On 14 January 2019, the Basel Committee on Banking Supervision (Basel Committee) published its final standards on the minimum capital requirements for market risk (the Final Standards).

The Final Standards replace the current minimum capital requirements for market risk set out in the Basel II and Basel 2.5 reforms. The revisions made in the Final Standards, compared to earlier versions, include:

  • a simplified standardised approach for use by banks that have small or non-complex trading portfolios;
  • clarifications on the scope of exposures that are subject to market risk capital requirements;
  • revised standardised approach treatments of foreign exchange risk and index instruments;
  • revised standardised approach risk weightings applicable to general interest rate risk, foreign exchange and certain exposures subject to credit spread risk;
  • revisions to the assessment process to determine whether a bank’s internal risk management models appropriately reflect the risks of individual trading desks; and
  • revisions to the requirements for identification of risk factors that are eligible for internal modelling.

The text of the Final Standards has been prepared in a new modular format that adopts the style of the new “consolidated framework” which the Basel Committee will apply to all standards on its website in the coming months. The Final Standards are available in two versions – one version which includes previously published frequently asked questions that are relevant to the framework and another version without the FAQs.

The Basel Committee has also published an explanatory note on the Final Standards. This outlines the background and rationale for the fundamental review of the trading book project that led to the revised market risk framework published in January 2016, and the key features of the framework. The note also sets out the refinements and clarifications introduced in January 2019 and the potential capital impact of the finalised framework based on quantitative impact study data.

The Final Standards come into effect on 1 January 2022.