| Four key industry bodies have released a joint response to the combined US regulatory agencies' notice of proposed rulemaking (NPR) on the implementation of Basel II's market risk requirements. The industry bodies comment that the US proposals will impose unnecessary extra costs on participating US banks, could add complexities to the global implementation that will in turn add to the risks, and are too prescriptive in methodological details.
The International Swaps and Derivatives Association (ISDA), the Institute of International Finance (IIF), the Risk Management Association (RMA), and the London Investment Banking Association (LIBA) in this response dated 23rd January, the last day available for submissions, focussed on three main areas:
- the issue of regulatory principles versus rules for calculation of VAR and incremental default risk,
- the changes that bifurcate the trading book into positions that are covered by the proposed market risk rules, as opposed to positions that would have their risk-weighted assets calculated by banking book rules, and
- the proposal to split the implementation of market risk rules from those of credit and operational risk.
The response is firmly against all three of these proposals and ends by commenting, "We believe that one of the best features of the Market Risk Amendment is its focus on general principles instead of enshrining industry 'best practices' as rules. We continue to believe that the attempt to prescribe methodological details in a field where advances are being made regularly and where the business and risk profiles of firms vary greatly is at best premature. Some of the proposed requirements in the Market Risk NPR, however, will impose substantial additional costs—not to mention complexities that may lead to unnecessary errors, confusion, or compliance problems—while adding no real risk management value to the methodologies firms are developing."
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