analytics for SA. They come to Bloomberg because there are parts of the workflow that isn't complete."

Examples of incomplete workflows include coverage on particular asset types, bucketing data and index exposures.

Stern said SA outsourcing was less a two-tier system (large in-house versus medium outsourced) than a spectrum of compliance levels. In meetings with the Basel committee the regulator "didn't seem to mind" that banks were outsourcing solutions, he said. The main point was that firms were complying in some shape or form.

See also: Goldman/UBS fines sharpen Mifid reporting compliance

"When we met with the Basel committee they asked us lots of questions about how we build our solutions, how we architect them, how we test them, how clients use them and what happens when something goes wrong," he said. "There was a real push here to understand the vendor space."

From a systemic risk perspective, the regulators need to make sure that vendor solutions are robust. If twenty different banks are using the same system and there's a bug in the calculation there would be serious problems.

Meanwhile, all banking sources expressed concerns about the potential for regulatory divergence: "Wouldn't it be great if all the regulators could hold hands and implement FRTB together in a uniform way?" said a Bank of England source. "The regulators would also like this to happen, not least with Brexit round the corner."

Internal Modelling

The big question banks are having around building internal models is based on a cost-benefit analysis: What's the capital relief compared with the cost of implementation?

"FRTB is not just about cleaning up systems, it’s about requiring firms to demonstrate they can model transparency and understand that their right to model can be removed," said the Bank of England source.

Stern said he'd seen little interest in internal models in smaller banks."I would be surprised if more than one or two regional banks in US do internal model approach (IMA); by contrast, some big banks are saying right now they're going to do a standardised IMA," he said.

In Europe there was more pressure to do standardised IMAs, he said. But for all banks the key question was fundamentally of a business nature.

Meanwhile, all of the banking sources Practice Insight spoke to expressed concerns over the increase in capital requirements that accompanies FRTB, which while obvious remained the most pressing implementation challenge they face.

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