In our previous blog, we discussed the new rules introduced by the Basel Committee on Banking Supervision (BCBS)  aimed at strengthening banks’ trading frameworks.  These rules, popularly known as Fundamental Review of the Trading Book or FRTB, address issues related to the capitalization of banks’ trading books, thus discouraging capital arbitrage between banking and trading books, and internal risk transfers. 

With the adoption of FRTB, banks have until the end of 2019 to reach compliance with new rules in these key areas:

  • P&L (Profit and Loss) attribution test – P&L attribution test helps evaluate the efficiency of the internal models and their ability to capture all the relevant risks impacting the portfolio. This is a new requirement and each trading desk has to independently pass this test. If a desk experiences breaches four or more times, then it will be put on standardized approach methodology.1
  • Risk factor eligibility (modelable vs non-modelable) – Each of the risk factors which banks model will need to undergo an eligibility check, meaning that the banks will need to obtain real prices for them.2 With this measure, we believe that BCBS aims to strengthen the internal models to include only those risk factors which will have consistent interpretation by the banks. This will also eliminate any ad-hoc risk factor inclusion to help reduce the capital impact.
  • Data requirements and risk measures at desk level – FRTB rules are explicit in proposing the reporting structure of market risk to management and regulators will be checking this at the trading desk level3.  As we see it, banks will also need to obtain the data and run their risk calculations at a trading desk level and to adjust their data sourcing and calculation strategies accordingly.

The implementation of these rules pose significant challenges to banks as they seek to achieve compliance.  Some major areas of focus include strengthening existing market risk infrastructure and technology capabilities; positioning additional computational capacity to support FRTB calculations; and planning for additional complexity in operations and processes due to changes in their desk structures (although we believe that some banks may seek to incorporate this into ongoing Volcker Rule implementation activities) and the standardization of data sources. 

If we examine the FRTB rules and their impacts on business functions within banks, we will observe that majority of FRTB rules have a direct or indirect impact on banks’ data management strategies (see Figure 1). Solving for data challenges will constitute a big portion of implementation efforts of the banks as they mobilize their resources to commence compliance efforts.

Figure 1. FRTB Impact Analysis Framework

Source: Accenture Analysis

We will continue to examine some of the data issues confronting banks in the next few blogs of this series.

For more information see SlideShare deck: “Fundamental Review of the Trading Book (FRTB) – Data Challenges


References

  1. “Minimum Capital Requirements for Market Risk,” Basel Committee on Banking Supervision, January 2016. Access at: http://www.bis.org/bcbs/publ/d352.htm
  2. Ibid
  3. Ibid

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