On January 6, ISDA, the Association for Financial Markets in Europe (AFME) and the Institute of International Finance (IIF) submitted a joint response to the European Commission’s (EC) targeted consultation on the application of the market risk prudential framework.

ISDA, AFME and the IIF believe the market risk framework should be risk-appropriate and as consistent as possible across major jurisdictions to ensure a level playing field without competitive distortions due to divergent rules. The risk of misalignment with other jurisdictions in both content and timing remains significant from an EU perspective and the joint response proposes solutions to minimize that risk.

In a survey conducted across ISDA’s membership, 15 out of 31 banks, accounting for 57% of market risk risk-weighted assets (RWAs), indicated they wish to delay implementation of the Fundamental Review of the Trading Book (FRTB) to ensure consistent implementation across jurisdictions and to support a level playing field and global competitiveness. When only considering EU-headquartered banks, 12 banks (out of 22) favor a delay, which represents 71% of the market risk RWAs of EU-headquartered banks. However, there are also 16 EU- and non-EU-headquartered banks, accounting for 43% of market risk RWAs, that wish to transition to the new FRTB framework on January 1, 2027 and have highlighted the continued operational complexities of running the new FRTB framework in parallel with the current Basel 2.5 standard. The survey also highlights that a large majority of banks would be in favour of delaying the trading book / banking book boundary as banks remain concerned with the larger operational implementation issues associated with its application.

ISDA acknowledges that the EU is more constrained in the tools it has at its disposal through a delegated act, and that a delay will only be possible with a change to the Level 1 text.

The proposals in the EC consultation to introduce amendments across the standardized and internal models-based approaches and the introduction of a multiplier to guarantee capital neutrality for firms negatively impacted by FRTB implementation are a step in the right direction, but need to be carefully calibrated because this approach creates complexities, especially around the design and calibration of the multiplier, which remains a crude, non-risk sensitive tool.

According to ISDA, AFME and the IIF, there is a preference for bank-specific multiplier options rather than industry-wide solutions. Based on the latest Pillar 3 disclosure data, 14 of the 31 banks that responded to the survey will be negatively impacted by FRTB implementation. Among these 14 banks, option A – a bank-specific multiplier that is periodically recalibrated – is the most favored option, with seven banks supporting the measure, accounting for 74% of the market risk RWAs for this sample.

The response also includes detailed recommendations on the 10 targeted adjustments proposed for the standardized and internal models-based approaches.