A trading book is the portfolio of financial instruments held by a brokerage or bank. I am currently a managing director at moodys copal amba and head their risk management services practice. The portfolio of financial instruments in the trading book may be resold to benefit from shortterm price fluctuations, used for hedging or traded to fulfil the firms or clients needs. Aug 07, 2016 regulators have seen principles based approach to allocate transactions to a trading or a banking book as a source of capital arbitrage for the banks. Trading book definition of the trading book crr 2, art. The boundary between the trading book and the banking book. There are two prescribed approaches to calculate the market risk. The economic impact on all impacted banks is large. Strict limits on the movement of instruments between the books after initial designation. Financial instruments in a trading book are purchased or sold for reasons including to. A frtb product list flag for the banking and trading book based on the current presumptive list defined by bcbs crr ii needs to be stored in the systems. Financial instruments in a trading book are purchased or sold to facilitate trading for the institutions customers, to profit from trading spreads between the bid and ask prices, or to hedge against a number of types of risk.
The full presentation includes measurement exercises in. On 14 january 2016 the bcbs published the frtb rules which aim to standardise the treatment of market risk internationally and impose stricter global capital requirements. To achieve a more robust framework, the basel committee on banking supervision bcbs issued a series of. A trading book is a portfolio of financial instruments held by a brokerage or bank. Each member country, including the united states, will have to consider how it will give effect to the frtb framework. Post the 2008 financial crisis, there were multiple regulations issued by the regulatory bodies t. The precise answer is both complex and involves considerable latitude for opinion. See basel committee on banking supervision, regulatory consistency. This means revisiting any previous approach to modelling this structure, embedding it in an electronic representation, and ongoing monitoring.
Frtb demands a clear segregation of banking book and trading book instruments. Current rules have allowed banks to allocate transactions to trading book largely based on the intent to trade or to hedge. Instruments comprise financial instruments, foreign. Differences between interest rate risk irr in the banking. The standards, approved in january 2016 by the basel committee on banking supervision bcbs and slated for compliance in january 2019, will fundamentally change the way firms calculate, plan for, and manage risk on the trading book. Securities underwritings are only included in the trading book if the bank expects to purchase the security on the settlement date. The frtb was subsequently devised to tackle a number of structural flaws in the framework that were not addressed by basel 2. Key modelling challenges anshuman, can you please tell the center for financial professionals audience about yourself and your professional experience. A financial institutions trading book comprises assets intended for active trading. These can include equities, debt, commodities, foreign exchange, derivatives and other financial contracts.
Differences between interest rate risk irr in the banking and. Through the frtb rules, bcbs is seeking, for example, to establish a more objective boundary between the trading book and the banking book, and to eliminate capital arbitrage between the regulatory banking and trading books. Sep 26, 2017 why banks trading books are new target of rules. Frtb requires that business be allocated to either the trading or banking book, and not jump the boundary in an arbitrary way. Securities and financial contracts that a bank intends to trade, resell or profit from on. May 23, 2012 what is the difference between the trading book and the banking book of a bank. The frtb, released by the basel committee on banking supervision bcbs in 2016, revised the minimum capital requirements for market risk to address the shortcomings of the basel iii market risk capital framework. Its complex, potentially very costly and has a number of. If a bank does an interest rate swap with a customer, thats trading book. Frtb builds on the intent based criteria for trading banking book assignment as set out in basel ii. Feb 15, 2016 frtb builds on the intent based criteria for trading banking book assignment as set out in basel ii.
Its impact stretches far beyond changes to model methodology, and will be felt well beyond risk, with front office, finance, and it all heavily affected. The distinction parallels the one between the banking book, containing notably longcredit loans, and the trading book, usually including long and short positions e. However, it clarifies these criteria through more prescriptive rules. Frtb lacks clarity on a number of important aspects and still has challenging implementation timelines in spite of the delays to implementation dates key areas that are still being debated include eligibility testing, nonmodellabilityand the boundary between the trading and banking books. A clear definition for the differentiation between trading and banking book positions shall help prevent regulatory arbitrage regarding capital charges. What is the difference between a banking book and a. May 09, 2017 frtb is a regulation issued by the basel committee on banking supervision bcbs, a committee of banking supervisory authorities established in 1974. The difference between the trading and banking book. So far, the banks have been deciding if a book was a trading book or a banking book, and there was an incentive to arbitrage from this determination, as there was a difference in the capital. The rules are due to come into effect at the end of 2019 and are encapsulated in bcbs 352, minimum capital requirements for market risk.
Real estate holdings and retail and small business lending must go in the banking book. Irr in the trading book is subject to pillar i and hence carries a capital charge, whereas interest rate risk in the banking book irrbb is subject to pillar 2 and does not carry a regulatory charge. Regulators have seen principles based approach to allocate transactions to a trading or a banking book as a source of capital arbitrage for the banks. On 2 may 2019, the european banking authority eba launched a consultation on four draft regulatory technical standards rts on the standardised approach.
Banks must use sa, unless they meet ima requirements on an ongoing basis, in which case. The global financial crisis of 2007 and 2008 revealed significant weaknesses in the market risk capital mrc framework. Basel committee on banking supervision publishes final. Basel iv revised trading and banking book boundary for. By shearin cao, technical specialist, traded risk management, standard chartered bank. Frtb removes nearly all of a firms ability to move assets between the banking book and trading book. Frtb builds on intent based criteria by imposing strict limits on internal risk transfers between the banking and trading books, with the key purpose being to eliminate regulatory capital arbitrage. However under frtb this principles based approach will go away and will. Frtb new market risk framework polarizes regulators and.
A mapping of the frtb products product categories on the bcbs crr ii presumptive list to a bank s product list via a gui needs to be implemented. Deviation requires explicit approval from supervisor. The trading book is an accounting term that refers to assets held by a bank that are regularly traded. All other instruments must be included in the banking book. Implications and actions for banks nevertheless, a number of banks have expressed the concern that frtb will lead to a significant increase in capital requirements which, combined with higher compliance costs, could decrease banking profitability. At the same time, a number of important design and calibration questions need to be addressed before the frtb can be implemented, to avoid it resulting in a. Basel committee on banking supervision consultative. Inconsistencies in the allocation of individual financial instruments to the trading book or the banking book have been resolved by a new system. In january 2016, the basel committee on banking supervision. Frtb is a regulation issued by the basel committee on banking supervision bcbs, a committee of banking supervisory authorities established in 1974.
An introduction to expected shortfall frtb, using components of the corresponding module found under optimal mrms e learning service. The frtb rules, which represent a key postcrisis banking reform in the. The trading book is required under basel ii and iii to be marked to market daily. Video would be covering detailed aspects of frtb like internal models and. The rule, which takes effect january 2022, is focused on strengthening capital standards and creating a more resilient banking sector. Frtb still builds on the intent based criteria for tradingbanking book assignment but. Revised trading and banking book boundary for market risk 7. The new boundary between the trading book and banking book which will limit the potential for regulatory arbitrage.
There is a clear criterion for assigning instruments to the trading book with the objective of ensuring only traded instruments are included in capital calculations and that regulatory arbitrage is minimized. Banking book positions can only be transferred into the trading book if the risk is offset through separate matched external hedges. A revised market risk framework the trading book banking book boundary the committee believes that the definition of the regulatory boundary between the trading book and banking book has been a source of weakness in the design of the current regime. Please contact the center for financial professionals today to discuss how we can deliver your thoughtleadership at the event, help you generate leads, and provide you with unique networking and branding opportunities.
The primary issue with the above framework has been a lack of clear demarcation of boundary between the two books, which in the past enabled banks to shift assets to the trading book from the banking book prior to the financial crisis due to lower capital requirements and then do the reverse post financial crisis due to massive loss in. Rbc25 boundary between the banking book and the trading book. Basel committee on banking supervision consultative document. Nov 18, 2016 an introduction to market risk capital frtb, using components of the corresponding module found under optimal mrms e learning service. Achieving frtb compliance tata consultancy services. The major overhaul of market risk capital regime is.
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