Navigating Regulatory Uncertainty in 2025

As we move further into 2025, regulatory demands will remain a pressing concern for capital markets participants. 

Firms across the globe are poised to continue contending with complex, evolving regulations such as the Markets in Financial Instruments Regulation (MiFIR) and the Fundamental Review of the Trading Book (FRTB). These frameworks introduce updated rules, diverse go-live timelines, and substantial compliance challenges. 

In this white paper, we explore how financial institutions can navigate this complex terrain through adopting proactive risk management strategies and leveraging advanced technology for addressing evolving regulatory requirements. 

Topics covered include: 

• Navigating evolving regulations, while anticipating potential shifts due to U.S. policy changes
• Overview of key regulations requiring attention this year, including MiFIR,  FRTB and Basel III/IV
• Compliance challenges, including sourcing reliable data, building robust calculation infrastructure, and ensuring transparent regulatory reporting
• Strategic responses to regulatory challenges, including leveraging advanced models, enhancing SIMM and FVA frameworks, and investing in technology solutions
• Key considerations for financial institutions to stay resilient to regulatory change in 2025

FAQs

How should banks prepare their risk infrastructure for FRTB compliance in 2025 when only 10 institutions globally have committed to the Internal Model Approach?

The challenge with FRTB is not understanding the regulation — it is building the analytics infrastructure to qualify and stay qualified for the Internal Model Approach. Only 10 banks globally have committed to IMA implementation, according to Numerix, because supervisory approval can be revoked at any time if a bank fails required risk tests. The operational consequence of falling back to the Standardized Approach is severe: SA capital charges run 1.5x to 1.8x higher than IMA, according to SIFMA analysis. Banks that invest in robust, auditable risk calculation infrastructure reduce both their initial qualification burden and their ongoing risk of model failure that triggers mandatory SA reversion.

What is the difference between the FRTB Internal Model Approach and the Standardized Approach for trading book capital requirements?

Under FRTB, banks must choose between the Standardized Approach and the Internal Model Approach for market risk capital. The SA applies fixed regulatory factors regardless of a bank's actual portfolio risk profile. The IMA uses the bank's own models to calculate risk-sensitive capital requirements — and where it is approved, capital charges run 1.5x to 1.8x lower than SA equivalents by risk class, according to SIFMA analysis cited by Numerix. The operational difference is significant: IMA requires daily calculations, supervisory approval, and continuous model validation. Banks with the analytics infrastructure to sustain IMA compliance carry materially lower capital costs as a structural advantage.

Will U.S. bank deregulation under the Trump administration reduce FRTB and Basel compliance requirements for capital markets firms?

U.S. deregulation is unlikely to roll back existing regulations like FRTB and Basel requirements in any material way, according to Stuart Plesser, Senior Director monitoring U.S. banks at S&P Global, speaking to Global Finance Magazine in December 2024. Policy changes under a new administration primarily affect regulations still in development — not implemented frameworks. For capital markets firms, this means FRTB, MiFIR, and Basel III/IV compliance investments are not discretionary hedges against political risk. They are operational requirements that will remain in place regardless of U.S. political direction. Firms that paused compliance programs in anticipation of deregulation are likely behind their peers.

How does Funding Valuation Adjustment modeling help banks meet Basel III capital and liquidity requirements?

FVA accurately incorporates the cost of funding derivative positions into pricing and risk management — a critical requirement for firms managing uncollateralized or partially collateralized trades. Under Basel III, banks must maintain compliance with the leverage ratio, liquidity coverage ratio (LCR), and net stable funding ratio (NSFR), according to Numerix. FVA directly addresses these requirements by reflecting the true funding costs embedded in derivative positions, enabling banks to optimize their funding strategies, improve capital efficiency, and reduce regulatory capital charges. Firms without precise FVA modeling are allocating capital sub-optimally and likely overstating derivative profitability.

How much higher are FRTB Standardized Approach capital charges compared to the Internal Model Approach, and what does this cost a bank operationally?

FRTB SA capital charges exceed IMA charges by 76% and 50% by risk class — representing a ratio of 1.5x to 1.8x — according to SIFMA analysis cited by Numerix. For a bank running a substantial trading book, this differential is not theoretical: it translates directly into locked-up regulatory capital that cannot be deployed. The 10 banks globally that have committed to IMA do so because the capital savings justify the operational burden of maintaining supervisory approval. For most banks, the question is not whether to pursue IMA — it is whether their analytics infrastructure can sustain the daily calculations and model validation required to keep their approval intact once granted.

How does the ISDA SIMM version 2.7 update in 2024 affect initial margin requirements for OTC derivatives desks?

ISDA updated its Standard Initial Margin Model to version 2.7 in 2024 and expects market participants to adopt new versions promptly, according to Numerix. SIMM governs the calculation of initial margin on uncleared OTC derivatives — a material balance sheet item for any bank or asset manager with a derivatives book. Version updates typically reflect changes in risk factor sensitivities or calibration methodologies, meaning existing SIMM implementations can produce incorrect margin calculations if not updated. In 2025, the European Banking Authority outlined plans to enhance data infrastructure and introduce a central validation function to strengthen SIMM data management, adding a supervisory layer to what was previously a bilateral compliance requirement.

How does MiFIR affect OTC derivatives reporting obligations for capital markets firms in 2025?

MiFIR's 2024 updates strengthened market data transparency requirements and introduced more stringent reporting guidelines and trading obligations for OTC derivatives, according to Numerix. Firms must ensure their data infrastructure can meet real-time reporting requirements and the updated trading obligations that MiFIR imposes on both buy-side and sell-side participants. Unlike FRTB — which primarily affects banks' capital calculations — MiFIR's reporting obligations apply across the market structure, including asset managers and hedge funds with derivatives exposure. Compliance requires data systems that can capture, clean, and report trade-level data at the frequency and format MiFIR specifies, without manual intervention that introduces reporting latency or errors.

How does cloud-based analytics infrastructure address the three core challenges of FRTB and Basel compliance?

Capital markets firms face three structural compliance challenges: sourcing accurate risk factor data, building calculation infrastructure that can handle large volumes of complex computations, and producing outputs that are both accurate and explainable to regulators, according to Numerix. Cloud-based analytics platforms address all three simultaneously: they provide scalable compute for daily FRTB calculations, integrate with market data feeds for risk factor sourcing, and generate auditable outputs that regulators can verify. Firms running FRTB calculations on in-house systems that cannot scale during peak reporting periods face model validation failures — and the SA capital penalties that follow.

What is the operational consequence for a bank whose FRTB Internal Model Approach approval is revoked by a regulator?

If a bank's internal model fails to comply with IMA standards — for example, failing the required risk tests — the regulator can compel it to switch to the Standardized Approach, according to Numerix. The capital consequence is immediate: SA charges are 1.5x to 1.8x higher than IMA charges by risk class, per SIFMA analysis. There is no grace period. A bank running a large fixed income or derivatives trading book could see its regulatory capital requirement increase by tens of basis points overnight on that book's RWA — a material earnings impact that makes IMA approval maintenance an ongoing operational priority, not a one-time implementation project.

How does integrating cross-functional risk, compliance, and technology governance help firms navigate 2025 regulatory uncertainty?

The core challenge of 2025's regulatory environment is not any single framework — it is the combination of FRTB's capital requirements, MiFIR's reporting obligations, Basel III/IV's liquidity standards, and SIMM's margin methodology, all running simultaneously on overlapping infrastructure, according to Numerix. Firms that manage these requirements through siloed risk, compliance, and technology teams face integration failures: a model change for FRTB can affect FVA calculations; a data infrastructure update for MiFIR can affect SIMM inputs. Integrated governance structures that coordinate changes across functions reduce the risk of non-compliance arising from unintended interactions between regulatory systems — the most common failure mode in multi-regulation environments.