Fundamental review of the trading book: Legal perspectives

Jennifer Connors, Rebecca Leon, Mark Fitterman and Kristal Petrovich
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Jennifer Connors: Partner, Financial Regulation and Enforcement Practice, Baker McKenzie, USA
Rebecca Leon: Partner, Financial Regulation and Enforcement Practice, Baker McKenzie, USA
Mark Fitterman: Senior Counsel, Financial Regulation and Enforcement Practice, Baker McKenzie, USA
Kristal Petrovich: Associate, Financial Regulation and Enforcement Practice, Baker McKenzie, USA

Journal of Securities Operations & Custody, 2021, vol. 13, issue 4, 374-380

Abstract: The Basel Committee on Banking Supervision has historically played a key role in setting international standards for bank capital require ments. This paper covers the latest Basel framework, Basel IV, which is set to go into effect in 2023.This new framework introduces significant changes from previous frameworks and raises numerous legal and compliance issues, including different capital requirements applicable to banking books, which are subject to credit-risk capital requirements, and trading books, which are subject to market-risk capital requirements. The paper highlights challenges banks will face in implementing new ‘fundamental review of the trading book’ (FRTB) regulations that are part of Basel IV. FRTB will require banks’ technology systems and operations to adapt to the increased demand for data tracking that will be needed to perform new market risk calculations. Banks will also need to update policies on an annual basis to account for any extraordinary events in the previous year. The paper also addresses Basel IV’s impact on affiliates and outsourcing arrangements. The paper concludes by pointing to the need for regulatory guidance on how compliance with the complex capital requirements will be assessed and the type of enforcement that can be expected.

Keywords: fundamental review of the trading book; Basel IV; bank capital; trading book; banking book; internal models approach; standardised approach (search for similar items in EconPapers)
JEL-codes: E5 G2 K22 (search for similar items in EconPapers)
Date: 2021
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