The European Banking Authority (EBA) has recommended that national authorities not prioritize enforcement or sanctions related to new rules defining the operations included in a bank’s trading portfolio versus its banking portfolio. This recommendation is set to take effect with the introduction of the new European framework for market risk, scheduled for January 1, 2027, and will remain in place until the end of 2029 or until legal clarifications are made.
In essence, the EBA has issued a non-intervention letter advising authorities to avoid treating violations of the new rules on portfolio classification as a priority. This applies only if the delegated act adopted by the Commission in June comes into force, extending until December 31, 2029, or until legislative clarifications occur. During this period, banks will be allowed to continue using the previous classification method for calculating capital requirements related to market risk, regardless of whether they utilize the reduction mechanism introduced by the Commission. The EBA believes that concurrently applying two classification systems would generate additional costs, create parallel procedures, and result in inconsistent treatment across banks performing similar activities.
The classification of financial instruments is divided into two primary categories: the trading portfolio, which generally includes positions held for short-term sale aimed at profiting from price fluctuations or hedging market risks, and the banking portfolio, which mainly consists of loans, equity stakes, and positions held for routine operations or longer periods. This distinction is crucial as it dictates different methodologies for calculating risks and capital requirements.
Assets in the trading portfolio are subject to market risk regulations, which assess potential losses due to changes in prices of bonds, stocks, currencies, or other instruments. Conversely, positions in the banking portfolio are primarily governed by credit risk rules and other risk categories. The regulations defining where each position should be classified are known as the boundary between the trading and banking portfolios. They govern the conditions under which a bank can move a position from one category to another.
The European Union is preparing the introduction of a new market risk framework based on the internationally recognized Fundamental Review of the Trading Book (FRTB) standards. This new framework alters capital calculation methodologies as well as some position classification rules. Initially set for full implementation in 2025, the Commission postponed this date to January 1, 2027, to allow for delays in other jurisdictions, ensuring that European banks are not disadvantaged relative to international competitors.
On June 4, 2026, the Commission adopted a new delegated act modifying the application of these rules temporarily from 2027 to 2029. This act introduces operational simplification measures and multipliers to adjust capital requirements. This delegated act is still subject to oversight by the European Parliament and the Council, with EBA’s letters gaining relevance only if it comes into effect.
The mechanisms introduced aim to allow banks negatively impacted by the transition to the new system to temporarily reduce their capital requirements for market risk. This is intended to prevent disproportionate increases in the required capital during the adjustment period. Eligibility will be based on a comparison of requirements calculated under the old system versus those emerging from the new framework, with a reference date set for March 31, 2027.
Ordinarily, a bank may use this mechanism only if the new calculation results in a higher capital requirement than what was indicated by the previous methods. The application of the reduction is neither automatic nor mandatory. Institutions must notify their supervisory authority and demonstrate compliance with the conditions. The EBA recommends that banks anticipating an increase in requirements engage with supervisors in advance and submit notifications before the May 2027 reporting deadlines.
Banks utilizing the mechanism are required to maintain the ability to compute capital requirements simultaneously using both the old system and the new framework, as regular comparisons are needed for periodic recalibration. EBA has identified potential issues arising from the fact that the Commission’s act retains some old rules for calculations while other legislative provisions might compel banks to apply the new portfolio delimitation.
This situation can lead to a single instrument being classified in two different ways, depending on the calculation or reporting framework in use. Banks would therefore need to maintain parallel procedures, databases, and controls for two systems that do not necessarily yield the same classifications. EBA warns that this complexity would be costly and challenging to manage. Transferring a position between portfolios could significantly impact risk models, capital requirements, authority reporting, and internal control processes.
The inconsistencies might not only affect banks using the adjustment mechanism. If some banks can employ the previous delimitation while others are mandated to adopt the new rules immediately, this could lead to different treatment of similar entities within the same market. EBA believes such discrepancies could adversely affect competitive conditions and the integrity of the European financial market. For this reason, it advocates for flexibility also to be accorded to institutions that do not use the adjustment multiplier.
In practical terms, banks could temporarily continue to assess market risk using the classification that was applicable before the introduction of the new elements of the FRTB framework. The recommendation also applies to internal risk transfers. A bank might internally transfer risks from its banking portfolio to a unit managing it within the trading portfolio. The rules establish the conditions under which such transfers can be recognized for capital calculation purposes.
Simultaneous application of two different delimitations might lead to distinct treatments of the same operation, complicating the recognition of its impact. EBA advises supervisors against prioritizing enforcement actions regarding compliance with the new delimitation rules, reclasifications of instruments, or internal transfers until the framework is clarified.
The same leniency is suggested for certain reporting obligations. Banks should not be compelled to report the composition of their trading portfolio based on the new delimitation if they continue to use the previous rules for capital calculation. Without this approach, an institution would end up calculating capital requirements using one delimitation and describing its portfolio structure to the supervisor using another. EBA believes that reporting should align with the system effectively employed for calculations.
This recommendation is in force until the earlier of December 31, 2029, or the effective date of the necessary legislative changes. The Commission has indicated that it intends to present a legislative proposal during the first quarter of 2027, aiming to clarify the application, temporary suspension, or amendment of provisions concerning portfolio delineation.
While the non-intervention letter does not repeal existing rules or formally alter their application date, it reflects EBA’s concerns that strict adherence to these provisions may create exceptional difficulties for orderly market functioning, financial stability, and consistent supervision. The aim is to provide a temporary solution until the European Parliament and Council can adopt the proposed legislative changes.
Additionally, EBA has issued technical clarifications regarding the utilization of multipliers, reporting, disclosure of information, and treatment of certain structural currency positions. For eligible banks, the adjustment mechanism must be applied starting from the first quarter of 2027, with institutions unable to defer initiation based on market observations.
Before opting out of the mechanism, banks are required to inform their supervisory authority. A temporary reduction in the capital requirement calculated under the new system below levels of the previous calculation does not automatically necessitate the cessation of application.
Clarifications also address the interaction between the multiplier and thresholds limiting the advantages gained through internal models. The Commission’s indicated goal is to maintain capital neutrality during this transition period, meaning that adjustments should be calibrated so that the resulting market risk requirement is equivalent to what would have been calculated under prior methods, including any influence from ceilings on internal models.
EBA provides temporary instructions for the information disclosed by banks. Institutions opting for the adjustment mechanism should indicate this choice, presenting data based both on the old system and the new methodological framework. Some tables will indicate the theoretical requirement emerging from the FRTB framework before any overarching adjustments are applied, while others, used for displaying capital and key indicators, will reflect the total effect of the mechanism.
This dual representation is essential for investors and supervisors to understand not only the value calculated under the new framework but also the requirement that effectively influences prudential indicators. EBA plans to revise technical reporting standards to incorporate the new delegated act, expected to be released in the latter half of 2027.
Until then, banks are expected to utilize existing forms while including information per the temporary guidelines issued by the authority. Institutions employing the multiplier will report requirements calculated using both methodologies, whereas other banks will report solely the outcomes of the FRTB framework, alongside applicable temporary adjustments.
EBA also clarifies participation in the European exercise that assesses banks’ risk models. Institutions continuing with the old internal models for calculating adjustments will be involved in the corresponding component. Banks implementing the standardized FRTB approach will participate in market risk comparison exercises beginning in 2027.
The collection of data for new FRTB internal models is currently paused until there is clarity on the extent to which European banks will adopt this approach. EBA proposes that the benchmarking exercise, originally slated for 2027, be postponed until the latter half of the year.
The application of the framework will necessitate a transitional period during which banks, supervisors, and EBA manage simultaneously the old calculations, new methodologies, temporary adjustments, and changes in reporting systems.
Documents do not project the administrative costs for banks or the aggregate effects of adjustments on European sectoral capital. They also do not specify which institutions are eligible for the multiplier or indicate how many banks will continue utilizing existing internal models. The ultimate impact will depend on portfolio structures, approved methodologies, the differences between old and new calculations, and each eligible institution’s decision to implement the adjustment.
The Fundamental Review of the Trading Book represents the revised international standard for capital calculation to cover market risks, developed post-financial crisis to both delineate portfolios more strictly and improve loss measurement, thereby reducing unjustified inconsistencies arising from internal models. The EU has postponed full implementation to ensure comparable conditions among European banks and their counterparts in jurisdictions where the standard has been delayed. The delegated act from 2026 maintains the January 1, 2027, date while introducing temporary adjustments through the end of 2029.
