As we have discussed in previous blogs, the new Fundamental Review of Trading Book (FRTB) rules published by the Basel Committee on Banking Supervision (BCBS) pose a number of implementation challenges to banks with a significant presence in capital markets. 

Banks that have not taken steps toward implementation should do so soon, both to comply with FRTB requirements and to allow for a smooth transition to the new regulatory environment.  Banks should be constrained, however, to comply with the new FRTB requirements while reducing the implementation challenges and strengthening their market risk capital requirements.  The biggest single problem, we believe, lies in overcoming the data challenges arising from the new rules.  Three data issues, in particular, are fundamental to an effective implementation of the FRTB framework: 

  1. Risk Sensitivities Sourcing.  The rules for standardized approach (SA) and internal models-approach (IMA) advocate both the use of risk sensitivities and consistency in their calculation which, for the first time, should be the same as those used for the pricing models or instrument prices in the profit and loss statement that management receives.1 
  2. Market Data Sourcing. Banks need to source pricing information for risk factors to be eligible for inclusion in IMA calculation. These market prices need to be “Real”and from observable transactions.2 The rules specify conditions which need to be fulfilled for risk factors to be considered modelable.3 Due to these restrictions, and to the limited availability of pricing information, market data should be a high hurdle for the banks.
  3. Risk Calculator Data Gaps.  Understanding the incremental data requirements versus the existing data calculation models and calculators is crucial, as FRTB has introduced changes to the way risk charge is calculated under both the Standardized Approach (SA) and the Internal Model Approach (IMA).4

Each data issue has multiple ramifications and sub-issues for banks to resolve.  In future blogs, we will explore each issue in greater detail. 

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. Real prices – Under risk factor analysis, each of the risk factors need to have 24 observable price points over a year. These observable price points have to be “Real” which is defined as:
    • It is a price at which the institution has conducted a transaction
    • It is a verifiable price for an actual transaction between other arms-length parties; or
    • The price is obtained from a committed quote.
    • If the price is obtained from a third-party vendor (with some conditions to accepting the vendor data)“Minimum capital requirements for market risk.” Basel Committee on Banking Supervision, January 2016. Access at:http://www.bis.org/bcbs/publ/d352.htm
  1. Ibid
  2. Accenture analysis and “Minimum capital requirements for market risk.” Basel Committee on Banking Supervision, January 2016. Access at:http://www.bis.org/bcbs/publ/d352.htm

 

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