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    EBA Issues No-Action Letter on Trading Book Boundary Provisions

    February 27, 2023

    The European Banking Authority (EBA) answered 27 questions under the Single Rulebook Question and Answer (Q&A) tool, in the month of February 2023. The addressed Q&A topics include Pillar 3 ESG disclosures as well as supervisory reporting (FINREP, COREP, Liquidity, Leverage ratio and own funds) under the Capital Requirements Regulation or CRR. EBA also published a no-action letter stating that competent authorities should not prioritize any supervisory or enforcement action in relation to the new banking book—trading book boundary provisions. Along with the letter, EBA published an opinion on the application of the provisions relating to the boundary between trading book and banking book.

    EBA issued the no-action letter on the new baking book, following an assessment of the concerns as well as considering the positions recently adopted by the legislators in the ongoing legislative process to amend the Capital Requirements Regulation (CRR2). The amendments to the CRR2 introduced certain elements of the Basel standards on the trading book/non-trading book boundary framework, which will enter into application as of June 28, 2023. As part of the ongoing legislative process amending the CRR2, both the Council and the Parliament, in their respective positions, proposed to postpone the application date of the boundary provisions to January 01, 2025. However, the legislators’ effort to postpone the application date of the boundary provisions is void if the legislative process ends after June 28, 2023. The front-loaded application of the boundary provisions compared to the rest of the Fundamental Review of the Trading Book (FRTB) framework creates the following significant operational issues:

    • Institutions would be subject to an operationally complex and fragmented two-step implementation of the boundary framework.
    • Institutions would be subject to an operationally burdensome and costly fragmented application of the rules for the reclassification of positions and internal-risk transfer between the trading and non-trading books.
    • No jurisdictions at global level envisaged such a two-step implementation of the boundary and internal-risk transfer frameworks. This would de-facto lead global institutions to be subject to very different regulatory requirements depending on where the risk management is performed, leading to fragmentation in the regulatory framework and in the financial markets.

     

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    Keywords: Europe, EU, Banking, Single Rulebook, Q&A, Reporting, Basel, Regulatory Capital, CRR2, FRTB, Trading Book, Market Risk, EBA

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