Fundamental review of the trading book – consultative document, May 2012: “This consultative document sets out a revised market risk framework and proposes a number of specific measures to improve trading book capital requirements. These proposals reflect the Basel Committee on Banking Supervision’s increased focus on achieving a regulatory framework that can be implemented consistently by supervisors and which achieves comparable levels of capital across jurisdictions. Key elements of the proposals include:

• A more objective boundary between the trading book and the banking book that materially reduces the scope for regulatory arbitrage – feedback is sought on two alternative approaches;
• Moving from value-at-risk to expected shortfall, a risk measure that better captures “tail risk”;
• Calibrating the revised framework in both the standardised and internal models-based approaches to a period of significant financial stress, consistent with the stressed value-at-risk approach adopted in Basel 2.5;
• Comprehensively incorporating the risk of market illiquidity, again consistent with the direction taken in Basel 2.5;
• Measures to reduce model risk in the internal models-based approach, including a more granular models approval process and constraints on diversification; and
• A revised standardised approach that is intended to be more risk-sensitive and act as a credible fallback to internal models.”