The final rules for the Fundamental Review of the Trading Book (FRTB) regulations were published last year and although details of how the regulators in each jurisdiction will implement them remain ill-defined, we know the changes are coming and that now is the time to prepare. FRTB, part of the Basel III rules, will transform how banks manage their capital requirements and how they are structured and managed internally.
The rules at a local level are not yet granular enough for banks to confidently implement them. This makes preparation difficult and the deadline of January 2020 is not far off considering the massive scale of the changes. Financial institutions need to get lean, efficient and ultimately prepare well ahead of this change. With this in mind, we propose some critical steps to help during this period of uncertainty.
Step 1: understanding the scale of the changes
The implementation of FRTB will be substantial and incur significant costs. If you haven’t already done so, setting up a programme to ensure good governance and structure is critical. It’s important for the FRTB team to establish contact with stakeholder groups early on as they will be assessing the potential impacts based on findings from the team, as well as those assessed internally.
Step 2: get lean, quickly
The estimated costs of implementing FRTB will double or quadruple the business costs across a bank. It’s important to reduce costs while aligning procedures and systems to stay competitive and ensure you have the right mix of desks to operate your business. Streamlining business and IT processes, implementing automation in areas such as back testing, consolidating systems and reducing your costs per trade are all essential.
Step 3: organise your data
One of the main concerns the various regulatory programmes have raised for banks relates to the completeness and consistency of their data sourced from multiple systems. Additionally, business desks will potentially need to produce up to 60 times more data than current levels for certain desks. The subsequent increased workload for regulators will be enormous. In preparation, allocating more resources and processes to interpret the data is essential.
This has been a brief look at only some of the critical topics within FRTB. What is known is that it’s coming – what’s not known is how the banking world will look once local interpretations of the regulations are finalised.