2025 Financial Regulations: Capital &amp; Transparency

IFD/IFR (Investment Firms Directive/Regulation)

LIBOR Transition

Source: European Securities and Markets Authority

MiFID II/MiFIR:

Elevating Transparency and Market Integrity

In 2025, MiFID II/MiFIR will introduce significant updates, including the launch of a consolidated tape (CT) to unify real-time market data, stricter transparency standards with a single-volume cap for equities, and enhanced post-trade reporting for OTC derivatives.

These changes will require financial institutions to upgrade data handling, reporting, and compliance capabilities to meet new transparency demands and ensure regulatory alignment across the EU/UK.

The Markets in Financial Instruments Directive II (MiFID II) and MiFIR are foundational to the EU’s regulatory framework, setting standards for transparency, market integrity, and investor protection across Europe.

Implemented in 2018, MiFID II/MiFIR has continually evolved to close gaps exposed by the financial crisis, particularly in reporting, transparency, and data management. With new amendments taking effect in 2025, financial institutions are required to adapt quickly to keep pace with these standards.

These changes emphasize transparency in market data accessibility, reporting requirements, and trading practices, making 2025 a pivotal year for firms operating in the EU and UK.

Key Amendments

The 2025 MiFID II/MiFIR updates address market structure evolution, placing new emphasis on transparency, data accessibility, and regulatory convergence across the EU. The three most impactful updates are:

Small Trading Venue Provisions

Notably, small trading venues that account for under 1% of EU trading volumes have a pathway to participate with fewer data requirements, though they remain subject to baseline data accuracy standards.

For these venues, establishing a scalable data solution now will facilitate compliance as they transition into the CT system.

Overview and Relevance of MiFID II/MiFIR

1. Consolidated Tape Implementation

In early 2025, EU financial markets will introduce a consolidated tape, requiring trading venues to contribute real-time transaction data. The CT will serve as a unified data source for transactions across asset classes, consolidating fragmented data sources and providing investors and firms with a comprehensive view of market activity.

This requires rapid adaptation from trading venues, which must align data contribution processes with CT standards for accuracy and timeliness.

“The amended volume cap seeks to simplify transparency in equity markets, reducing administrative complexity for trading venues and facilitating uniform data reporting.”

Purpose and Strategic Importance: MiFID II/MiFIR’s transparency mandate ensures that investors and regulators have access to accurate, real-time data on trades, pricing, and market trends. For financial institutions, aligning with these regulations is critical for maintaining operational credibility and market participation. For instance, tighter rules around equity and non-equity market transparency allow regulators to closely monitor trading activity, adding further accountability for trading venues and data providers.

“MiFID II seeks to address systemic risk by enforcing rigorous transparency standards, which not only provide investor protection but also enhance overall market stability.”

Source: European Securities and Markets Authority

Focus for 2025: The 2025 amendments underscore a focus on consolidated data access, new transparency measures, and post-Brexit divergence in the UK. These changes require financial institutions to adjust data handling and reporting practices across the EU and UK, balancing compliance with strategic adaptability. For institutions operating in both regions, preparing for this divergence now will help prevent potential non-compliance due to regulatory differences that may widen further post-2025 (click timeline to enlarge).

“The consolidated tape is expected to significantly reduce data fragmentation, creating a more cohesive view of market activity. This advancement aims to streamline data flow, enabling real-time accessibility that benefits both institutions and investors.”

Source: Financial Conduct Authority MiFID II Guide, October 2024

2. Single-Volume Cap for Equity Markets

For equities, the 2025 amendments will streamline transparency by replacing the former double-volume cap with a single-volume cap at 7%. This cap standardises market practice, and financial institutions should begin preparing reporting processes accordingly to avoid operational disruptions.

3. Enhanced Post-Trade Transparency for OTC Derivatives

New rules set stricter requirements for deferred publication of OTC derivative trades, aligning publication timing with transaction size and liquidity levels. For firms handling OTC derivatives, early 2025 will mark a transition point, with deferred publication available only for qualifying large-scale or illiquid transactions.

As financial institutions prepare for 2025, these MiFID II/MiFIR changes present operational challenges that demand strategic planning and timely action.
Complexity in Compliance and Operational Costs: Institutions will need to enhance data infrastructure and compliance monitoring to meet new transparency mandates under the consolidated tape. Firms relying on high-frequency transaction data will need to ramp up data handling capabilities, such as storage and analytics, to ensure accuracy. This may require substantial investments in IT, especially for firms directly contributing to the consolidated tape, which must provide near real-time data access.
“As transparency standards evolve, firms must prioritise data governance, ensuring their systems can sustain the volume and frequency of mandated reporting.”Source: Financial Conduct Authority MiFID II Guide, 2024
Immediate Action Step: Firms should conduct a gap analysis by Q1 2025 to identify any deficiencies in data management or reporting, allowing time for targeted system enhancements.
Strategic Impact on Trading and Data Use: As data visibility becomes centralised, firms can use enhanced transparency to their competitive advantage. For instance, high-quality, real-time data allows firms to make faster trading decisions and adjust strategies in response to market shifts. However, firms unprepared to adapt data handling practices risk competitive disadvantages as clients increasingly prioritise transparent, compliant trading practices.
Non-Compliance Risks: Penalties for non-compliance in 2025 will include possible sanctions from ESMA and national regulators, potentially restricting non-compliant firms from full market access. To mitigate these risks, financial institutions should initiate regular compliance reviews throughout 2025, identifying and addressing any inconsistencies in reporting and data handling.
Navigating MiFID II/MiFIR in 2025 will demand specialised expertise across several critical areas. Financial institutions will need a blend of data management, regulatory analysis, and IT skills to support compliance efforts effectively:
Real-Time Data Management Skills: With the consolidated tape and transparency standards setting stringent data requirements, teams must be proficient in data governance, reporting accuracy, and large-scale data processing. Skills in real-time data handling, such as experience with tools like kdb+ for data-intensive reporting, will be particularly valuable for meeting new transparency standards.
“Meeting MiFID II’s reporting requirements calls for advanced data management and compliance skills, particularly for managing high-frequency data in real time.” - Source: Handbook of the Financial Conduct Authority, 2024
Regulatory Analysis and Risk Mitigation: Regulatory experts well-versed in MiFID II/MiFIR will be essential in ensuring that compliance strategies accurately reflect both EU and UK-specific updates. For firms operating cross-border, an understanding of UK post-Brexit divergence will be key to maintaining dual compliance as requirements increasingly differ.
Technology Infrastructure and Security: Technical teams must build and maintain adaptable IT systems that can manage high data loads and process near real-time reporting without downtime. Cybersecurity expertise is also critical to protect sensitive data, especially in light of centralised data handling mandates from the CT.
Drawing on extensive experience in MiFID II compliance, industry experts offer the following recommendations to help financial institutions prepare effectively for the 2025 changes.
Start Early with Phased Implementation: Initiate preparations in Q4 2024 to avoid last-minute pressure as 2025 progresses. By conducting early compliance tests and data processing simulations, firms can identify potential system bottlenecks and adjust gradually to full compliance.
Timeline Suggestion: A phased timeline across Q1 and Q2 2025, starting with data compliance readiness in Q1 and testing full data reporting systems by Q2, provides a smooth transition toward full implementation.
Foster Cross-Departmental Collaboration: Compliance with MiFID II/MiFIR changes requires alignment between legal, IT, and operational teams. By establishing compliance leads within each department and holding regular progress meetings, firms can ensure that adjustments to reporting standards and data handling remain on track.
Invest in Specialised Tools and Training: Given the depth of the 2025 amendments, institutions should invest in specialised training for their teams. Real-time data tools that support quick processing, analysis, and secure reporting can reduce the need for manual interventions, helping to maintain compliance accuracy. Training for risk and compliance teams should cover both EU and UK-specific amendments to ensure comprehensive readiness.

Caspian One & MiFID II - client story

To meet stringent MiFID II compliance requirements, a leading global investment bank engaged Caspian One to re-engineer their Cash Equities Technology framework. With a total project funding of £17.3 million, Caspian One deployed a team of 35 specialised consultants to work alongside a 420-person internal department.

Leveraging expertise in regulatory analysis, KDB engineering, and full-stack development, our team helped the bank capture and process over 300GB of real-time market data daily. This flexible, agile approach enabled the client to scale resources as needed, hit key regulatory milestones, and retain critical specialist talent, ensuring long-term system integrity and compliance.

> Explore this story in more detail

Summary Key Takeaways

Essential Compliance Milestones: Institutions should prioritise compliance actions ahead of the primary 2025 deadlines, targeting Q1 2025 for initial system audits and Q2 for full reporting readiness. By Q3, institutions should conduct compliance testing, positioning themselves well in advance of full regulatory enforcement

Major Impact Areas: Key adjustments to transparency standards, especially through the consolidated tape and enhanced OTC derivatives transparency, highlight the importance of robust data systems. Aligning internal processes with these requirements will be essential for maintaining compliance and client trust

Required Skills and Next Steps: Regulatory analysis, real-time data management, and advanced IT infrastructure will form the foundation for effective MiFID II/MiFIR compliance in 2025. Investing in these areas now ensures a smoother adaptation to regulatory demands and a more competitive position as transparency standards evolve

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IFD/IFR (Investment Firms Directive/Regulation)

LIBOR Transition

Source: Basel Committee on Banking Supervision, 2023

Basel III Finalisation:

(Basel IV) Enhanced Capital & Risk Mgt. Requirements

In 2025, the Basel III Finalisation (often called "Basel IV") will introduce stricter capital and risk management requirements for banks globally. Major changes include a standardised output floor for risk-weighted assets (RWAs), revised capital calculations for operational and credit risks, and an updated leverage ratio.

These updates will require banks to strengthen their risk assessment models, increase capital reserves, and prepare for enhanced regulatory oversight on operational risk.

Overview and Significance of Basel III Finalisation

The Basel III framework, developed by the Basel Committee on Banking Supervision, was introduced to address vulnerabilities highlighted by the 2008 financial crisis.

Basel III strengthens banking resilience through standards for capital adequacy, leverage, liquidity, and risk management. Now, with the Basel III finalisation (often referred to as “Basel IV”), regulators are introducing critical refinements to ensure that banks remain robustly capitalised and better equipped to manage risk.

Purpose of Basel III Finalisation: While the original Basel III standards set foundational measures, the finalisation phase introduces adjustments that fine-tune capital requirements, aiming to standardise risk-weighted asset (RWA) calculations and minimise discrepancies between banks’ internal assessments and regulatory expectations. This “Basel IV” approach further safeguards against future financial instability by mandating consistent, transparent risk assessment across jurisdictions.

Focus for 2025: By January 1, 2025, the updated standards will be in full effect in many jurisdictions, including the EU and UK. Financial institutions must be prepared to adhere to these heightened requirements, particularly around capital buffers and operational risk assessments, making 2025 a transformative year in global banking regulation (click on timeline to expand).

Key Components of Basel III Finalisation

The Basel III finalisation standards introduce several new and enhanced measures, focusing on risk-weighted assets, capital buffers, and operational risk. These adjustments are intended to create a more consistent, comparable, and conservative approach to risk management.

Revised Risk-Weighted Assets (RWAs) Framework

The finalised standards impose new restrictions on banks’ internal models for calculating RWAs, establishing an output floor of 72.5%. This floor ensures that a bank’s internally calculated RWAs are not less than 72.5% of the standard model, preventing overly optimistic risk assessments. This measure will particularly impact institutions using advanced models for risk exposure assessment, requiring them to hold higher capital than under previous standards.

“The output floor ensures a minimum level of conservatism, creating a backstop against excessive variability in RWA calculations and promoting a level playing field across banks.”

Revised Operational Risk Framework

Basel III finalisation also replaces the previous operational risk models with the Standardised Approach for Operational Risk (SA). This new approach requires banks to calculate operational risk capital based on historical losses, effectively removing the Advanced Measurement Approach (AMA). The SA is designed to simplify the assessment process while maintaining accuracy in capturing operational risk.

Capital Buffers and Leverage Ratios

The finalisation reinforces Basel III’s original leverage ratio requirement and mandates banks to maintain a capital conservation buffer to absorb potential losses during periods of financial stress. Additionally, the countercyclical buffer allows regulators to require extra capital reserves during economic upswings, further enhancing banks’ resilience to cyclical market fluctuations.

The Basel III finalisation introduces rigorous standards that will require banks and financial institutions to adapt their capital planning, risk management, and internal processes. Key implications include:
Increased Capital Requirements: The output floor and revised RWA framework will likely increase capital requirements for many institutions, particularly those with extensive trading operations. Banks must prepare to hold higher levels of regulatory capital, which could impact profitability if not managed strategically.
Immediate Action Step: Institutions should conduct a capital impact assessment by early 2025 to determine how the new output floor will affect their balance sheets and consider capital-raising measures if necessary.
Operational Adjustments: With the replacement of the AMA by the Standardised Approach for Operational Risk, banks that previously relied on internal models will need to restructure their operational risk assessments. This shift may require significant investment in data infrastructure and recalibration of loss measurement methodologies.
Strategic Shift in Risk Management Practices: Basel III finalisation’s standardised, conservative approach to risk will necessitate a more robust, cross-departmental approach to risk management. Financial institutions may need to integrate risk assessment more closely with their strategic planning functions, enhancing internal coordination to ensure compliance across all operational areas.
“By aligning capital with actual risk exposure through standardised methods, Basel IV encourages a proactive approach to risk management, emphasizing the importance of cross-functional coordination within financial institutions.” - Source: KPMG Basel IV, 2024
To implement Basel III finalisation requirements effectively, financial institutions must enhance their capabilities in capital planning, regulatory compliance, and data management. Essential skill sets include:
Advanced Risk Analysis and Capital Planning: Compliance with Basel IV’s output floor and revised RWA framework requires in-depth expertise in risk modelling and capital forecasting. Risk analysts will need to be skilled in interpreting complex data sets, with experience in Basel-specific requirements and methodologies.
"The Basel III Endgame requires banks to develop not only robust capital management processes but also integrate strategic capabilities to navigate evolving regulatory landscapes and maintain competitive resilience." - Source: EY Basel III Endgame
Operational Risk Management: With the introduction of the standardised approach for operational risk, institutions will need professionals who understand both qualitative and quantitative elements of operational risk. Experience in managing loss event data and adapting to structured regulatory methodologies will be essential.
Data Management and Regulatory Reporting: The conservative nature of Basel IV requires precise, transparent data reporting. Financial institutions must invest in data management systems capable of capturing, validating, and analysing vast amounts of risk-related data in real-time, and regulatory reporting teams will need to be adept in navigating cross-jurisdictional compliance requirements.
To support banks in aligning with Basel III Finalisation, experts recommend a phased approach, focusing on immediate alignment with critical standards and gradual improvement of risk management systems over 2025.
Early RWA Assessment and Capital Reallocation: Banks should conduct an RWA audit by Q1 2025, focusing on high-impact asset classes and identifying adjustments necessary to meet the output floor requirements. This proactive step will prevent last-minute adjustments and help maintain operational continuity.
Operational Risk Data Enhancements: The transition to the Standardised Measurement Approach will require high-quality operational risk data. Banks should prioritise enhancing data collection for loss history and business indicators, establishing a consistent reporting framework that can support SMA calculations effectively.
Cross-Functional Compliance and Training: Basel III Finalisation will require cross-functional coordination across risk management, IT, and compliance departments. Banks should consider establishing dedicated compliance teams to oversee Basel III adherence and invest in training programs to ensure employees are knowledgeable about the updated requirements and reporting standards.
“Cross-departmental collaboration will be critical for implementing Basel III, as regulatory compliance increasingly overlaps with risk management and data governance.” - Source: European Central Bank, 2024

2025 Timeline for Implementation

Q1, Jan-Mar: Conduct initial RWA assessments and gap analyses, identifying areas most impacted by the output floor and operational risk adjustments. Begin data audits to ensure accurate RWA calculations

Q2, Apr-Jun: Implement capital reallocation strategies and strengthen data management capabilities to meet SMA requirements. Provide targeted training sessions for compliance and risk management teams

Q3, Jul-Sept: Complete system upgrades to support new reporting requirements and conduct pilot tests for operational risk data handling. Begin compliance testing for standardised RWA and leverage ratio metrics

Q4, Oct-Dec: Finalise adjustments based on compliance test results and prepare for regulatory audits by ensuring all departments meet Basel III standards. Conduct a full internal review to verify adherence to Basel III Finalisation

Summary Key Takeaways

Primary Compliance Targets: The key focus areas for Basel III Finalisation include implementing the output floor for risk-weighted assets (RWAs), transitioning to the Standardised Measurement Approach (SMA) for operational risk, and meeting updated leverage ratio requirements. Ensuring compliance in these areas will be essential for maintaining regulatory alignment in 2025 and beyond
Capital and Risk Adjustments: Increased capital demands are expected, especially for banks holding high-risk assets or real estate exposures. Adjustments in lending practices may be required to meet the standardised credit risk weights, particularly for real estate, retail, and corporate assets. Banks should prepare by reassessing their capital allocation strategies and recalibrating RWAs under the new requirements
Essential Skills and Next Steps: Expertise in capital adequacy, data analytics, and compliance will be critical for successful Basel III Finalisation. Institutions should prioritise upskilling in operational risk assessment, standardised RWA calculation, and leverage ratio management. Teams across risk, compliance, and IT departments will need training and resources to align with these updates efficiently

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IFD/IFR (Investment Firms Directive/Regulation)

LIBOR Transition

Source: Linklaters Financial Regulation Insights, 2024

PRIIPs Regulation:

Updated Key Information Documents (KID) to Align with MiFID II

In 2025, PRIIPs (Packaged Retail and Insurance-based Investment Products) regulations will see updated Key Information Document (KID) standards across the EU, emphasizing clearer cost disclosure and alignment with MiFID II requirements.

The UK, meanwhile, is preparing to replace PRIIPs with the Consumer Composite Investments (CCI) framework, bringing tailored disclosure requirements to improve transparency for UK retail investors.

The PRIIPs regulation was introduced by the EU to enhance transparency for retail investors, requiring standardised disclosure of risks, costs, and potential returns for complex retail financial products.

Key Information Documents (KIDs) are central to PRIIPs, offering consumers accessible information about investment products to support better-informed decision-making.

“The shift to CCI reflects UK’s commitment to provide consumers with disclosures that are both relevant and accessible, without the rigidity of EU PRIIPs standards.”

Overview and Relevance of PRIIPs Regulation

Purpose and Strategic Importance

The goal of PRIIPs is to ensure that retail investors can easily compare investment products and understand the associated risks and costs. PRIIPs mandates that financial institutions provide a KID for each product, structured to offer clear, standardised information.

“PRIIPs KIDs are designed to provide standardised, comparable information, giving retail investors clarity on costs and risks associated with financial products.”

Source: Apex Group, 2024

Revised Cost Disclosure Standards

The updated EU PRIIPs standardise cost disclosures using the ‘arrival price’ method, correcting inconsistencies from past calculation models. This approach aims to enhance consumer comparability across product types, particularly for UCITS and AIFs.

Focus for 2025

As of January 2025, the EU will implement revised KID standards to improve cost transparency and align with MiFID II, addressing long-standing criticisms regarding inconsistencies in cost calculation methodologies and risk representations. In the UK, the PRIIPs framework will be replaced by the Consumer Composite Investments (CCI) framework, which is set to better reflect UK market needs and simplify retail disclosures (click on image to expand).

Key Components of PRIIPs Regulation Changes

The 2025 changes to PRIIPs KIDs focus on enhanced clarity, cost calculation updates, and UK-specific shifts toward a new framework.

Key components include:

“Using the arrival price methodology for transaction costs ensures greater accuracy and consistency in disclosures, a longstanding request from the investment community.”

Source: FCA Policy Statement PS22/2, 2024

Alignment with MiFID II Standards

The revised KID requirements are designed to align closely with MiFID II’s transparency and cost disclosure mandates, reducing discrepancies between PRIIPs and MiFID KIDs. This alignment simplifies compliance for firms operating across both regulatory standards, particularly around risk indicator representations and performance scenario disclosures

UK’s Consumer Composite Investments (CCI) Framework

The UK will diverge from the EU’s PRIIPs framework with the CCI framework, expected to go live in mid-2025. The CCI approach prioritises flexible disclosure standards tailored for the UK retail investment market and exempts certain investment trusts from standardised KID requirements

The updated PRIIPs regulation brings both operational and strategic challenges for financial institutions, particularly those serving retail investors in both the EU and UK.
Increased Complexity in Cost Reporting: With the arrival price method now mandatory for cost disclosures under the EU PRIIPs, institutions need to update transaction data reporting systems to ensure compliance. Firms previously relying on different cost calculation models must adapt to maintain standardised reporting and avoid inconsistencies in KIDs.
Immediate Action Step: EU-based institutions should conduct a compliance review of their cost calculation methodologies to ensure they align with the arrival price approach before the 2025 implementation deadline.
Strategic Impact on Cross-Border Offerings: For institutions operating in both the EU and UK, divergent regulations pose compliance challenges, as PRIIPs applies within the EU while the UK adopts the CCI framework. This may require dual KID formats or adaptations in product information to comply with each jurisdiction’s standards.
“Diverging PRIIPs standards in the UK and EU could lead to added administrative costs, as firms must prepare region-specific KIDs for cross-border retail products.” - Source: FCA, 2024
Transparency and Consumer Trust: Enhanced transparency under both EU and UK reforms is expected to foster consumer trust. Institutions that adapt to PRIIPs changes proactively can leverage the updated disclosures as a competitive differentiator, offering consumers clearer, more reliable information on investment risks and costs.
To comply with the updated PRIIPs standards, institutions will need expertise in several key areas, including data management, regulatory reporting, and customer-facing communication.
Data Analytics and Cost Calculation Expertise: Compliance with the arrival price methodology requires advanced data analytics capabilities. Teams must be skilled in calculating transaction costs based on precise entry data to ensure accuracy in the cost disclosures presented to consumers.
Cross-Jurisdictional Compliance Knowledge: Firms offering products in both the EU and UK will need compliance specialists with experience navigating PRIIPs and the new CCI framework. This expertise will help ensure that each KID aligns with jurisdictional requirements, especially in areas like cost and risk disclosures.
“Enhanced disclosure standards mean that compliance teams must be proficient in cost transparency methodologies, which is now essential under the 2025 reforms.” - Source: Apex Group, 2024
Customer-Focused Communication Skills: As disclosure standards evolve, institutions must ensure that customer-facing teams can explain KID content effectively. Clear communication of risks and costs helps build consumer trust and supports better-informed investment decisions.
To support compliance with the PRIIPs updates, experts recommend a strategic approach focused on proactive adaptation to the new cost methodologies and clear, region-specific KID formats.
Early System Updates for Cost Calculations: Financial institutions should begin updating transaction cost reporting systems by Q4 2024 to ensure seamless transition to the arrival price methodology in early 2025. Conducting initial data tests can help teams identify any reporting gaps and adjust accordingly.
Implement Region-Specific KID Templates: For institutions with cross-border retail offerings, it’s advisable to implement region-specific KID templates for the EU and UK to prevent discrepancies and ensure alignment with respective disclosure requirements. A dual-template system can simplify compliance across both PRIIPs and CCI frameworks.
Invest in Staff Training and Customer Education: Teams interfacing with retail clients should receive training on the PRIIPs and CCI disclosures, ensuring that they can clearly explain cost structures, risk metrics, and performance scenarios to clients. Educating clients on these disclosures also supports improved customer relations and trust.
“Ensuring that disclosures are clear and customer-friendly is essential for building consumer trust in an increasingly complex regulatory landscape.” - Source: Linklaters, 2024

2025 Timeline for Implementation

Q1, Jan-Mar: Begin updating transaction cost calculation systems and preparing region-specific KID templates

Q2, Apr-Jun: Conduct compliance reviews for EU PRIIPs and initiate CCI alignment for UK products. Roll out initial staff training for customer-facing teams

Q3, Jul-Sept: Test and finalise KID templates; complete dual-format adaptations for cross-border products

Q4, Oct-Dec: Launch updated KID disclosures to retail investors, ensuring alignment with both PRIIPs and CCI frameworks

Summary Key Takeaways

Primary Compliance Targets: The key updates for 2025 include cost calculation standards (arrival price) for the EU’s PRIIPs and the introduction of the CCI framework in the UK. Financial institutions should focus on adapting KID templates and transaction cost calculations to align with these changes
Cross-Jurisdictional Complexity: Institutions operating in both the EU and UK will need to manage divergent requirements for PRIIPs and CCI, which may necessitate separate KID formats and customised compliance processes
Necessary Skills for Compliance: Expertise in data analytics, region-specific regulatory compliance, and customer-facing communication are essential for aligning with the PRIIPs updates and effectively managing KID disclosures

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IFD/IFR (Investment Firms Directive/Regulation)

LIBOR Transition

Source: Basel Committee on Banking Supervision, 2024

FRTB:

(Fundamental Review of the Trading Book) Stricter Risk Sensitivity in Market Trading

In 2025, the Fundamental Review of the Trading Book (FRTB) will introduce heightened market risk standards for banks, focusing on stricter risk sensitivity and regulatory scrutiny.

Key updates include a revised standardised approach (SA) for market risk, an enhanced internal models approach (IMA) with stringent approval criteria, and more precise boundary definitions between trading and banking books to minimise regulatory arbitrage.

Overview and Relevance of FRTB

The Fundamental Review of the Trading Book (FRTB) framework, developed by the Basel Committee on Banking Supervision (BCBS), aims to overhaul how banks assess and hold capital against market risks.

Set for full implementation in January 2025, FRTB addresses weaknesses revealed during the 2008 financial crisis by emphasizing risk sensitivity and aligning capital requirements more closely with actual market exposures.

Purpose and Strategic Importance

FRTB’s primary objective is to enhance financial stability by increasing the resilience of banks against market shocks. The framework mandates clearer boundaries between trading and banking books, reducing incentives for banks to minimise capital requirements through book shifts.

By enforcing capital charges in alignment with market risk levels, FRTB aims to prevent systemic risks from accumulating within banks’ trading activities.

“The FRTB framework addresses systemic risks by ensuring that market risk is accurately measured and managed, fostering a more resilient banking sector.”

Focus for 2025

The 2025 implementation introduces mandatory capital requirements under both the standardised approach (SA) and internal models approach (IMA). The IMA will be subject to stringent testing requirements, including profit and loss (P&L) attribution and backtesting, and will require regulatory approval - a departure from previous practices (click image to enlarge).

“FRTB’s standardised approach (SA) introduces a higher degree of risk sensitivity, establishing a more precise capital charge baseline for banks globally.”

Source: European Banking Authority, 2024

“Under FRTB, the internal models approach is rigorously regulated to enhance transparency and consistency, ensuring models reflect true market risk.”

Source: PwC UK, 2024

Boundary Definitions Between Books

FRTB clarifies the boundaries between trading and banking books to prevent regulatory arbitrage, mandating that banks categorise assets based on intended trading strategy and capital requirements.

Key Components of FRTB Changes

FRTB introduces several critical updates that impact market risk assessments and capital calculations, with a focus on standardisation, transparency, and enhanced validation requirements.

Standardised Approach (SA)

FRTB’s SA now includes sensitivity-based calculations and granular risk factor categorisation to increase the accuracy of market risk assessments. The SA provides a fallback for banks that cannot use IMA and is more risk-sensitive than previous methodologies.

Internal Models Approach (IMA) Requirements

Banks that wish to adopt IMA must meet strict regulatory benchmarks, including successful P&L attribution tests and backtesting to demonstrate model accuracy. The enhanced IMA standards aim to curb excessive reliance on internal models, which previously allowed variability in risk calculations. The PRA and other regulators require annual validation by internal audit or third-party evaluators to ensure complete compliance.

Implementing FRTB by 2025 will demand significant changes in capital allocation, operational processes, and cross-border compliance efforts.
Increased Capital and Operational Costs: FRTB’s sensitivity-based SA and testing requirements for IMA are expected to increase capital costs, particularly for banks with significant trading book exposures. Additionally, compliance with these standards may require updates to IT systems and data infrastructure, adding operational expenses.
Immediate Action Step: Banks should conduct a cost-benefit analysis of SA vs. IMA in early 2025 to assess capital requirements and determine which approach aligns with their trading profiles and risk appetite.
Operational Complexity in Risk Assessment: Meeting FRTB’s requirements, particularly for IMA, demands extensive data handling capabilities. Banks will need to ensure data accuracy for regulatory submissions and pass ongoing P&L attribution and back testing for model validation, a process requiring significant internal resources or third-party support.
“FRTB’s regulatory testing and model validation requirements necessitate robust internal systems, with many banks turning to advanced analytics and automation to meet these demands efficiently.” - Source: Deloitte UK, 2024
Cross-Border Regulatory Challenges: FRTB’s global implementation presents unique challenges for cross-border institutions, as timelines and interpretations vary. For example, the EU delayed FRTB to January 2026 to align with other jurisdictions and avoid competitive imbalances.
“The EU’s delayed FRTB implementation reflects the need for a level playing field across global markets, ensuring consistency for internationally active banks.” - Source: European Commission, 2024
Effective FRTB implementation requires expertise across risk management, data analytics, and regulatory compliance, as well as cross-departmental collaboration to address stringent regulatory demands.
Market Risk Analytics Proficiency: Proficiency in risk factor sensitivity analysis and modelling is essential, as banks must calculate risk-weighted assets (RWAs) with precision. Teams should be adept in both SA and IMA methodologies to adjust to regulatory testing standards.
Advanced Data Management and Validation Skills: FRTB compliance demands high-quality data handling, especially for IMA back testing and P&L attribution. Banks will benefit from data governance frameworks that ensure accuracy and meet regulatory expectations for model validation.
“Enhanced data analytics capabilities are critical for banks to handle the stringent validation and reporting standards under FRTB’s internal models approach.” - Source: PwC UK, 2024
Regulatory Compliance and Audit: Expertise in regulatory audit and risk-based compliance is crucial. FRTB mandates annual validation of IMA by internal audit or independent third parties, underscoring the importance of skilled compliance teams familiar with both internal and external review processes.
Achieving FRTB compliance requires banks to strategically prepare for both standardised and model-based approaches, balancing capital costs with operational resilience.
Evaluate SA and IMA Suitability: In Q1 2025, banks should assess the feasibility of adopting IMA by reviewing costs, operational readiness, and data management capabilities. This decision will determine their compliance pathway and impact their capital planning strategy.
Invest in Robust Data Systems and Validation Tools: Given the intensive data requirements of FRTB, banks should prioritise upgrading data management infrastructure, particularly for IMA validation. Automation in data analytics can improve accuracy and efficiency in P&L attribution and back testing.
Cross-Functional Training and Compliance Coordination: Cross-departmental coordination between compliance, risk management, and IT is essential for FRTB adherence. Specialised training will equip teams to implement SA and IMA requirements effectively, meeting the new standards for 2025.
“Cross-departmental training in FRTB standards enhances efficiency, equipping teams to handle complex risk assessments and model validations effectively.” - Source: Linklaters Financial Regulation Insights, 2024

2025 Timeline for Implementation

Q1, Jan-Mar: Conduct SA vs. IMA cost-benefit analysis and set up boundary definitions for trading and banking books

Q2, Apr-Jun: Begin implementing data management upgrades and initiate P&L attribution testing for IMA compliance

Q3, Jul-Sept: Train compliance teams on SA and IMA requirements and conduct cross-border compliance reviews

Q4, Oct-Dec: Finalise model validation processes, complete regulatory submissions, and ensure adherence to both SA and IMA standards

Summary Key Takeaways

Primary Compliance Targets: Institutions should focus on implementing the revised standardised approach (SA) or internal models approach (IMA) as well as preparing for enhanced boundary compliance between trading and banking books
Capital and Cost Considerations: FRTB compliance will increase capital and operational costs, especially under the IMA’s data-heavy validation requirements. Early planning will help banks manage these costs effectively
Essential Skills for Success: Expertise in market risk analytics, data governance, and regulatory compliance will be key for implementing FRTB’s advanced standards by the 2025 deadline

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IFD/IFR (Investment Firms Directive/Regulation)

LIBOR Transition

Source: PwC Luxembourg, 2024

IFD/IFR:

(Investment Firms Directive/Regulation) Continued Capital and Liquidity Adjustments for Smaller Investment Firms

In 2025, the EU’s Investment Firms Directive (IFD) and Investment Firms Regulation (IFR) continue implementing capital and liquidity standards tailored for investment firms based on firm size and complexity. Under IFD/IFR, investment firms are categorised into three classes, each with specific capital and reporting obligations, providing a risk-sensitive framework that aligns prudential requirements proportionately with firm activity.

The IFD and IFR frameworks were introduced to replace the one-size-fits-all approach of the Capital Requirements Directive (CRD) for investment firms.

The new structure offers a differentiated regulatory regime for investment firms based on their business model, size, and level of systemic risk.

By focusing on proportionality, IFD/IFR supports market stability by setting capital and liquidity requirements that better match firms’ unique risk profiles.

Focus for 2025

The final phase of IFD/IFR implementation continues to mandate differentiated requirements for Class 1, 2, and 3 firms. Each class faces unique thresholds for capital reserves, reporting, and liquidity based on risk exposure, with compliance enforced by updated EBA reporting templates (click image to enlarge - class breakdown diagram for Capital, Liquidity, and Governance Requirements).

“The IFR/IFD frameworks offer a proportionate approach, allowing small and medium-sized firms to meet regulatory demands without excessive capital burdens.”

Key Components of IFD/IFR Changes

IFD/IFR structures firms into three classes, each with tailored capital, liquidity, and reporting requirements to align with firm-specific risks.

Class 2 Firms (Medium-Sized Firms)

Class 2 firms are subject to the IFD/IFR’s own capital and liquidity rules, primarily calculated through K-factors. These metrics evaluate risk levels in areas like trading volumes and client exposure, providing a customized approach to capital that aligns closely with operational risks.

Overview and Relevance of IFD/IFR

Purpose and Strategic Importance

The IFD/IFR frameworks aim to enhance the resilience of investment firms by ensuring they maintain adequate capital reserves in proportion to their risks. The directive’s K-factor metrics allow regulators to assess capital requirements based on a firm’s specific exposure areas, such as client assets, trading volumes, and market interconnections.

This approach helps to prevent systemic risk accumulation in firms without the extensive prudential needs of larger banking institutions.

Class 1 Firms (Systemically Important Firms)

Large firms posing systemic risks are designated Class 1, requiring them to adopt CRD standards akin to large banks. These firms must maintain substantial capital based on risk-weighted assets and are subject to stringent governance and risk management requirements to mitigate systemic impacts.

“The IFR/IFD regime uses K-factors to tailor capital requirements, enabling mid-sized investment firms to maintain capital that aligns closely with the specific risks posed by their operational and market activities.”

Source: Arthur Cox LLP

Class 3 Firms (Small and Non-Interconnected Firms)

Small firms with minimal systemic impact fall under Class 3, facing the least stringent requirements. Their capital thresholds are lower, and they are exempt from extensive governance and reporting obligations, allowing them to focus resources on growth rather than compliance.

The tailored nature of IFD/IFR means that firms must align their capital, liquidity, and governance practices with specific requirements based on their classification.
Capital and Liquidity Adjustments by Class: Each firm classification under IFD/IFR has its own approach to capital requirements. Class 2 firms, for example, must calculate their capital needs using K-factors that focus on trading volume, client funds, and other risk metrics. Class 1 firms must adhere to CRD-level capital reserves, while Class 3 firms face minimal requirements. This tiered approach allows institutions to prioritize capital in line with their actual risk levels.
Immediate Action Step: Class 2 firms should assess K-factor calculations early in 2025, as these measurements will shape minimum capital requirements and provide a basis for liquidity planning.
Enhanced Reporting and Disclosure Requirements: IFD/IFR mandates regular reporting to demonstrate ongoing compliance. Class 2 firms, in particular, must submit data on K-factors and liquidity ratios using the European Banking Authority’s (EBA) revised templates. Accurate, timely reporting is critical to meeting these obligations and avoiding regulatory penalties.
Governance and Risk Oversight for Class 1 and 2 Firms: Class 1 and 2 firms must implement extensive governance practices, including risk management policies, board accountability, and adherence to European governance codes. For smaller, Class 3 firms, governance requirements are streamlined, emphasizing only essential risk oversight and liquidity management.
IFD/IFR implementation requires expertise in regulatory compliance, capital management, and data handling, particularly for Class 2 firms managing K-factor calculations and reporting.
Capital and Liquidity Management Proficiency: Firms must ensure teams understand K-factor-based capital assessments and liquidity buffer requirements. This expertise will be especially valuable for Class 2 firms that need to maintain sufficient capital and liquidity reserves directly linked to operational exposure.
"The new prudential regime requires investment firms to have robust capital and liquidity management frameworks in place, with processes that align capital reserves and liquidity with firm-specific risk exposures." - Source: EBA, 2024
Data Management and Regulatory Reporting: Compliance teams need to manage and report K-factor data accurately to meet EBA’s disclosure standards. Familiarity with EBA templates and the XBRL data format, a standard for European regulatory submissions, will support smooth regulatory reporting.
Governance and Compliance Skills: Class 1 and 2 firms require governance teams well-versed in European corporate governance codes and risk management practices. Effective oversight will be essential for maintaining alignment with the enhanced governance standards under IFD/IFR.
IFD/IFR compliance calls for a strategic approach to capital allocation, governance, and reporting to ensure firms meet regulatory demands efficiently.
Early Assessment of K-Factor Metrics for Class 2 Firms: Class 2 firms should conduct early K-factor assessments to ensure they align with IFD/IFR’s capital and liquidity requirements. Accurate K-factor calculations will inform capital strategies and establish a basis for compliance reporting.
Invest in Scalable Reporting Technology: Firms should consider scalable solutions for data collection and regulatory reporting. Systems capable of automating K-factor tracking, liquidity metrics, and XBRL submissions will support efficient compliance, especially for Class 2 firms with regular reporting obligations.
Governance Training for Class 1 and 2 Firms: As IFD/IFR governance standards increase for larger firms, Class 1 and 2 firms should invest in governance training to equip board members and senior leaders with a strong understanding of IFD/IFR requirements.
“Investment firms are expected to adopt robust governance frameworks, incorporating training and oversight to ensure that leadership and management bodies are well-prepared for regulatory compliance and aligned with prudential standards.” - Source: EBA Roadmap, 2024

2025 Timeline for Implementation

Q1, Jan-Mar: Begin K-factor reviews and assess liquidity reserves for Class 2 firms

Q2, Apr-Jun: Implement scalable reporting systems, initiate governance training for Class 1 and 2 firms

Q3, Jul-Sept: Conduct compliance testing: K-factor calculations, finalise data management upgrades

Q4, Oct-Dec: Complete final compliance checks and prepare EBA submissions to confirm full adherence to IFD/IFR standards

Summary Key Takeaways

Primary Compliance Targets: Firms should focus on meeting capital and liquidity thresholds, with Class 2 firms concentrating on accurate K-factor reporting and Class 1 firms aligning with CRD-level standards
Operational and Governance Adjustments: IFD/IFR’s tailored framework means that firms must establish reporting and governance practices that match their risk and operational profiles
Required Expertise: Knowledge in capital management, regulatory reporting, and governance is critical for meeting IFD/IFR’s differentiated requirements

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IFD/IFR (Investment Firms Directive/Regulation)

LIBOR Transition

Source: Bank of England, 2024

LIBOR Transition:

Shifts to Alternative Reference Rates (ARRs): SONIA and SOFR

By the end of 2024, LIBOR has fully ceased, including the remaining synthetic rates used for legacy contracts. Firms are now required to use alternative reference rates (ARRs) like SONIA (UK) and SOFR (US), which are transaction-based and reduce systemic risk.

As firms complete their transition to ARRs, they must adapt systems and processes to align with new rate methodologies and manage any remaining contract adjustments.

Overview and Significance of LIBOR Transition

The London Interbank Offered Rate (LIBOR) served as a critical benchmark for global financial markets, but its vulnerabilities became apparent during the 2008 financial crisis.

The transition away from LIBOR has been a multi-year global initiative to replace it with more stable, transaction-based alternative reference rates (ARRs), such as SONIA (Sterling Overnight Index Average) in the UK and SOFR (Secured Overnight Financing Rate) in the US. As of 2025, these ARRs have become the standard for contracts once linked to LIBOR, requiring firms worldwide to adapt their systems and practices accordingly.

Purpose and Strategic Importance

The LIBOR transition aims to stabilise global financial markets by moving away from rate calculations based on bank-submitted estimates to rates grounded in real transactions. This shift mitigates systemic risk, particularly in interest rate-sensitive sectors, and ensures a robust foundation for floating-rate contracts, including loans, bonds, and derivatives.

“All five LIBOR panels have now ended… RFRs [like SONIA and SOFR] provide robust, transaction-based rates that can be used across the full range of assets, making floating rate markets safer.”

Focus for 2025

With LIBOR now fully phased out, firms are expected to use SONIA, SOFR, and other ARRs for any outstanding legacy contracts and future transactions. Regulators caution firms to avoid adopting credit-sensitive rates (CSRs) as replacements, to prevent replicating LIBOR-like risks (click timeline to enlarge).

Key Components of LIBOR Transition

The LIBOR transition introduces several critical adjustments, from system adaptations to updated interest rate methodologies for calculating payments on new and legacy contracts.

End of Synthetic LIBOR

The last synthetic LIBOR rates ceased in late 2024. These synthetic rates served as a bridge for contracts that required more time to transition, giving institutions a temporary solution for complex contract updates. With their cessation, firms must complete remaining transitions to ARRs.

“SONIA and SOFR now serve as the benchmarks for floating-rate instruments, replacing LIBOR with rates grounded in real transactions, enhancing market stability.”

Source: Financial Stability Board, 2024

Alternative Reference Rates (ARRs)

SONIA (UK) and SOFR (US) are the primary ARRs, differing from LIBOR in that they are backward-looking and based on real transactions. SONIA compounds daily, while SOFR includes variations like the Term SOFR, designed to support loan markets.

Regulatory Guidance on ARR Use

Regulators in the UK and US emphasize that firms should use well-established ARRs like SONIA and SOFR rather than exploring newer credit-sensitive rates, which may reintroduce similar risks that LIBOR posed.

The LIBOR transition has substantial implications for financial institutions, especially regarding contract updates, data management, and internal risk models.
System and Contract Updates: Transitioning from LIBOR to ARRs requires banks to update legacy contracts, replacing LIBOR references with SONIA, SOFR, or other RFRs. Systems must be updated to handle new rate calculation methods and payment structures, particularly for backward-looking rates like SONIA.
Immediate Action Step: Conduct a review of remaining legacy contracts to confirm that all LIBOR references are updated and that ARRs are correctly integrated across product lines and internal systems.
Operational Adjustments and Compliance: Firms now need to manage payments based on daily compounded rates, requiring adjustments in data handling, calculation methodologies, and payment processing. This impacts all products previously based on LIBOR, including loans, derivatives, and bonds.
“The shift to ARRs like SOFR and SONIA necessitates significant operational adjustments, especially in handling compounded rates for legacy contract transitions.” - Source: Bank of England, 2024
Regulatory Compliance and Market Risk Management: Regulators are closely monitoring firms’ transition progress, particularly in ensuring that ARRs are integrated without introducing instability. Firms must ensure that new contracts align with regulatory expectations, minimising reliance on legacy rates that could elevate systemic risk.
Effective LIBOR transition management calls for expertise in risk management, data analytics, and regulatory compliance to ensure smooth adaptation to SONIA, SOFR, and other ARRs.
Contract and Risk Management Proficiency: Contract specialists and risk managers play a key role in adapting legacy contracts and understanding ARR risks. These teams must be proficient in backward-looking rate calculations and monitoring daily compounded interest rates.
Data Management and Analytics Expertise: The shift to transaction-based ARRs, particularly those that compound daily, increases the demand for accurate, frequent data handling. Data teams must be skilled in real-time data processing, given the need for continuous rate calculations.
Regulatory Compliance and Audit Skills: Compliance teams require familiarity with ARR-specific guidelines and regulatory frameworks across jurisdictions. They will also need to perform regular audits to confirm that contract updates meet legal and operational standards.
As institutions finalise the LIBOR transition, proactive planning and strategic updates to systems and processes will help ensure compliance and stability.
Conduct a Comprehensive Legacy Contract Audit: Financial institutions should complete thorough audits of legacy contracts to confirm full ARR integration. Ensuring accuracy in payment structures, compounded rate calculations, and contract language helps prevent errors and minimises regulatory risks.
Enhance Systems for ARR Calculation and Reporting: Investment in ARR-compatible systems is essential. For accurate and timely calculations, firms should implement tools that support the unique structures of SONIA and SOFR, including daily compounding and backward-looking calculations.
Establish ARR Training Programs: Cross-departmental training ensures that all teams - from contract managers to compliance staff - are up to date on ARR methodologies, calculation processes, and regulatory standards.
“The ARRC supports the use of SOFR Term Rates in business loans where adapting to an overnight rate could be more difficult, providing a structured transition tool for legacy LIBOR contracts and new issuances alike.” - Source: Federal Reserve Bank of New York

Caspian One & LIBOR - client story

To address the global shift from LIBOR, a leading Canadian financial institution partnered with Caspian One to lead a multi-year LIBOR transition program. With an allocated budget of £20 million, Caspian One’s expert Program Manager guided the initiative across Canada and the Caribbean, covering six critical workstreams: Contracts, Communications, Operational Readiness, Product Strategy, Risk Management, and Finance/Treasury.

Our team facilitated the update and digitisation of over 50,000 systems, ensured rigorous documentation remediation, and engaged over 200 senior stakeholders. This collaborative approach enabled the client to achieve full operational readiness, meet essential regulatory milestones, and ensure a smooth shift to new interest rate benchmarks, positioning them confidently for a post-LIBOR landscape.

Summary Key Takeaways

Primary Compliance Targets: The completion of the LIBOR transition requires firms to integrate ARRs like SONIA and SOFR across all financial products, with regulators expecting full compliance in payment structures and contract updates
Operational Adjustments: The transition demands substantial system updates, data handling improvements, and risk recalibration. Firms must be able to manage compounded rates, backwards-looking interest calculations, and align with ARR-specific regulatory guidelines
Essential Expertise: Skills in data analytics, contract management, and regulatory compliance are crucial for managing ARR transitions effectively

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IFD/IFR (Investment Firms Directive/Regulation)

LIBOR Transition