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An Industry Update on FRTB Implementation in APAC

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Implementation of Fundamental Review of the Trading book (FRTB) regulation across APAC raises many challenges, not least fragmentation of the regulation across jurisdictions in the region, fulfilling complex requirements of the regulation, sourcing necessary data, and selecting the internal or standarised model approach for specific trading desks.

While the challenges are significant, and FRTB has been cited as the largest market risk overhaul in the past two decades, it also offers opportunities for APAC banks to modernise technology infrastructure, change the shape of the business, and look for competitive advantage.

A recent webinar hosted by A-Team Group and sponsored by Refinitiv, an LSEG business,  and ICE, FRTB Implementation in APAC: An industry update, discussed these issues and more. The webinar was moderated by A-Team editor Sarah Underwood and joined by expert speakers Dr. Xiao Xiao, Head of Derivatives and Regulation APAC, at ICE Data Services; Fausto Marseglia, Head of Product Management, FRTB and Regulatory at Refinitiv, an LSEG business; Gaël Robert, Head of Global Risk Analytics at Mizuho; and Vishal Kapoor, Sector Team Lead & IBG Business Lead, Group Research, and Executive Director at DBS Bank.

Progress on FRTB in APAC

Setting the scene, an opening audience poll question asked how much progress webinar delegates had made in the implementation of FRTB in APAC. Answers were split, with 75% of the delegates noting that they have made a fair amount of progress, although there is still a little to do, and 25% saying they have made some progress, but still have a lot to do.

The webinar speakers suggested the divided opinions could be a reflection of varied FRTB implementation dates, as well as bank approaches to using either the more demanding Internal Model Approach (IMA) to compliance or the Standardised Approach (SA).

In terms of FRTB implementation timelines, Singapore, Hong Kong, China and Japan are expected to go live in 2024, with Australia following in 2026. As well as a staggered timeline, there is fragmentation in how jurisdictions are approaching FRTB requirements, with China, in particular, taking a more conservative approach and planning to report aspects of the regulation more frequently than set out in the suite of BCBS capital rules that underpin the regulation.

As one speaker put it: “The fragmentation of rules and deadlines is posing concerns about a level playing field, which is not ideal.”

Challenges of FRTB

A second audience poll on the challenges of FRTB, showed 56% of delegates citing sourcing all required data and data quality as their top challenge, 44% the Risk Factor Eligibility Test (RFET) that requires a certain amount of ‘real’ price data to accurately model risks and allow desks to run the IMA, 33% selecting the IMA or SA approach, and 11% non-modellable risk factors (NMRFs) that do not meet the modellable criteria and must be capitalised using a stress scenario.

The speakers acknowledged the poll results, noting the need to source more data both internally and externally, integrate it with existing systems, and ensure data consistency from front to back office. “This is a challenge in itself, and FRTB is a project in itself,” said a speaker. The difficulties of selecting whether to run an IMA or SA approach on individual trading desks were reflected in delegate responses on the RFET and NMRFs, which are elements only of the IMA.

The challenges of achieving an IMA approach and reducing capital requirements are significant. Referring to Europe, a speaker noted ‘it was the big ambition but not necessarily the reality in the early days’. Another commented: “If a bank wants to use the IMA, it has to invest a lot of money. And it has to have specialized skills to work on the models. What we are seeing, and this is a problem in many cases, is that savings on capital requirements are not always there.”

The business

The burden of implementing FRTB is also altering the shape of business at some banks, as the IMA or SA are allocated to individual trading desks depending, in great part, on portfolios. “We need to approach FRTB as a business problem, not a regulatory problem. The intention behind the regulation is to run an efficient and risk-free trading business. So, a top-down strategy works well in terms of organising the desks, as in some banks desks have been organised depending on who is capable of doing what. Capability is now second, what business is run on the desks is first.”

The business must also consider performance measurement as capital costs are assigned to each desk, and deal with issues such as desks in different locations and, perhaps, with slightly different regulatory requirements.

Transformation

The sheer volume of data required for FRTB and the complexity of getting compliance right mean many banks are using the regulation as a catalyst for transformation or an opportunity to rethink data strategy. Benefits resulting from compliance include capital optimisation, a better view of risk, improved transparency on the best route to trade and who to trade with, opportunities to modernise internal processes and monetise data management infrastructure, and using investment in FRTB for other use cases.

Circling back to FRTB compliance timelines, a speaker concluded: “What really matters is how you cross the finishing line. You can cross the line being exhausted and grumpy, or you can cross it being fresh and smiling. We want to cross the finishing line fresh and smiling, to do that, you need to start early.”

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