Banks across the Asia-Pacific region are bracing for a rocky implementation of Fundamental Review of the Trading Book (FRTB) rules, as disparate regulatory timelines, diverging local standards and operational complexities deepen the challenging task of compliance.
The FRTB, a key component of the final Basel III rulebook, represents a sweeping revamp of the way that banks determine and hold regulatory capital for market risk. The new standards are designed to tackle some of the deficiencies in the Basel 2.5 framework, devised in the immediate aftermath of the global financial crisis.
To determine market risk capital, all lenders must apply a Standard Approach (SA) to their capital models but can also opt for a more complex, internal model approach (IMA) on a trading desk-by-trading-desk basis. Though SA will be relatively easier to implement, under both systems lenders will be subject to a set of new and demanding data, technology and infrastructure challenges.
A May 2023 regional survey of 24 Asia-Pacific banks by Murex, a capital markets technology provider, lays bare many of these – and other – hurdles linked to FRTB implementation. For one, Murex found a high degree of uncertainty over regulatory timeframes, with nearly half of the survey’s respondents indicating a lack of clarity around final reporting deadlines.
One problem we see relates to the different speeds of FRTB adoption between markets
This situation is compounded by a potential divergence as to how the rules are interpreted at the local level. “One problem we see relates to the different speeds of FRTB adoption between markets. In addition, the degree to which the standard Basel framework is tweaked at the local level is also important, as it potentially introduces more complexity,” says Tim Clarsen, head of risk management business solutions for Asia-Pacific at Murex.
On June 8, the Monetary Authority of Singapore confirmed it would impose market risk supervisory reporting requirements from July 2024, before the introduction of capital adequacy and disclosure requirements from January 2025.
Internationally active banks in Japan face a go-live date of March 2024, while lenders in Hong Kong and China are also bracing for deadlines in 2024.
Australia, meanwhile, has announced a 2026 deadline for FRTB implementation. Yet Australian lenders, in common with some regional peers, are already well ahead in terms of their FRTB preparations.
“If you look at what’s been happening in Australia – even though the regulations are not yet published – the banks actually started their FRTB programmes some years ago. The first step in that process involves replacing their legacy market risk systems,” says Mr Clarsen.
Early efforts to evaluate system capabilities and technology requirements ahead of FRTB implementation are bearing fruit, as regional banks map out their respective strengths and weaknesses. Murex’s survey indicates that nearly 40% of participating banks believe their market risk systems (MRS) are insufficient to meet FRTB requirements.
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Of the institutions intending to pursue IMA, 75% believe their current MRS is sufficient, while 55% of those institutions targeting the Standard Approach indicated a new system would be required.
Technology and infrastructure considerations are accompanied by daunting data and analytics challenges, irrespective of whether banks target the SA or IMA. Nevertheless, the IMA’s implementation at the trading-desk level will present unique difficulties, particularly for institutions that operate on a cross-border basis.
“FRTB implementation requires a lot of data. There are many practical and operational issues around whether banks can actually source data from across various jurisdictions and use it, given the IMA is implemented on a desk-by-desk basis. Sometimes desks are organised on a jurisdictional basis, so different rules may potentially apply to different desks,” says Monsur Hussain, head of research for financial institutions at Fitch Ratings.
Meanwhile, the latest Basel Committee on Banking Supervision (BCBS) Basel III Monitoring Report, from February 2023, also suggests that leading global banks’ regulatory capital requirements will increase by some margin, irrespective of whether they target the IMA or SA, as a result of FRTB implementation.
This chimes with the Murex Asia-Pacific survey, in which participants indicated that the new rules will increase their capital requirements on market risk “by a factor of 1.5 to 3”.
in [China] FRTB is critical but not as critical as elsewhere because the exposure to market risk is quite small
Yet for some markets in Asia-Pacific, including China, the capital implications could be less onerous, relative to global norms. “If you look at risk-weighted assets in China, overall the exposure to market risk is only 1%. So in that country FRTB is critical but not as critical as elsewhere because the exposure to market risk is quite small,” says Fausto Marseglia, head of product management, FRTB and regulatory propositions at financial data company Refinitiv.
Despite this, China’s regulatory authorities are adopting a prudent stance towards FRTB implementation, according to Mr Marseglia: “The thing that I've noticed is that for the SA, the rules in China are broadly aligned – with some small differences – to the BCBS standard. But for the IMA, China is taking a more conservative approach.
“For example, they want to have the profit and loss attribution test run on a monthly basis and for backtesting to be run on a daily basis. Also, they are proposing stricter and more conservative rules for the default risk capital requirements, which will lead to higher capital requirements for banks that adopt IMA.”
Regulatory differences across markets of this kind, coupled with varying implementation timelines and the FRTB’s embedded operational and technological challenges, all point to a difficult few years ahead for Asia-Pacific banks as they complete their final Basel III frameworks.
