Basel Oversight Body Endorses Proposed Framework Within FRTB

On January 10th, the Group of Central Bank Governors and Heads of Supervision (“GHOS”), the Basel Committee’s (“Committee”) oversight body, endorsed the new market risk framework as part of the Fundamental Review of the Trading Book (“FRTB”). The proposed framework is expected to be published in the coming days after the FRTB Group finalizes it during their meeting on January 14th.

According to the press release, the GHOS claimed to have achieved notable improvements in the proposed framework, which takes effect in 2019, including:

  • A revised boundary between the banking and trading books that will reduce scope for arbitrage;
  • A revised internal models approach with more coherent and comprehensive risk capture;
  • An enhanced model approval process and more prudent recognition of hedging and portfolio diversification; and
  • A revised standardised approach that serves as a credible fall-back and floor to the model-based approach, and facilitates more consistent and comparable reporting of market risk across banks and jurisdictions.

SFIG and its partner trade associations will continue to inform Congress of the securitization industry’s concerns on the potential negative effects of the FRTB.

The GHOS will also review the Committee's proposals on the risk-weighted framework and the design and calibration of capital floors towards the end of 2016. The Committee will conduct a quantitative impact assessment during the year and will focus on not significantly increasing overall capital requirements.

In addition, the GHOS discussed the final design and calibration of the leverage ratio. It was agreed that the leverage ratio should be based on a Tier 1 definition of capital and should comprise a minimum level of 3 percent. Additional requirements for global systemically important banks were also discussed. The GHOS will finalize the calibration in 2016 to allow sufficient time for the leverage ratio to be implemented as a Pillar 1 measure by January 1, 2018.

Please contact with any questions regarding SFIG’s Advocacy efforts.

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