South African major Banks have started rather timidly their journey toward implementing FRTB, the most significant transformation of the trading market risk framework for the last 20 years. Are these banks fully aware of the main challenges ahead, and how can they use this complex regulation to redefine their business model and move ahead of their competitors?
FRTB represents a significant and revolutionary change to the existingframework for calculating market risk capital.
Following the 2007-08 financial market crisis which exposed the weaknesses of the Basel II and VaR-based framework, the Basel Committee introduced a set of incremental revisions to the Basel II market risk framework to address the most pressing deficiencies which were issued under the Basel II.5vdirective. At the same time, a fundamental review of the trading book was also initiated to tackle a number of structural flaws that were not addressed by those incremental revisions, with the main purpose being to ensure that the standardised and internalmodel approaches to market risk, deliver credible capital outcomes and promote consistent implementation of the standards across jurisdictions.
FRTB initial paper was issued in 2013, followed by various iterations until issuance of the final version in January 2016. The new rules are set to come into force globally by December 2019, although some jurisdictions like the EU are alreadymentioning a three year phase-in period. Banks are allowed to implement FRTB under the Standardised Approach (SA) or the Internal Model Approach (IMA).
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