info@valkeris.com
FRTB
CURRENT STATE
FRTB standards require access to comprehensive transaction data for use in Non Modellable Risk Factor (NMRF) assessment hence the importance of capturing a large percentage of OTC derivative transactions then processing interest rate, credit, equity and FX derivatives on a global basis. Banks can benefit from utilising and supplementing this data to demonstrate the ability to model across all asset classes.
FRTB is mainly an issue to do with regulatory reporting. BCBS 352 covers a broad range of topics and processes that apply to various departments throughout the bank. The most immediate and prominently discussed effects indeed are the regulatory reporting requirements and the corresponding demands from IT in implementing new fields and interfaces required for the derivation of the market risk capital charge. However, the framework also includes explicit organisational requirements which originate from the trading and risk control units. Among these are specific rules for the setup of the trading desk structure as well as new pillar II requirements for the risk management of trading positions. Additionally, the new banking book / trading book boundary and its limited permeability in terms of internal risk transfers may put entire trading strategies and business lines at risk due to higher capital costs.
OBSERVATION PERIOD
With the observation period for FRTB-compliant reporting beginning in 2019, there are roughly two years left for tackling the major workload. Within this time frame, there are various pressing tasks to be performed:
- The relevant portfolio – i.e. the new trading book according to BCBS 352, needs to be defined and the application for special treatment of specific positions with regard to the trading book / banking book boundary has to be evaluated.
- The technical implementation, including new interfaces between front office and/or risk controlling systems and the regulatory reporting engine, has to include roughly 45 new fields that are not yet in use in the regulatory reporting.
- The restructuring of the trading floor in line with the new organisational requirements needs to be completed by the end of 2018.
- The regulator requires up to one year’s time for the validation and approval of the desk structure and the trading book / banking book boundary
SCENARIO
Typically Banks operate with the following Market Risk functionality:
- Enterprise risk platform including stores for trade, static and market data.
- Historical, Parametric and Monte Carlo VaR and sensitivity calculations.
- Extensive pricing library covering all asset classes.
- VaR investigation/drill down via market risk reporting cube.
- Stress testing.
- VaR back testing.
- P&L explain.
- Trade and market data correction and VaR re-runs.
- Powerful what-if capabilities.
- Workflows for corrections and operational efficiency.
- Integration tools to accept inputs from a variety of bank systems
PROPOSITION
Our offering is aimed at leveraging a bank’s existing infrastructure and is comprised of four modular, integrated components:
- FRTB Data Service: transaction and historical pricing data sets to supplement banks’ data for meeting modellability requirements
- Risk Factor Utility: a hosted utility for managing and deriving risk factors and generating scenarios for backtesting, P&L attribution and Expected Shortfall
- Analytics Risk Engine: a market risk calculation engine and stress testing framework
- FRTB Studio: a rapidly deployed, impact analysis tool which combines full drill down and intraday views of risk and capital measures across CVA (Credit Valuation Adjustment) and Market Risk (for Standard Approach and Internal Model Approach)
BENEFITS
Scalable Analytics calc engine to alleviate performance concerns associated with greater computational demands of FRTB.
In-memory aggregation technology which helps with aggregation-heavy FRTB calculations especially on on large data sets.
Complete market risk production workflows tailored for FRTB including backtesting, P&L attribution test, market data management, approval and overrides
DEPLOYMENT
- Component-based, can be deployed to deliver a tailored FRTB solution with existing infrastructure.
This solution can grow with the business to capture FRTB-CVA capital, Counterparty risk, XVA pricing and initial margin. - Low risk solution given the tight timelines for FRTB compliance (2019)