Expanded FRTB Reporting Requirements

On 11^th January 2024, the European banking authority (EBA) finalized the Implementing Technical Standards (ITS) expanding the Pillar I market risk reporting requirements under the Fundamental Review of the Trading Book (FRTB) framework. The ITS introduce new templates to capture detailed information on the instruments and positions covered in the alternative standardized approach (ASA) and alternative internal model approach (AIMA). The new reporting standards are expected to apply starting 31^st March 2025. This article delves into the key components of the recent updates with a focus on the ASA reporting, analyzing their potential implication on financial institutions.

Back in January 2016, the Basel Committee on Banking Supervision (BCBS) released a new standard to determine the Pillar I capital requirement for market risk, which is known as the Fundamental Review of the Trading Book (FRTB). The FRTB was developed as a response to the shortcomings in the regulatory framework following the global financial crisis of 2007-2008. The framework underwent further amendments in 2019 to provide more clarity to the boundaries between books and the treatment of internally transferred instruments for hedging purposes, alongside modifications to the methodology. The primary objective of the FRTB framework is to enhance the comparability and transparency of capital requirements for trading activities across banks and to improve the resiliency of the banking system. 

In Europe, the FRTB was first integrated in the prudential framework of the EU in 2019 as part of the Revised Capital Requirements Regulation (CRR II), accounting for specific features of the European banks. Several items (as back-testing, profit and loss attribution, and risk factor modellability) were incorporated in EU law in the following years by means of Regulatory technical standards (RTS) developed by the EBA.

Despite these legislative acts, the FRTB is not binding yet in terms of own funds requirements, as the full implementation is awaiting a political agreement on the CRR3/CDR6-package. Nevertheless, the FRTB has been in force for roughly two years by means of a reporting requirement.

The ITS introduce several changes to the existing ASA summary template, new detailed ASA templates - to be filled by all banks - as well as new AIMA templates for the desks with permission to use to the internal model approach. In addition, the ITS introduce a template capturing information on the reclassification of instruments between the banking and trading books. The trading book thresholds, above which the reporting requirements exist, and the thresholds template(TBT) remain unchanged.

The summary template (“MKR ASA SUM”) sees some limited evolutions. Firstly, columns have been added to input the own fund requirements in the selected correlation scenario. Secondly, the own fund requirements for the “main” ASA portfolio are separated from, firstly, the internal risk transfer portfolio (IRT) used to hedge interest rate risk and, secondly, positions in collective investment undertakings (CIU’s) calculated using mandate-based approach. IRT and mandate based CIU portfolios are treated as standalone positions. Lastly, fields have been added to breakdown the reporting by “offsetting group” and by “scope”, as explained below.

^{Figure 1: Headers of the ASA Summary templates – new items in green.}

The ITS also introduce twelve new templates providing details regarding the sensitivity-based method (SBM), the residual risk add-on (RRAO) and the default risk charge (DRC). These templates only cover the “main” ASA portfolio: the IRT and mandate based CIU portfolios are exempt from the more granular reporting.

Detailed SBM templates have been added for each of seven risk classes. They have a common structure illustrated in figure 2 below. Financial institutions are requested to provide the detail of the sensitivity to a level that allows the replication of the final calculation, as well as the interim results (weighted sensitivities). The bucketing and the level of detail requested for the (unweighted) sensitivities depends on the risk class and mirrors closely the calculation steps in accordance with the regulation. For example, for the general interest rate risk class (GIRR), for every currency (bucket), delta amounts are broken down per regulatory tenor, except for inflation and cross-currency basis risk positions, which are reported separately as totals. Similarly, for every currency (bucket), GIRR Vega amounts are broken down per option maturity and per underlying residual maturity, and as separate totals for inflation and cross-currency basis.

^{Figure 2: Headers of the new detailed ASA Summary templates (details in green depend on the risk class)}

In the new residual risk add-on template (MKR ASA RRAO), financial institutions are asked to allocate the notional amount of positions subject to residual risk according to the most relevant asset class and the type of residual risk (type of exotic underlying or exotic payoff). A breakdown of the exempted positions (listed, centrally cleared or back-to-back instruments) is also requested according to the type of residual risk).

Finally, in the three default risk charge templates (MKR ASA DRC1 to DRC3), financial institutions are requested to break down gross and net jump-to-default amounts by type of instrument and by assumption regarding the LGD as illustrated in figure 3.

^{Figure 3: Headers of the new detailed ASA DRC templates (details in green depend on whether instrument is securitization, non-ACPT or ACPT)}

Note that banks subject to the simplified standard approach that voluntarily apply the ASA have the possibility to only report the ASA summary template, without the remaining more detailed new ASA templates.