On January 26th the Basel Committee on Banking Supervision (BCBS) released its first set of Frequently Asked Questions (FAQs) on the Fundamental Review of the Trading Book (FRTB). Although the FAQs shed light on a number of issues pertaining to both the Standardized Approach (SA) and the Internal Models Approach they failed to clarify several areas where the industry had been seeking guidance.
- The FAQs left the most important questions unanswered.
- Hedging benefits for trading activities are not generally available.
- Banks can use internal pricing models to calculate SA sensitivities.
- Opacity for Hypothetical P&L exclusions raise additional questions.
- Stricter requirements for risk factors to be deemed modellable.
- Trading desks will likely segregate securitizations.
- The treatment of backtesting exceptions at the desk-level are clarified.
- Different treatment for equities and fixed income securities.
- The Internally Modeled Capital Charge remains a challenge.
- Capital floors will remain a key issue for discussion in March.
To read this first take, please click here.