As the published timelines for banks to comply with the Fundamental Review of the Trading Book (FRTB) draw closer, it has been observed that banks are reducing their use of the internal models approach (IMA) for market risk across jurisdictions.
Many banks that are or were on the IMA under Basel 2.5 plan to transition entirely to the standardized approach under the FRTB. Furthermore, those banks transitioning from the IMA under Basel 2.5 to the IMA under the FRTB only plan to do so for a very limited portion of the trading book (15-40% under the FRTB compared to an average of 85% under Basel 2.5).
The move away from the IMA appears to be a relatively recent trend. When the FRTB rules were first issued for consultation in 2012, most banks on the IMA under Basel 2.5 intended to transition to the IMA under the FRTB on a like-for-like basis in terms of their trading book coverage. However, as the rules evolved and banks assessed the cost and impact of implementing and operationalizing the IMA, many have scaled back their ambitions and, in many cases, chosen to transition completely to the SA. Banks that are retaining internal models plan to prioritize the IMA only for selected trading desks where the choice of IMA desk coverage is dependent on the bank’s corresponding business activities and infrastructure readiness.
This whitepaper analyzes the drivers for low IMA adoption across the industry. The themes and views presented are based on discussions with executive sponsors across 26 global trading banks. The paper also reflects banks’ perspectives on the key advantages of the IMA, alongside their views on the steps that could be taken to incentivize greater IMA adoption.
Click on the attached PDF to read the paper.
Documents (1) for Fundamental Review of the Trading Book: Internal Models Approach Adoption
Latest
Joint Response to EBA Consultation
On August 12, ISDA and the Association for Financial Markets in Europe (AFME) responded to the European Banking Authority’s discussion paper on certain taxonomy key performance indicators (KPIs) and other aspects of the Disclosures Delegated Act under Article 8 of...
Response to JSCC on Clearing Fund Consolidation
On August 12, ISDA responded to the Japan Securities Clearing Corporation’s (JSCC) consultation on its proposal to consolidate clearing fund consumption, calculation and deposit segmentation across six clearing qualifications under the Financial Instruments and Exchange Act. ISDA members broadly support...
Response on CSDD Guidelines
On August 6, ISDA responded to the European Commission’s (EC) consultation on due diligence guidelines under the Corporate Sustainability Due Diligence Directive (CSDDD). While ISDA acknowledges that model contractual clauses can be a helpful resource for in-scope companies, there are...
Response to BoE on Extension of Settlement Hours
On August 6, ISDA responded to the Bank of England’s (BoE) consultation paper on the extension of settlement hours for RTGS and CHAPS, the UK’s high-value payment system. ISDA supports the BoE’s plan to extend RTGS and CHAPS settlement hours...