FRTB implementation in the EU: the Commission buys itself time

Intended audience: Chairs of board risk committees, CROs, treasurers, heads of markets, heads of regulatory affairs in banks with trading activity.

At a glance:

• The European Commission is considering delaying the implementation of the final Basel III market risk rules until 2027, and consulting on introducing temporary capital relief measures that would apply until January 2030. The consultation follows the announcement of a delay to implementation of Basel 3.1 in the UK, and ongoing uncertainty over the timing and substance of the rules in the US.
• The Commission proposes relief measures that would affect both Alternative Standardised Approach (ASA) banks and Internal Model Approach (IMA) banks, including phasing in Non-Modellable Risk Factor charges and temporarily applying the Profit and Loss Attribution Test as a monitoring tool rather than a full requirement.
• Feedback from industry will likely be mixed and it will be challenging to strike a balance across different views. But, taken together, the delay and the relief measures would buy the Commission time to monitor developments elsewhere and enable it to maintain a level playing field for EU banks for as long as possible.

The European Commission has published a consultation on the application of the final Basel III market risk standards in the EU, as a response to the uncertainty over the implementation of the Basel rules in the US and UK. This follows its announcement last year of an initial delay to the implementation of the Fundamental Review of the Trading Book (FRTB) rules until 1 January 2026. The Commission is seeking views from industry and national regulators/supervisors by 22 April 2025.

Three options on the table

The Commission is seeking views on three options:

1. Maintaining the status quo – FRTB implementation on 1 January 2026;
2. Delaying implementation by another year – FRTB implementation on 1 January 2027; and
3. Implementing relief measures for up to three years (see annex) – leading to full FRTB implementation either on 1 January 2029, or 1 January 2030, depending on whether Option 2 is also adopted.

The legal background

CRR3 article 461a empowers the Commission to delay (by up to two years) and introduce relief measures (for up to three years) to the “own funds requirements for market risk” part of CRR3, to the extent that those measures are consistent with maintaining a level playing field between EU rules and third countries’ standards. The Commission has specified that, if it chooses Option 2, it will consider applying Option 3 in the future. The Commission’s powers do not extend to banking and trading book boundary requirements and to the market risk output floor rules, although the EBA – in a no action letter – has asked Competent Authorities (CAs) not to require banks to implement those two market risk provisions until the FRTB measures in CRR3 apply.

Article 461a also empowers the Commission to submit a new legislative proposal to ensure a global level playing field for market risk, based on a report to be published by the EBA by 10 July 2026. A new proposal could potentially significantly amend the current CRR3 market risk text. 

Maintaining a level playing field

Among the proposed relief measures (outlined in full in the Annex), the three that would have the most significant impact on EU banks are:

IMA banks

• Phasing-in capital requirements for Non-Modellable Risk Factors (NMRF), applying a flat multiplier (between 35% and 45%) for three years.
• Using the Profit and Loss Attribution Test (PLAT) only as a monitoring tool until 1 January 2029.

ASA banks

• Temporarily waiving the Residual Risk Add-On (RRAO) (i.e. applying a zero multiplier) both for instruments with an exotic underlying and instruments with other residual risks (e.g. options that can be exercised at different dates).

The combined effect of the delay and relief measures would be to maintain a level playing field for EU banks for as long as possible. We expect this to happen in two stages: a further 12-month delay to January 2027 would give the Commission an additional year to monitor developments in the US and UK; and then as a second step, the proposed relief measures would temporarily reduce the capital impact of the FRTB on EU banks, in effect mitigating the potential impact of divergence between the EU, UK and US frameworks. As noted above, the Commission would then be able to make further adjustments through a new legislative proposal, for example making certain relief measures permanent.

While banks will generally welcome initial relief measures, support for a further delay could be mixed. ASA banks operating internationally – including subsidiaries of international banks – may advocate aligning the EU implementation timeline with the US and the UK. On the other hand, some EU-focused ASA banks, having largely assimilated the new rules, may perceive a delay as an additional cost burden given the need for continued maintenance of parallel systems and the delayed realisation of capital benefits associated with transitioning from CRR2 internal models to the ASA. IMA banks, on the other hand, will likely be more supportive of the Commission’s proposed approach given the potential capital benefits.

The relief measures could also have the additional benefit of attracting more banks to the IMA. Uptake has been low so far - an ISDA study in 2024 found that only four banks in EMEA were planning to adopt the modelled approach. This was not the original intention of policymakers when the FRTB was agreed, not least given the potential concentration risks posed by most banks using the standardised approach, and the reduced incentive for banks to invest in risk-sensitive modelling techniques. Moreover, as highlighted in the consultation, the limited adoption of IMA has slowed the development of third-party data solutions (e.g. for the risk factor eligibility test (RFET)), reducing the availability of the data required to model risk factors accurately - which in turn would result in higher NMRF charges. By offering significant IMA-specific relief measures relative to the small cohort of banks which have applied for the approach, the Commission is signalling its intent to promote wider IMA adoption.

What happens next in the EU and elsewhere?

By publishing this consultation, the EU has demonstrated a desire to move quickly to give EU banks a clearer view of the direction of travel. We expect that the Commission will seek to finalise its approach quickly (by Q2 2025) – there will be limited appetite for another protracted set of negotiations given the time it took to reach the original agreement over the wider package. 

In other jurisdictions, however, the path ahead looks less clear:

• US – it remains unclear if and how the US federal banking agencies will proceed with the Basel Endgame proposal. While finalisation, particularly with an emphasis on capital neutrality, is still the most likely outcome, the possibility of the US abandoning the Endgame remains. The uncertainty is reinforced by a February 2025 executive order that provides greater centralisation and oversight of independent agencies' regulatory activities within the Executive Office of the President, potentially affecting the future trajectory of US capital standards.
• UK – unlike the Commission, the PRA can independently decide on a further delay and/or any other amendments to its rules. However, beyond the delay announced in early 2025, as yet there is little clarity on how or whether the UK will adjust its approach in response to developments in the US or EU.
• Other – some other jurisdictions (such as Canada, Switzerland and Japan) have already fully implemented the FRTB rules, meaning that international banks headquartered in those jurisdictions will already be dealing with the effects of an unlevel global playing field. Adjusting already implemented rules may in practice be more complex than amending or deferring rules that do not yet apply. One of the key questions for those jurisdictions will be whether divergence between their home framework and the rules in the EU, US and UK is temporary or permanent.

Conclusion

The Commission’s decision to consult on the FRTB way forward signals that it is in listening mode. It seems likely that the Commission will implement both the delay (until 2027) and relief measures (until January 2030) in order to maintain flexibility in the face of uncertainty in the US.

While the relief measures may be a first positive signal, banks may request further – and possibly permanent – concessions, depending on where the US and UK rules land. However, the limited consultation period (just until 22 April 2025) does not leave much time for the banking industry to develop a concerted industry response.