FRTB, CCAR and bonus caps for prop traders

Basel delay does not ensure global FRTB consistency

A European Parliament draft would let supervisors decide response to P&L attribution test fails

Fed backtracks on CCAR cleared swaps exposure

Regulator had also postponed plan to feed cleared client exposure into G-Sib rankings

EBA steps up bonus cap pressure on Dutch prop traders

Dutch regulator told to “pay attention” to remuneration rules EC plans to scrap for non-banks

COMMENTARY: Double Dutch

Dutch institutions are increasingly feeling the pressure from European policymakers intent on applying harmonised EU-wide rules.

Most recently, the European Banking Authority (EBA) ramped up pressure on Dutch regulators to enforce strict bank-like bonus caps on principal trading firms. The move follows the closure of an EBA investigation into a proprietary trading firm exemption from the Capital Requirements Regulation (CRR) granted by the Dutch central bank – with suspicions that probe was triggered by France or the UK as a means to deliberately undermine Amsterdam.

Dutch prop traders must now adhere to CRR, and with that obligation comes a duty to pay attention to its provisions on remuneration if – as is likely – firms need to undertake capital restoration plans. This would restrict bonus payments – limits that have actually been gold-plated in the Netherlands and would be detrimental to pay structures at prop trading firms, whose staff are the company’s owners.

Paradoxically, the EBA is insisting Dutch non-bank market-makers must apply CRR at a time when the European Commission is considering overhauling the prudential regime for prop traders.

The banking sector in the Netherlands this week was also feeling under the thumb of EU policymakers finalising Basel III rules. The revision is aimed at catching outliers after excessive variation was found in risk-weighted assets across jurisdictions.

Dutch, as well as Nordic banks, would be particularly hard hit by risk weight increases. Under the Basel update, risk sensitivity has been partially improved by replacing a standardised risk weight for residential mortgages, for example, with a weight depending on loan-to-value (LTV) ratios. But higher LTV ratios in the Dutch and Nordic mortgage market compound the output floor’s effect, further increasing capital requirements.

The banks point to historically low losses for mortgages in their markets. They think the output floor is too central to the Basel compromise to be amended in the EU, but are pushing for more risk granularity in the standard formula.

It is not the first time the Netherlands has found find itself at odds with European rule-makers.

Under the second Markets in Financial Instruments Directive, trading venues can only allow electronic access to end-users who are regulated in the EU. But, along with Germany, the Netherlands had plans to implement a less stringent version of the requirement and allow third-country access – before getting shot down by the European Securities and Markets Authority.

In October, meanwhile, the Netherlands financial markets regulator expressed frustration at Esma’s back-tracking over a deal on what constitutes a spot month in cash-settled gas and physically settled power derivatives contracts under Mifid II.

STAT OF THE WEEK

Out of a global capital shortfall of €90.7 billion ($107 billion) for group 1 internationally active banks if the Basel III rules were applied today, based on end of 2015 data, more than 40% or €36.7 billion could be attributed to EU banks.

QUOTE OF THE WEEK

“Why should you get paid more for holding robust stocks that deliver stronger returns in recessions, have stable cashflows and so are seemingly less risky? It doesn’t make a lot of sense” – James Sefton, Imperial College London