With US prudential regulators poised to publish a revised Basel III endgame proposal this year, and EU and UK regulators moving to finalize their own rules, ISDA is maintaining a laser focus on achieving a risk-appropriate capital framework that is as consistent as possible. Timely implementation is important, but key jurisdictions also need sufficient time to align their rules and correct calibration flaws. This is why we think EU policymakers should consider delaying implementation of the market risk framework, while banks should be allowed to transition to the Fundamental Review of the Trading Book (FRTB) next year if they wish to do so.

Earlier this week, ISDA, the Association for Financial Markets in Europe and the Institute of International Finance submitted a joint response to the European Commission’s (EC) targeted consultation on the application of the market risk prudential framework. The EC had sought industry feedback on a set of temporary adjustments to the FRTB to address aspects of the framework on which other jurisdictions have already deviated from the Basel standards or indicated they plan to diverge. We welcome the EC’s willingness to revisit the standards and its recognition of the importance of global consistency.

To inform our response, we surveyed 31 EU and non-EU banks to get insight into their preferred approach. Fifteen of those banks – representing 57% of risk-weighted assets (RWAs) for market risk – indicated they wish to delay FRTB implementation to achieve consistent implementation across jurisdictions. The remaining 16 banks – accounting for 43% of market risk RWAs – would like to transition to the FRTB on January 1, 2027, highlighting the operational complexity of running the new framework in parallel with the existing rules. Some banks would also see a fall in their RWAs under the FRTB, so are not in favor of delaying implementation.

Given this response, we would urge the EC to consider a further delay to FRTB implementation so it can respond to developments in other jurisdictions to achieve a framework that is as consistent as possible. However, banks that would like to transition to the FRTB as planned at the start of next year for operational reasons should still be able to do so.

As for the specific amendments to the FRTB proposed by the EC, which include adjustments to both the standardized and internal models approaches, we think they are a step in the right direction. The changes are very similar to those included in an earlier consultation last year, which we welcomed as addressing issues ISDA has long advocated to resolve.

In addition to those proposed adjustments, the EC is also considering the application of a multiplier for overall market risk capital requirements, which could be used by banks that are negatively affected by the rules to limit their capital increases for three years. Based on the latest Pillar 3 disclosure data and available information, we determined that 14 of the 31 banks that responded to the survey will experience higher capital requirements following FRTB implementation, so the multiplier would apply to those banks.

However, a multiplier is a crude, non-risk sensitive measure, so it is critical we get the design and calibration right. The EC set out several possible options, which we considered carefully when developing our response. Among the 14 banks that would be negatively affected by the FRTB, there is a preference for the multiplier to be bank-specific rather than industry-wide. It should also be periodically recalibrated throughout the three-year period to the Basel 2.5 capital requirements and should aim to neutralize any increases in market risk capital as a result of the FRTB. Seven banks – accounting for 74% of market risk RWAs of the 14-bank sample – identified this as the optimal formulation for the multiplier.

As US and UK policymakers take the next steps to finalize their own Basel III rulebooks over the coming months, we’ll have a clearer view of the global capital framework. In this critical phase of the process, we encourage the EC to take a pragmatic approach to achieve a set of rules that is robust, appropriate and consistent with other jurisdictions.