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DTCC Solves FRTB Risk Factor Modellability Problems with Pooled Data Solution

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DTCC’s release of a beta version of its FRTB Real Price Observations Data Service provides a pooled data solution designed to help banks within the scope of Fundamental Review of the Trading Book (FRTB) analyse risk factors in line with the regulation’s Risk Factor Eligibility Test (RFET), and review price observation data to understand whether a risk factor is a modellable or non-modellable risk factor (NMRF) under the internal model approach (IMA) to compliance.

The service is cloud-based and was developed by DTCC in collaboration with 35 banks – global systemically important banks (G-SIBs), large regional banks, and every leading bank trading OTC derivatives around the world – that took part in a pilot project. The resulting service maps risk factors to a pool of global derivatives data to test modellability of illiquid instrument classes.

As a leading global reporting vehicle for OTC derivatives, DTCC is well positioned to help banks with FRTB data needs for OTC derivatives and cash instruments data that can act as a proxy.

Tim Lind, managing director and head of DTCC Data Services, says: “FRTB is more a data exercise than a modelling exercise. It is designed to make sure banks understand the risk in their portfolios and capitalise against that. OTC derivatives reform is not just about reporting, but also about understanding risk.

“We are the first entity to bring together global derivatives data in a standardised and normalised database. This has been a huge challenge, but we now have 100 million transactions in the database and have released an app that allows banks to take risk factors and compare them to data in the database to see if there are real price observations for those factors. Banks can test risk factors with real data to see if they are eligible and can be used in an IMA.”

The pilot service is powered by ActivePilot, ActiveViam’s in-memory analytics technology, which was selected as it can handle the scale of queries expected to be made to the database. The pilot will continue until the second quarter of 2020, when DTCC will release a production version of the service using APIs to provide access to the data and support automation.

The database does not include pricing, which is proprietary to firms, but does include observations of trades that have been made, allowing banks to see if there has been enough trading activity around an OTC derivative to consider it modellable. The database initially contains data from OTC derivatives traded in the US and Europe, with DTCC planning to add Asia-Pacific data as banks are authorised to share their data.

Lind says: “This is a game of scale and numbers. The more data there is, the better banks can manage risk factors and eligibility. DTCC has the largest pool of observations on OTC derivatives trading.” Despite this, Lind expects competition in provision of observation data for OTC derivatives to come from data vendors, some of which are also expected to provide price observation data for other asset classes.

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