ISDA Calls for Risk-Appropriate Capital as Basel III Divergence Widens Across Global Markets
As ISDA marks its 40th anniversary, the organization is doubling down on a core principle that has guided the derivatives market since 1985: building a framework rooted in consistency, transparency, and risk sensitivity. In its latest *derivatiViews* update, ISDA warns that disproportionate or inconsistently applied trading book capital requirements can restrict access to funding, limit hedging activity, and heighten vulnerability to external shocks. With the final phase of Basel III reforms approaching, the industry’s focus has turned to ensuring capital rules remain appropriate and aligned across jurisdictions.
The divergence emerging among the US, EU, and UK threatens to complicate this goal. In the US, following extensive industry feedback, with a new version expected in the coming months. Meanwhile, the EU and UK plan to implement the Fundamental Review of the Trading Book (FRTB) at the begin of 2027, although the UK Prudential Regulation Authority has proposed delaying internal models until 2028. These differing timelines highlight growing fragmentation at a moment when consistency is more significant than ever.
ISDA stresses that inconsistent implementation would undermine global market stability. The association argues that effective and risk-sensitive capital requirements must be harmonized to prevent market distortions. With 2026 marking the point at which key Basel III components should be completed, ISDA’s advocacy is focused squarely on urging policymakers to finalize rules that strengthen financial stability without unnecessarily constraining market functioning.
Takeaway
How EU, UK and US Divergence on FRTB Could Impact Internal Models and Market Risk Capital
A central issue in the reform process is the FRTB—a major overhaul of . The framework imposes more stringent testing for , and ISDA notes that this is already driving a sharp decline in banks planning to rely on such models. An ISDA survey revealed that only 10 of 26 banks intend to use internal models under the new conditions, and even then, only for a much narrower set of trading desks. This shift could reduce the alignment between risk and capital and increase reliance on standardized approaches.
The European Commission’s new consultation proposes temporary relief measures, including targeted amendments to both standardized and internal models approaches and the use of a “multiplier” to cap rising capital requirements for three years. While ISDA is collaborating with members to respond to the consultation, the organization argues that enduring, structural answers—not short-term adjustments—are necessary to ensure lasting risk sensitivity.
ISDA has recommended recalibrating key aspects of the FRTB to make internal models more viable. Among the proposed adjustments are changes to the , the risk factor eligibility test, and non-modellable risk factors. ISDA reports productive engagement with US policymakers and is hopeful that revisions to the US Basel III endgame will restore the feasibility of internal models. The group emphasizes that capital frameworks should reflect actual risk, not penalize diversified portfolios through blunt calibration.
Takeaway
Why Completing Basel III With Risk-Sensitive Rules Is Critical for Market Liquidity
As the final components of Basel III come into focus, ISDA stresses that the industry cannot afford regulatory fragmentation or capital regimes that fail to reflect true risk. Deep, liquid capital markets rely on a balance between prudent regulation and the ability of banks to use appropriate models that capture the complexity of their portfolios. Without this balance, banks may be discouraged from offering hedging answers, leading to an increase in systemic vulnerabilities.
The use of internal models under FRTB is especially significant for large, diversified institutions that benefit from risk-sensitive calculations. If regulatory hurdles prevent their use, capital requirements may rise sharply, creating incentives for herd behavior and portfolio concentration—outcomes ISDA warns could reduce market stability rather than enhance it. While the FRTB standardized approach is more risk-sensitive than its predecessors, its calibration still generates steep capital increases for banks with broad exposures.
ISDA concludes that completing Basel III must remain a global priority and that policymakers should commit to capital rules that are genuinely fit for purpose. The association will continue working closely with regulators across the EU, UK, and US to advocate for frameworks that uphold market resilience rather than constrain it. With 2026 approaching, the challenge lies in ensuring the final form of Basel III supports robust trading markets, protects against shocks, and maintains access to hedging across asset classes.
