Paris, 12 August 2024
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.
Legal basis and background
The no-action letter is based on Article 9c of Regulation (EU) No 1093/2010 (EBA Founding Regulation). That article provides that the EBA may issue no-action letters, if it considers that the application of one of the relevant legislative acts is liable to raise significant issues, as provisions contained in such act may directly conflict with another relevant act, and if it considers on the basis of the information available that the application of the relevant provisions raises significant exceptional issues pertaining to market confidence and the orderly functioning and integrity of financial markets.
On 24 July 2024, the European Commission adopted a Delegated Act in accordance with Article 461a of Regulation (EU) 2024/1623 (‘CRR3’), which postpones the use of the alternative approaches for the calculation of the own funds requirements for market risk by a year to 1 January 2026. The publication of that Delegated Act by the European Commission was accompanied by a set of question and answers on some aspects of the postponement, including the application of the revised boundary between the banking and trading books, and the use of the alternative standardised approach in the context of the output floor calculations.