I have been looking into FRTB since last couple of months and after reading various Point of Views, talking to the experts and listening their views, I feel that the key concerns banks have about FRTB implementation are:
- Most important concern is the data and its alignment.
- Need for national regulator’s clarity on the local level implementation.
- Overall cost of implementation. (need to understand the bank’s internal systems)
- Analytics of the FRTB
- Viability of the business
- Estimates on the ongoing business as usual costs.
Reason-ability of these concerns:
Data and its alignment
For many banks FRTB implementation will require significant changes to the current market and risk infrastructure. This may include:
- Comparing risk factors captured in risk management tools and pricing models.
- Compare the banks current methodologies to measure risk factor sensitivities to prescribed methodologies under the sensitivity based approach and then undertake the remediation efforts to support the standardized calculations.
- Identifying sources of gaps in transaction data that may impact the real price criteria and determine the infrastructure and processes required in remediation of such gaps.
- Analyzing the sources of reference data needed for the standardized approach.
- Assessing hardware and calculation efficiency needed to meet the increased amounts of computations and data storage.
- FRTB programs need to be coordinated with other programs like BCBS 239.
So the biggest challenge executives have: it is the fragmented systems. This problem gets into data, model, their monitoring and practically every process related to the risk management.
This fragmented data, systems’ and processes’s problem is multiplied because in addition to organic growth banks inorganically from by continuous acquisitions, mergers of businesses. These acquired businesses may be from different domain what banks initially have. If acquisition in different geographic location, the systems may not only face challenge of different regulatory territory but challenge as basic as difference in language.
Regular churning of the portfolio based on “at the moment” business and economic scenarios also compounds this challenge.
There is article which I would like the reader to check: FRTB Compliance – Implementation Challenges http://www.garp.org/#!/risk-intelligence/culture-governance/compliance/a1Z40000003PBRnEAO/frtb-compliance-implementation-challenges
Non Modelable Risk Factors also pose serious challenges in FRTB compliance. For pricing a security, the current available at the point market data may be sufficient but the FRTB compliance demands that risk systems use same risk factors for pricing as the front office. For risk calculation purpose that data may not available in history.
National regulator’s clarity on the local level implementation
This is off course a serious concern because it is relevant to start planning the implementation of the framework. But historically national regulators seldom deviate materially from the basic idea. So this concern though serious but is not critical.
But though not critical there can/would be lots of confusion for banks which have global presence and thus operate in multiple jurisdictions. It is because every jurisdiction will have its own requirement for FRTB implementation for bank’s local and international assets. Some of them can be:
- Definition of exotics and complex instruments for residual add-ons by various jurisdictions.
- FRTB has enhanced supervisory powers in approval of transfering instruments from banking to trading books. For banks working on multiple jurisdictions, the variation of supervisor’s opinion will pose challenges in implementation.
Overall cost of implementation
FRTB is about making the risk systems transparent and comparable. Banks who have followed a disciplined approach in ensuring this as a culture will not incur huge costs.
The new trading and banking book boundary will lead to increased operational costs with multi-faceted approaches and technology infrastructure changes.
Analytics of the FRTB
This is not the most challenging issue of FRTB. Banks have already develop analytical frameworks for back testing their VaR models. Meeting the FRTB guidelines would not demand any significant analytics challenges.
Through PnL attribution you are supposed to capture the unexplained PnL between risk systems PnL and the front office PnL.
Viability of business
Failure of internal models in PnL attribution will force banks to fall back on Standardized Approach which will cause raise in capital requirements. This may make trading desks/business less attractive in terms of profits. It is possible that some desks/businesses might be shut.
Estimates on the ongoing business as usual costs
There is mention of word “report” 69 times in the final document released on Jan 16th. Clearly FRTB has made all the risk processes more sensitive and those sensitivities would need to be recorded, monitored and periodically analyzed. These will be significant costs on establishing model/process monitoring frameworks. This culture will give risk to the discipline in the risk processes and hence returns will be seen in ling term.
I will update this page as I learn and understand FRTB more.