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A perfect perfecta: For risk monitoring and FRTB implementation, pick the winner at post time

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With contributions from Anh Chu, Head of Canada Product Management and Gavin Pugh, Head of APAC Risk Sales, AxiomSL

AxiomSLFinancial institutions may be facing higher capital requirements based on the Basel Committee on Banking Supervision (BCBS) changes to FRTB. The deadline for implementing the new market-risk FRTB reporting requirements is 2023. And certain jurisdictions must report even sooner, for example under Capital Requirements Regulation 2 (CRR2). New FRTB reporting requirements affect how firms measure their market-risk capital charge and achieve consistency with other critical calculations including the standardized approach for counterparty credit risk (SA-CCR) and credit valuation adjustment (CVA).

Together these elements will alter organizations’ capital requirements. To monitor their risk profiles they will require flexibility, granular data drilldown to the trade level, and an ability to create bespoke stress-test scenarios. Being ready for post time will require preparation across several areas of an institution.

The favorite in race three is… ‘best risk’

At the track, the crowd eagerly awaits the announcement of the favorite horse in any given race. Basel IV and FRTB changes are creating a similar sense of anticipation for executive risk managers.

Coming ‘round the clubhouse turn are the following new FRTB reporting requirements:

  • Institutions must adopt regulators’ standardized approach
  • Additionally, they have the option to design their own models for calculating market risk exposure

Market risk rules will become more stringent because what is considered in scope for the trading book is being refined. Furthermore, for firms seeking to use their own models there are stricter requirements regarding quality of data and calculations. This means the capital calculations themselves must be changed to incorporate more risk factors and various liquidity horizons. Assessing and determining their very own ‘best risk’ will enable them to put money on the favorite, and if they are extremely clever, determine the top two to cross the finish line and thus win the coveted Perfecta.

Winning the perfecta: Large volumes and preparing for the future

The new FRTB requirements mean that institutions must step up their processes for FRTB, SA-CCR, and CVA calculations and ensure transparency and granularity in their data analysis. To accommodate new regulatory requirements and develop an effective means of assessing risk, institutions should consider the following:

  • Analyzing large trade volumes under the new FRTB reporting requirements – will necessitate sophisticated tools that (ideally) operate in the cloud and SaaS-enabled solutions
  • Being ready for current and future calculations – will necessitate a platform and solutions that seamlessly operate across jurisdictions and timelines

As we know, correctly picking a Perfecta in a horse race is a gamble. But for FRTB implementation you can improve your odds immensely by effectively addressing these two important elements: large data volumes and new calculations.

Hedging bets? There is a better way to manage risk

In other articles, we explored the critical questions institutions were asking, including:

  • Are the new required data sets (including the relevant sensitivities) under standardized approach (SA) integrated seamlessly into our calculation engine and reporting requirements?
  • Can we accommodate both internal model approach (IMA) and SA calculations?
  • Are we making business decisions based on sound risk and governance principles or are we reacting to the output floor?

The need to address these questions has not gone away, rather they now go hand in hand with the need for a flexible operational risk management ecosystem and bespoke scenario building capabilities. But although hedging a bet might be a good strategy at the track, when it comes to capital risk assessment, a secure approach with a reliable partner is best.

Galloping the distance: Good partnerships win races, even the perfecta

Institutions need a solution that will gallop onto the backstretch with the requisite speed and power and guide them through the challenges of a crowded race day field and to the finish line in style.

Thus, firms require a comprehensive suite of risk calculations and the ability to establish seamless processes, so they are enabled to:

  • Calculate CVA and SA-CCR
  • Develop a risk management ecosystem
  • Integrate with ease
  • Leverage speed for volume
  • Adapt bespoke risk factors

When organizations can access comprehensive calculations, leverage integrated stress-testing, and have transparent capabilities at their fingertips, senior management gains bird’s-eye and granular views of their organizations’ capital/credit/liquidity risk positions under scenarios of their choosing. This puts them well on their way to putting processes in place to meet regulatory reporting requirements and for building a stronger risk management ecosystem across their institutions.

And leading the pack wire to wire may be the ultimate winning strategy.

To read the in-depth article on developing a holistic risk ecosystem to handle FRTB implementation and Basel IV requirements, click here.

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