Transforming FRTB compliance into capital savings

FRTB is scheduled to go live in most jurisdictions by January 1, 2025, and banks around the globe are rapidly implementing FRTB solutions to handle new and unprecedented reporting and compliance standards. The Federal Reserve in the U.S. has finalized the NPR that brings in significant revisions to capital requirements across different areas, not just market risk.

The additional amount of data needed for FRTB is now fairly well understood. Some estimates set it at 50 times the previous requirement. This additional strain on banking systems does not need to lead to a full replacement of the existing data architecture. Introducing new technologies that can integrate with the existing ecosystem will greatly benefit the implementation speed and be budget conscious.

This regulation is all about compliance and solving the reporting needs, however industry leaders can turn it into opportunity. The system and processes can be designed to also take into consideration capital optimisation opportunities and gain competitive advantage. This should not be an afterthought.

Is current technology fit for purpose?

FRTB is not a new consideration for banks, Quantitative Impact Studies (QIS) shed light on the complexities of the regulations. This informed institutions, leading most to start working on data and integration issues early on.

However, with looming FRTB deadlines, banks deploying these systems will need to begin reviewing performance to see if they are truly capable of delivering on the business need for daily capital analytics and optimisation. They must consider data volumes, sophistication of the calculation, and potential operational challenges related to risk data quality and governance.

Some organisations, in regions where the regulations have been published for a while, are running SA and IMA analysis simultaneously, looking for opportunities to structure business in a way that will be compliant with the regulation. Such organisations benefit from having both methodologies running side-by-side to capture potential opportunities for capital efficiency. Although SA might be the chosen methodology by many, it is likely that some regulators will demand certain firms to implement the internal methods to minimise systemic risk.

Bottom line, any technology investment needs to produce value and longevity far beyond the current 2025 horizon. It’s critical to identify if the solution in place is merely sufficient for meeting compliance standards, or if it has room to scale and develop alongside evolving business interests.

Enhanced management of metrics

Risk officers will be running what-if and stress scenarios, introducing parameter simulations, analysing capital optimisation opportunities, studying the impact of various trade scenarios, probing the value of portfolio novations, etc.

End-to-end operational intelligence

Discovering and translating profitable insights to revenue is a step in the right direction, but the path from identifying an opening in the market to a trade desk pulling the trigger is not linear.

The existence of data is useless if both risk and revenue aren’t able to rapidly communicate, satisfy both user’s criteria for action, and present in a format that is transparent, easy to understand, and justifiable from any desk.

FRTB systems that act as a bridge between departments and provide a universal and flexible interface will deliver the capacity to leverage valuable insights as they emerge. Firms should strive to have solutions that offer end-to-end operational capabilities, and that can ensure all aspects of the business – front, risk, middle office – are covered consistently. This does not mean a monolithic system, but rather a system that can be easily adopted in the different business areas and facilitate agile evolution as the needs change.

Maintaining longevity and agility

Flexibility is key for maximising the insights an institution can extract from data, but it is also what infuses systems with long-term utility and institutional agility. More changes are sure to follow.

New market shocks are becoming commonplace and regulatory bodies will be forced to act in response. The value of today’s technology investments is measured both in the capital they can unlock in the market in an instant as well as the number of years they can continue to be useful.

Longevity also includes the capacity to integrate with a wide variety of existing systems, as well as with new technologies that evolve.

The message for the financial industry is clear: financial systems cannot be designed merely with today’s compliance, reporting, and technology in mind. The capacity to consolidate data in existing systems and analyse FRTB metrics should be constructed to operate as a component of overarching institutional risk management strategies reaching well into the future.

Going beyond compliance

Without a doubt, the choices made today have the potential to affect business outcomes for years to come.

Removing silos within the organisation and enabling access to multiple regulatory and business metrics is fundamental for banks to see the impact that a single trade may have on the bottom line and not just a single area.

FRTB is here, and financial firms need to deploy cutting-edge solutions on modern architecture that transcend new regulatory standards. By harnessing the most flexible, powerful, and efficient solutions, financial institutions will be able to perform far beyond compliance and establish themselves as tomorrow’s premiere industry competitors.

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About ActiveViam

Founded by a group of industry experts, ActiveViam understands the data analytics challenges faced by financial institutions across trading desks, risk, and compliance. That is why we pioneered the use of high-performance analytics in finance, helping the largest investment banks, asset managers and hedge funds make better decisions, explain results with confidence, and simulate the impact of their decisions.

Our mission is to deliver train-of-thought analysis on terabytes of data in the most cost-effective way so our customers can explain their results with confidence and model the scenarios that will optimise their business. We are a pure player specialising in risk data analytics for one of the fastest moving and most regulated industries with a presence in the world’s leading financial marketplaces: London, New York, Singapore, Sydney, Hong Kong, Paris and Frankfurt.

For more information please visit: www.activeviam.com