A Perfect Perfecta: For New FRTB Reporting Requirements, Pick The Winner At Post Time

The Fundamental Review of the Trading Book (FRTB) affects your capital calculations and has big impact on your risk monitoring framework. Don’t get stuck betting on the long shot.

By Richard Moss, Global Head of Risk Solutions, AxiomSL. With contributions from Anh Chu, Head of Canada Product Management and Gavin Pugh, Head of APAC Risk Sales, AxiomSL

Financial 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).

All these elements together 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, so they are prepared to place their bets.  Basel IV and FRTB changes are creating a similar sense of eager 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

When determining which horses will win at the racetrack, judging the horses’ capabilities, training, and track records are critical.

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

In Europe, preparing for the future means being ready for calculations required according to an impending CRR3. Other jurisdictions have set deadlines for specific calculations, including Canada, where CVA and FRTB requirements will be in effect as of November 2022 and November 2023, respectively.  Likewise, certain jurisdictions in Asia – namely Australia, Singapore, Hong Kong, and Japan – have extended their FRTB deadlines to January 2023. The Middle East has similarly received a reprieve from the roll out of FRTB and Basel IV with no regulatory mandates published to date. However, the market eagerly awaits the announcement of regulatory requirement deadlines in jurisdictions across the region, including Saudi Arabia, Qatar, Bahrain, and the United Arab Emirates.

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 critical elements: large data volumes and new calculations.

Hedging Bets? There Is A Better Way To Manage Risk

In a previous blog about FRTB, 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 With AxiomSL: 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.

On its ControllerView® platform for data management, analytics, and reporting, AxiomSL’s FRTB solution delivers market risk calculations to enable compliance with the new Basel IV framework requirements. Transparent processes enable firms to flexibly source original reference, trade, hierarchy, business-structure, trader-mandate, product-list, and price-evidence data. Its powerful extensible CapitalView data dictionary architecture enables that data to enter the calculation engine properly classified for Basel and FRTB risk management.

Importantly, as one of the first to align with International Swaps and Derivatives Association’s (ISDA) ‘golden source’ calculations, AxiomSL ideally positions clients to leverage trusted out-of-the-box calculations that accommodate Basel requirements, applicable globally and per national discretions.

Furthermore, the platform delivers a holistic framework – including a comprehensive suite of risk calculations and the ability to establish seamless processes – thus enabling institutions to:

  • Calculate CVA and SA-CCR – including the new CVA calculations requirements
  • Develop a risk management ecosystem – putting processes in place that go beyond regulatory reporting and enable business/risk insights from CVA, FRTB, SA-CCR calculations
  • Integrate with ease – making the most of tightly integrated modules and utilize more than just out-of-the-box regulatory calculations
  • Leverage speed for volume – incorporating big data technologies such as Spark, efficient handling of the large datasets required under FRTB are enabled without sacrificing transparency at critical calculation points
  • Adapt bespoke risk factors – enabling runs, scenarios, charting, and granular attribution at the trade level

A Race Plan: Maximize Your Horses’ Performance

The simple user interface built on ControllerView’s powerful data management capabilities facilitates adoption. By feeding this data into the platform’s capital and risk calculation modules such as FRTB, SA-CCR, CVA, or other bespoke analytics engines, clients can quickly and efficiently view stressed result datasets alongside baselines and other stress scenarios.

The Scenario Manager module, depicted below, is integral to AxiomSL’s overall stress-testing framework within the capital and credit risk solutions architecture (that includes the FRTB module which is shown subsequently).

AxiomSL’s Capital and Credit Ecosystem

AxiomSL FRTB Solution Module Provides Transparent Model Integration

The FRTB solution delivers integration with modeling tools and/or embedded open-source technologies (R and Python) via IntegratedModelView in a transparent framework. IntegratedModelView enables firms to manage and execute various internal models directly within the platform to generate the sensitivities for FRTB that are fed into the solution’s CapitalView data dictionary.

New FRTB Reporting Solution

Win, Place, Show: Assessing All Scenarios On Race Day

To apply stress-testing scenarios utilizing the stress definition and applicator functionalities, firms can automate iterative baseline datasets extraction via AxiomSL’s calculation solution data-dictionary or client data-layers to build stressed datasets for as many scenarios as they define. And the recently added upstream reconciliation point between market risk (FRTB) and counterparty risk uniquely enables clients to generate a true end-to-end flow for FRTB and SA-CCR, and strongly positions FRTB within a flexible risk management ecosystem.

With access to AxiomSL’s calculations, integrated stress-testing capabilities, and transparent granularity capabilities, 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 handle Basel IV and new FRTB reporting requirements, and win the Perfecta, you need the stable’s best thoroughbred! Contact us to discuss your needs.

We invite you to read other recent and insightful pieces on Basel IV and CRR2:



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