What does the EC’s postponement of the FRTB mean for the industry?

Last month, the European Commission (EC) adopted a Delegated Act (DA) to postpone the application date of the Basel III fundamental review of the trading book (FRTB) standards in the European Union (EU) for the banks’ calculation of their own funds requirements for market risk until 1 January 2026.

The EC essentially considered that the implementation of the FRTB rules should converge as much as possible across jurisdictions to ensure a level playing field among internationally active banks. Because the United States has not yet provided clarity on when and how it would finalise its implementation of the Basel III standards, the EC decided to postpone FRTB by a further year.

During the one-year postponement period, firms would continue to use their current (pre-FRTB) methodologies to calculate their own funds requirements for market risk. In parallel, the FRTB Standardised Approach will be used for the output floor calculation. This means that firms would need to continue reporting these elements to competent authorities based on the current reporting requirements.

More specifically, the existing reporting templates for market risk, as they are laid down in Commission Implementing Regulation (EU) 2021/451 and Implementing Regulation (EU) 2021/453, will continue to apply until 1 January 2026. As to the specific disclosure requirements for the own funds requirements for market risk, tailored to the FRTB framework, the EC clarifies that the new disclosure requirements would also be postponed by one year.

Regarding the output floor, the EC expects that EU banks currently using an internal model approach for capital purposes calculate the output floor for the market risk component of the own funds requirements on the basis of the comparison between the outcomes of the current Internal Model-based Approach and the FRTB Standardised Approach. This also means that EU banks that are currently using the standardised approach for capital purposes would need to compare its outcome with the FRTB Standardised Approach unless they are not subject to the current interim reporting requirements.

On the other hand, the EC reminded that the new requirements introduced by the banking package on the Banking Book (BB) - Trading Book (TB) boundary will become applicable from 1 January 2025, inviting the EU regulators and supervisors to take action in this area to avoid a staggered implementation of the different elements of the FRTB framework.

In response, the European Banking Authority (EBA) published a no-action letter on the BB-TB boundary, recommending that competent authorities should not prioritize any supervisory or enforcement action concerning the amendments to the provisions setting the boundary between the two books, or those defining internal risk transfers between them.

The EBA’s main concern appears to be that the front-loaded application of the revised provisions on the boundary and internal risk transfers, compared to the rest of the FRTB framework, which is not yet implemented in the EU for capital purposes, would subject institutions to an operationally complex, fragmented and costly two-step implementation. Furthermore, The EBA also considers that a front-loaded application of the boundary provisions would lead to global institutions being subject to very different regulatory requirements depending on where the risk management is performed, thus resulting in a fragmentation of the regulatory framework.

The publication of the DA was conveniently accompanied by a set of question and answers on some aspects of the postponement, including the use of the alternative Standardised Approach in the context of the Output Floor calculations, and more importantly, the application of the revised BB-TB boundary. In addition, the EBA's no-action letter was accompanied by a document outlining its considerations of technical questions and issues arising from the postponement. Firms in scope would be well-advised to review these documents carefully and to inform their competent authorities of additional material issues identified as recommended by the EBA.