Bank For International Settlements (BIS) has come out with a consultative documents to revise market risk framework and the proposed a number of specific measures to improve trading book capital requirements. These proposals reflect the Committee‘s increased focus on achieving a regulatory framework that can be implemented consistently by supervisors and which achieves comparable levels of capital across jurisdictions.

The key elements proposed by BIS committee:

  • A more objective boundary between the trading book and the banking book that materially reduces the scope for regulatory arbitrage – feedback is sought on two alternative approaches;
  • Moving from value-at-risk to expected shortfall, a risk measure that better captures “tail risk”;
  • Calibrating the revised framework in both the standardised and internal models-based approaches to a period of significant financial stress, consistent with the stressed value-at-risk approach adopted in Basel 2.5;
  • Comprehensively incorporating the risk of market illiquidity, again consistent with the direction taken in Basel 2.5;
  • Measures to reduce model risk in the internal models-based approach, including a more granular models approval process and constraints on diversification; and
  • A revised standardised approach that is intended to be more risk-sensitive and act as a credible fallback to internal models.

The Committee is also proposing to strengthen the relationship between the models-based and standardised approaches by establishing a closer link between the calibration of the two approaches, requiring mandatory calculation of the standardised approach by all banks, and considering the merits of introducing the standardised approach as a floor or surcharge to the models-based approach. Furthermore, the treatment of hedging and diversification will be more closely aligned between the two approaches.