The new rules for the Fundamental Review of the Trading Book (FRTB) – published last year by the Basel Committee on Banking Supervision – bear some similarities to the Volcker Rule, which is part of the Dodd–Frank Wall Street Reform and Consumer Protection Act.  We anticipate, however varying degrees of impact to banks’ existing trading desk structure, definition and instruments as FRTB is implemented.

Unlike the US-centric Volcker Rule, the FRTB is a global regulatory regime.  Key asset thresholds under Volcker – including US consolidated assets, consolidated assets and gross US trading assets and liabilities – govern foreign banking entities and lead to different types of trading desk structures.1

The Volcker Rule is based on compliance requirements that vary according to the size of the banking entity, resulting in different levels of a trading desk structure.  These may not align to FRTB trading desk attributes.2  Under Volcker, for example, key asset thresholds such as US consolidated assets, consolidated assets and Gross US trading assets and liabilities govern foreign banking entities.3  Trading desks may lack the risk management structure, trading strategies and limit monitoring required under FRTB.  US banking entities will primarily be subject to Volcker “Enhanced Compliance Requirements.”

Differences between FRTB and Volcker Rule standards will, we believe, result in low to medium degree of change for US banking entities, as trading desks are largely subject to Volcker trading desk requirements as part of the Enhanced Minimum Standards for Programmatic Compliance under Volcker Rule Appendix B.

For foreign banking entities, we believe the degree of change should be medium to high, as trading desks may not be subject to Volcker Trading Desk requirements and may need instead to be re-evaluated and enhanced under FRTB.

The Volcker and FRTB rules will co-exist for the foreseeable future. In other blogs in this series, we will look at steps banks should take to enhance their compliance programs so as to address both sets of rules.

For more information, see our presentation “How the Fundamental Review of Trading Book Impacts the Volcker Regime Trading Desk Structure.

How the Fundamental Review of Trading Book Impacts the Volcker Regime Trading Desk Structure

References:

  1. “Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds (Volcker Rule),” Federal Deposit Insurance Corporation, December 10, 2013. Access at: https://www.fdic.gov/regulations/reform/volcker/rule.html
  2. Ibid
  3. Ibid

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