12 August 2024

The EBA responds to the European Commission’s Delegated Act postponing the application of the market risk framework in the EU

...the front-loaded application of the revised provisions on the boundary and internal risk transfers, compared to the rest of the FRTB framework,... would subject institutions to an operationally complex, fragmented and costly two-step implementation

Following the European Commission’s adoption of a Delegated Act postponing the application of the revised market risk framework in the EU, the so-called Fundamental Review of the Trading Book (FRTB), the European Banking Authority (EBA) today publishes a no-action letter on the boundary between the banking book and the trading book and shares its considerations on technical questions and issues arising from the postponement.

In its no-action letter, the EBA recommends that competent authorities should not prioritise any supervisory or enforcement action in relation to the amendments to the provisions setting the boundary between the banking and trading books, or those defining internal risk transfers between books. In that context, the EBA also clarifies that the points it made in another no-action letter on the same topic issued in 2023 should remain applicable.

The EBA is of the opinion that the front-loaded application of the revised provisions on the boundary and internal risk transfers, compared to the rest of the FRTB framework, which is not yet implemented in the Union for capital purposes, would subject institutions to an operationally complex, fragmented and costly two-step implementation. In addition, there are no jurisdictions at the global level that envisage such a two-step implementation of the FRTB framework. This means that a front-loaded application of the boundary provisions would lead to global institutions being subject to very different regulatory requirements depending on where the risk management is performed, thus resulting in a fragmentation of the regulatory framework.

The EBA also shares some considerations on a set of technical questions and implementation issues arising from the postponement, that were deemed material and relevant with a view to achieving a harmonised implementation of the market risk framework across institutions during the postponement period. The EBA also provides clarity on the supervisory benchmarking exercise.

 

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