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BLOG. 4 min read

Basel III Endgame – FRTB Coming Soon to the United States

With the endgame for Basel III now in sight following the release of the NPR publication this summer, impacted US banks are now faced with important decisions around implementation. Despite any potential tweaks that may occur after the end of the comment period in November, banks will need to start preparing well in advance to meet 2025 deadlineswhether they plan on applying for the Internal Models Approach or not.

The proposed rule provides a more risk-sensitive capitalization of risk. With that comes a projected 16% increase in tier 1 capital requirements for banks impacted by the proposal. However, from a regulatory perspective, it’s expected that the economic costs of the increase in capital are more than offset by the benefits of a stronger, more resilient financial system.

One of the key changes in the new Expanded Risk-Based approach is that it is applicable to Category I-IV banks, which includes banks with greater than $100B in assets. The rules also potentially apply to smaller banks with large trading booksa trading book of $5B or higher, or a trading book representing 10% of a bank’s total assets. The goal is to provide transparency and consistency of capital requirements across all large banking organizations. Now that the rules and deadlines are clearer, there is a much greater need for preparedness, particularly for banks new to the FRTB framework, or near the threshold for needing to comply.

Notable features of the proposed rules

  • Unlike credit risk and operational risk, the internal models approach (IMA) is still allowed for market risk. However, a significant change in the U.S. proposal is the removal of internal models for DRC (default risk capital) under the IMA. The IMA DRC calculation had been one of the more challenging components in FRTB both from a computation and modeling perspective and is a notable difference from the Basel framework.   In the U.S., the IMA DRC will be replaced with the simpler Standardized Approach.
  • The proposal’s dual-requirement structure, applicable to Category I and II banks, will now be extended to Category III and IV banks. It will require banks to continue calculating risk-weighted assets under the current standardized approach in addition to the Expanded Risk-Based approach and take the higher of the two.
  • One of the overarching aims of the proposal is to ensure that capital requirements for all larger banks are at least as strict as for smaller banks.
  • For the Standardized Approach, the proposed rules are generally in line with the Basel framework. Many of the differences are in the form of small tweaks to risk weights and bucketing, adjustments to the sensitivity calculations, and some clarifications to the rules, such as in the application of the look-through approach
  • For the Internal Models Approach, other than the removal of IMA DRC, the proposed rules are broadly aligned with the Basel framework. However, several notable differences exist, including modifications to the model approval process, clarifications on the risk factor eligibility tests (RFETs) and the overall treatment of non-modelable risk factors (NMRFs)
  • Motivated by the collapse of Silicon Valley Bank (SVB) in March, banks must now include unrealized gains and losses from certain securities in their capital ratios

A track record of success

Many banks will look to technology partners to provide a cost-effective solution, balancing strong data management, analytics, decision support and reporting capabilities with low overall cost of ownership and the agility to respond to changing requirements. Choosing the right partner is critical to avoid being saddled with a “black box” solution where every tweak to regulation is costly and requires too long a lead time to implementation.

SS&C Algorithmics has partnered with banks around the world to address a multitude of risk and regulatory challenges, including FRTB. While the rule is not yet in place in the U.S., it has been adopted by other jurisdictions. Read our "FRTB Best Practices Guide: Lessons Learned in the Implementation of FRTB" eBook to find valuable insights learned through dozens of FRTB implementations.

The SS&C Algorithmics FRTB Solution

Whether you choose the Standard or Internal Models approach, the solution is designed to meet the complex needs of the regulation:

Complete solution: The SS&C Algorithmics FRTB solution provides an end-to-end solution that’s strong in data management, analytics, decision support and reporting.

Modular: The solution architecture is modular, so you don’t have to replace what is currently working well. You can choose individual components from valuation, aggregation and reporting to augment your existing infrastructure.

Speed to market: SS&C’s experienced team of experts has managed over 30 FRTB implementations across all major jurisdictions and regulatory regimes. Our proven methodology and expertise deliver a fast-to-market solution for banks.

Agility: With the US rules still open to public comment, it's important to have a solution with the agility to respond quickly to changes. The Algorithmics FRTB solution is designed to be configurable and extendible, making it easy to adapt to updates to the rules.

Multi-jurisdiction support: Many banks have reporting requirements across multiple jurisdictions, so our solution allows you to maintain multiple sets of FRTB rules within the same environment.

Flexible deployment: Implement on-premises or on the cloud with 24x7 monitoring and support from our team of FRTB experts. It’s your choice.

Advanced decision support: Banks need a solution that goes beyond producing numbers. You need insight into your capital. The Algorithmics FRTB solution offers banks a solution with advanced drill-down decision support capabilities so you can understand your risk.

Contact us today to discuss how you will tackle FRTB requirements.

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