FRTB Implementation Challenges: Capitalization of Funds

On December 13, ISDA published a second whitepaper on the capitalization of equity investment in funds (EIIFs) under the Fundamental Review of the Trading Book (FRTB) framework.

This paper builds upon an earlier ISDA publication in 2022 that highlighted the overly conservative capital requirements and operational complexities resulting from the proposed Basel III framework associated with EIIFs. Since then, several jurisdictions have implemented the FRTB (ie, Canada and Japan), while others have finalized their FRTB rules (ie, the EU and the UK) or are consulting on the final rules (ie, the US). This topic continues to be a globally important issue for the industry, with many unresolved concerns related to the treatment of EIIFs.

Moreover, the significance of these issues may not be fully recognized by supervisors and regulators. There is a clear disconnect between the theoretical expectations for EIIF capitalization and the practical realities observed, as evidenced by modifications to the submitted data from 19 banks as part of the European Banking Authority’s Basel III monitoring report. This led to a capital reduction of 80% for EIIFs. A similar adjustment is reported in the Bank for International Settlements Basel III monitoring exercise, although the number of banks involved is not disclosed.

This paper sets out recommendations for capitalizing EIIFs under the revised market risk framework and urges regulators to take action given the importance of EIIFs for capital allocation, risk diversification, market liquidity and economic growth.

Click on the attached PDF to read the paper. 

Documents (1) for FRTB Implementation Challenges: Capitalization of Funds

ISDA Omnibus Canadian Representation Letter

On September 2, ISDA published the Omnibus Canadian Representation Letter, which combines previously published representation letters drafted to assist firms in compliance with Canadian trade reporting, business conduct, regulatory margin and clearing classification rules. The Omnibus Canadian Letter is designed...

Joint Response on Cross-margining

On August 31, ISDA and FIA submitted a letter to the US Commodity Futures and Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) on the agencies’ joint request for comment on the implementation of portfolio margining and cross-margining...