What does the EBA`s proposal to expand FRTB reporting mean for banks?

The Fundamental Review of the Trading Book (FRTB) was introduced into the prudential framework of the EU by Capital Requirements Regulation (CRR 2) as a regulatory reporting requirement in 2020. The final draft Implementing Technical Standards (ITS) on the FRTB reporting requirements went into force in 2021 as part of version 3.1 of the EBA reporting framework, introducing the first elements of the FRTB into the EU prudential framework. 

While not binding in terms of capital requirements, this constituted the initial first step towards the full implementation of the FRTB in the EU. The FRTB reporting requirements on the FRTB standardised approach (FRTB-SA) were initially scheduled to apply from the first quarter of 2021. However, recognising that firms faced severe operational and reporting challenges at the time due to the COVID-19 outbreak the EBA had postponed the starting date for the FRTB-SA reporting to the third quarter of 2021, allowing EU banks to focus on their core operations and providing some operational relief.

Reporting requirement applies only to EU banks whose trading book and business subject to market risk exceed certain thresholds. Banks below the thresholds are only required to report on the size of the trading book and the business subject to market risk. Currently, requirements include a thresholds template with respect to the size of institutions’ trading books and the volume of their business subject to market risk, as well as a summary template, reflecting the capital requirements under the alternative standardised approach for market risk (MKR-ASA).

While banks with significant business subject to market risk have been reporting information on the own funds requirements calculated on the basis of the MKR-ASA since 2021, information reported is of high-level nature and focuses on the size of the instruments and positions in scope of the MKR-ASA, as well as on the final result of the calculation of the capital requirements.

Those banks that are authorized to apply the more sophisticated alternative internal model approach by their competent authority are also required to provide detailed information on the scope and nature of the instruments and positions that they include in the scope of application of their internal models for market risk, as well as on the different steps of the calculation of own funds requirements on the basis of this approach starting from November 2025.  These banks will also be required to calculate their capital requirements also on the basis of the MKR-ASA as a fall-back measure.

Under the current FRTB framework, market risk information submitted by banks is not sufficient to provide information to supervisors regarding the magnitude and nature of their trading book exposures. Therefore, the EBA is revising and expanding the set of information that banks are required to report under the FRTB as planned. It set out proposals for the expansion of the FRTB reporting framework with a targeted application in the third quarter of 2024. 

Required changes under the FRTB framework poses significant regulatory reporting challenges to banks, requiring them to invest in new technology and data infrastructure, upgrade their risk modeling capabilities, and implement robust internal controls and governance processes to ensure compliance with the regulations. To avoid cliff effects, the EBA has adopted a gradual and proportionate approach in expanding the reporting requirements resulting from the FRTB. This is particularly important because banks continue to be subject to the current market risk framework and the associated reporting requirements, in addition to the new requirements.

Revised reporting requirements are expected to provide supervisors with a sound basis for assessing banks’ progress regarding the implementation of the alternative standardised approach, as well as ensuring their compliance with capital requirements. However, proposed changes will mean additional regulatory reporting and compliance challenges for banks.​ To comply with the changes, some banks will need to invest in new technology and data infrastructure, upgrade their risk modeling capabilities, and implement robust internal controls and governance processes.

The EBA is expected to submit the draft ITS to the European Commission in autumn 2023 and the revised  reporting requirements are expected to apply from the reference date of 30 September 2024. While the reporting requirements under the FRTB regime are being expanded in a proportionate and gradual manner, banks would be well advised to review their existing systems and processes and begin making necessary upgrades to ensure they are compliant with the revised market risk framework.