Fundamental Review of the Trading Book (FRTB) is a more coherent, consistent framework than the Basel 2.5 market risk capital framework. The FRTB is aimed at addressing the shortcomings of the Basel 2.5 with the intention of establishing a more realistic view of risk. That, in turn, is resulting in appropriate capital adequacy provisioning, in the hopes of avoiding a repeat of 2008’s financial crisis.

The FRTB represents a major change in the way banks will be asked to measure risk and calculate their regulatory capital requirements for the trading book in future. The task is more difficult as it comes at a time when the implementation of the Basel III capital rules is still a challenge.

Present studies and analysis conducted by European policy makers on adopting FRTB highlight, that the overall capital impact of the FRTB on the financial industry is not yet clear. Such analysis also points out that the FRTB framework will result in punitive capital increases for certain business lines. Among such most affected financial products which have a greater significance on a Macroeconomic scale are sovereign bond markets, Small & Medium Enterprise (SME) credit, securitizations, equities, and commodities and foreign exchange hedges. For instance, a potential increase of 4.2 times in the capital requirements based on standard rules calculations which all banks will have to calculate and disclose post FRTB implementation will increase the capital required to be held against sovereign bonds.

Further, it may impact the liquidity in bond markets, equities whilst securitizations may deteriorate as a result of increased capital requirements. It is vital that financial industry’s key stakeholders identify FRTB’s potential in creating perverse incentives in situations where the risk of positions and their hedges are not adequately recognized. It is also essential that adoption of FRTB shouldn’t lead to affect securitizations market or any negative effects on economic growth agendas of policy makers.

Thus it is important that professionals in the financial industry and regulatory bodies comprehensively evaluate the impact of the FRTB rules and ensure they are consistent and coherent. In Vienna on 14th & 15th September 2017, the 7th Annual Risk Management Forum titled ‘RISK ZONE 2017’ will provide the opportunity to discuss the impacts and the efficient implementation of FRTB.