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  • Basel Committee on Banking Standards Finalizes Basel Market Risk Framework

    Following its consultation from March to June last year, the Basel Committee on Banking Standards has announced the final revisions to the Basel III market risk capital framework. At the same time, it has also announced its 2019 priorities.

    The objective of the Basel market risk framework is to ensure that banks hold enough regulatory capital to protect against losses arising from movements in market prices of instruments held in their trading book. Certain changes to the 2016 market risk framework are to:
    1. Clarify the scope of application. The Committee has provided further guidance on the regulatory book to which instruments should be assigned in circumstances where instruments could go into more than one book and has revised the treatment of structural foreign currency positions. The revised framework also allows equity investments in funds to be allocated to the trading book, provided that a bank: (i) is able to "look through" to the fund's underlying assets; or (ii) has access both to daily price quotes and to the information contained in the mandate of the fund.
    2. Revise the internal model approach to address implementation challenges, in particular, by amending the profit and loss attribution (PLA) test metric and failure consequence.
    3. Amend the standardized model approach. The approach to measuring risk factor losses was too high in relation to the actual risk and there was unnecessary operational burden. The changes in the standardized approach include widening the scope of currency pairs that are considered liquid in the FX risk class to ensure more currency pairs are subject to lower risk weights and introducing new "index" buckets for equity and credit spread risks so that each underlying position in an index does not need to be identified.

    The Basel Committee's 2019 priorities include:
    1. Finalizing existing policy measures, such as the leverage ratio treatment of client cleared derivatives and measures to curtail window-dressing behavior. The Committee will also continue its work to enhance operational resilience and intends to review its existing documents and publish updated versions. The Committee will also be considering potential policy measures related to crypto-assets, including assessing the risks emerging from financial technology and the resulting impact on supervisory and regulatory strategies.
    2. New policies will be considered on the implications for the banking system of the risks arising from the reform of benchmark rates, furthering the sustainable finance initiatives and the role of proportionality in the Basel framework. The Committee will also prepare guidelines for enhancing cooperation between prudential regulatory, anti-money laundering and investigative authorities.

    The Committee also states that for any future standards, more consideration will be given to how it can facilitate their timely implementation.

    View the revised 2019 market risk framework and explanatory note.

    View the Committee's 2019 priorities.

    View details of the 2016 market risk revisions.

    View details of the 2018 proposed Basel market risk framework.

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