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The Trials, Tribulations and Potential Benefits of FRTB Compliance

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Fundamental Review of the Trading Book (FRTB) regulation is more prescriptive than former Basel 2.5 market risk requirements, calls for a consistent workflow across risk, finance and the front office, and needs firms to source previously unused and difficult to find data – challenges that many banks have yet to conquer ahead of the January 2020 compliance deadline.

And these are not the only challenges presented by the regulation. A recent A-Team Group webinar discussing how best to lay the groundwork for FRTB compliance also detailed the challenges and implications of using the Standardised Approach (SA) or Internal Model Approach (IMA) for capital calculations under the regulation, and the difficulty of deciding which trading desks should be run under which model.

Webinar Recording: FRTB Laying the groundwork for compliance

On this point, an audience poll asking what approach firms are taking, showed 34% of respondents planning to use both models, but mostly the IMA; 14% using both models, but mostly the SA; 12% using the SA on all desks, 9% using the IMA on all desks; and, at this stage, 31% undecided.

Webinar speaker, Eugene Stern, global risk product manager at Bloomberg, said banks are at different stages of implementation and expects them to shake up their current model allocation to trading desks as a result of the heightened requirements of the FRTB model approaches, particularly IMA. He suggested some banks will use the regulation as a means to upgrade risk infrastructure and target the IMA model, although more are looking at compliance from a capital benefits perspective and will make desk-by-desk decisions on the basis of the capital relief of the IMA approach versus its cost of implementation.

Looking at the data souring and management challenges of FRTB, Hany Frag, senior director, head of methodology and analytics, capital markets risk management at CIBC, described fulfilling both models as ‘highly non-trivial’, noting the need to source data that is not usually used to make capital calculations under the IMA model, and suggesting that new data governance processes will need to be implemented to ensure compliance.

Featured Download: FRTB Laying the groundwork for compliance poll results

Adolfo Montoro, director, global head of market data strategy and analytics at Deutsche Bank, identified the P&L attribution test as the most challenging element of the IMA as it requires the convergence of risk and finance functions. For those taking the IMA approach, Frag recommended modern, highly automated, robust and sustainable technology infrastructure.

The upside? A final audience poll questioning the benefits organisations expect to gain from FRTB implementation beyond compliance, showed 65% of respondents expecting to gain a better understanding of the risk they carry, 45% increased competitive advantage, 40% reduced capital requirements, and 35% a potentially more profitable product portfolio – 20% expect to gain no benefits.

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