The International Swaps and Derivatives Association (ISDA) and the Institute of International Finance (IIF) submitted a joint response to the UK Prudential Regulation Authority’s (PRA) consultation on adjustments to the market risk capital framework.
While associations agree with the proposed delay to the Fundamental Review of the Trading Book (FRTB) internal models approach, which allows more time to consider issues with internal models, there are some significant operational costs to operate a dual system with the FRTB standardized approach (FRTB-SA) and the current (Basel 2.5) internal models.
Members of ISDA and the IIF would like to see more flexibility, with an opt-out mechanism allowing banks to fully continue with their existing models or to fully transition to FRTB-SA at the start of 2027. This would reduce operational complexity and align with the PRA’s objective of implementing the Basel 3.1 framework.
The proposed changes to the treatment of funds (collective investment undertaking) and the residual risk add-on are steps in the right direction in addressing FRTB-SA implementation issues, but further adjustments are needed.
The response also includes further recommendations beyond the PRA’s proposed changes, which have been long-standing advocacy items and remain critical to achieve a more risk-sensitive FRTB, reduce the operational complexity of the framework and encourage wider adoption of internal models.