Major South African banks have rather timidly started their journey towards implementing the Fundamental Review of the Trading Book (FRTB), the most significant transformation of the trading market risk framework for the last 20 years. This new capital requirement standard will have significant impacts on the cost of derivative transactions for corporate treasuries, as the increased capital charge will have to be transferred and shared with corporate clients. Are corporate treasurers 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 existing framework 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.5 denomination.
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 internal model approaches to market risk deliver credible capital outcomes and promote consistent implementation of the standards across jurisdictions.
The initial FRTB paper was issued in 2013, followed by various iterations until issuance of the latest version in December 2017. The new rules were initially set to come into force globally by December 2019, but recent delays and complexities to obtain alignment on the rules have pushed the implementation date back to January 2022.