Trading Book – Requirements and implementation

Charts Analysis Finance

From (probably) 2021 onwards (with regulatory reporting based on CRR II) banks must measure and manage Pillar 1 market risk within a fundamentally revised framework. Banks are exempted from the new framework if their regulatory trading book plus FX- and commodity positions in the banking book do not exceed 10% of total assets and do not exceed 300 mio EUR.

All other banks must get ready for the following fundamental changes:

1. New criteria on which positions have to and which positions must not be booked in the regulatory trading book.

2. For first time, the trading desk structure must be approved by the regulator.

3. Risks from the banking book mustn’t be hedged with risks from the trading book.

4. All concerned banks must implement a new sensitivity-based standardized approach.

5. Additionally, banks can seek supervisory approval to use an internal model for regulatory market risk reporting. However, the future internal models must be much better aligned to the actual P&L than today’s internal models. Furthermore, the future internal models require much more data and are computationally more complex than today’s internal models. Additionally, future internal models are not approved for a particular risk type, but for a particular trading desk. Finally, future internal risk models require a comprehensive and forward-looking process to classify and manage risk factors.

Beside the discussed implementation challenges, this regulatory initiative is exhibits a substantial amount of conceptual uncertainty as many technical details won’t be decided before 2019. Depending on the final methodology, an internal model might imply a high or low (or even no) capital saving. As long as this regulatory uncertainty is not resolved, many banks focus on the implementation of the standardized approach and have temporarily stopped their implementation projects for internal models.


Prof. Dr. Christian SchmaltzAuthor: Prof. Dr. Christian Schmaltz, Assistant Professor at Aarhus School of Business (Denmark) and speaker at the 18th Handelsblatt Conference EBR – European Banking Regulation (22-24 November 2017 in Frankfurt).