Financial Machineries is collaborating with Italian risk management consultancy Iason to deliver a service that will help banks prove they have enough data to use an internal model for market risk capital calculations required by Fundamental Review of the Trading Book (FRTB) regulation. Banks that cannot prove they have enough data to use an internal model must use the FRTB standard model, which brings with it punitive capital requirements.
The companies’ Secure Benchmarking Service (SBS) is a vendor neutral, hosted utility based on technology similar to blockchain and cryptography. It provides anonymised regulatory modelling, allowing banks and other independent data sources to aggregate OTC illiquid prices, contributions and traded and transacted datasets, and observe market risk regulatory capital rules that are modelled in line with those of FRTB.
The service is based on Financial Machineries’ contributed data and analytics expertise that is manifest in its Global Trade Repository Analytics service, and Iason’s specialism in EU stress test requirements and FRTB methodologies. Iason is defining the methodology for the utility, which will be marketed by Financial Machineries.
Antonio Castagna, CEO of Iason, says: “The consequences of FRTB will be that every firm will have to source greater levels of data with more granularity. By using SBS, each bank can be reassured that its trade data remains anonymous through the utility calculation process and is not able to be reengineered. Also, each bank will have full control of the resultant market data.”
Sheena Clark, founder of Financial Machineries, adds: “Data is fundamentally important to banks, they don’t want other banks to see it as they could reengineer positions and see volumes of trading parties.”
Explaining the technology underpinning the SBS, Castagna says: “Iason has harnessed a technology that was initially created in the 1980s, although not used in financial markets. It is cryptographic technology, similar to blockchain but not identical, that allows contributors to contribute data to a database, the results of which are not easily reengineered back to their original source. The contributors can see the end results, but not the original data. Not a single transaction or entity are identifiable from the database results. All results are anonymous and secret.”
Clark says the SBS utility’s vendor neutral quality differentiates it from other FRTB solutions in the market. The company is running a proof of concept of the service, talking to Tier 1 and Tier 2 banks in the UK about using it, and planning to have it in production by the second quarter of this year, in time for testing in the run up to FRTB compliance in January 2019.