Other parts of this series:
- Fundamental Review of the Trading Book (FRTB) Rules Pose New Challenges to Banks
- Banks’ Trading Frameworks Under Pressure
- Fundamental Review of Trading Book: Three Big Issues for Banks
- Fundamental Review of Trading Book Data Issue: Risk Sensitivities Sourcing
- Fundamental Review of Trading Book Data Issue: Market Data Sourcing
- Fundamental Review of Trading Book Data Issue: Risk Calculators Data Gaps
- Fundamental Review of Trading Book Data Issue: Risk Calculators Data Gaps – Part 2
- Fundamental Review of the Trading Book: Addressing Data Challenges
- Fundamental Review of the Trading Book: Addressing Data Challenges – Part 2
- Fundamental Review of the Trading Book: Transforming Market Risk Practices
In our previous blog, we discussed the new rules introduced by the Basel Committee on Banking Supervision (BCBS) aimed at strengthening banks’ trading frameworks. These rules, popularly known as Fundamental Review of the Trading Book or FRTB, address issues related to the capitalization of banks’ trading books, thus discouraging capital arbitrage between banking and trading books, and internal risk transfers.
With the adoption of FRTB, banks have until the end of 2019 to reach compliance with new rules in these key areas:
- P&L (Profit and Loss) attribution test – P&L attribution test helps evaluate the efficiency of the internal models and their ability to capture all the relevant risks impacting the portfolio. This is a new requirement and each trading desk has to independently pass this test. If a desk experiences breaches four or more times, then it will be put on standardized approach methodology.1
- Risk factor eligibility (modelable vs non-modelable) – Each of the risk factors which banks model will need to undergo an eligibility check, meaning that the banks will need to obtain real prices for them.2 With this measure, we believe that BCBS aims to strengthen the internal models to include only those risk factors which will have consistent interpretation by the banks. This will also eliminate any ad-hoc risk factor inclusion to help reduce the capital impact.
- Data requirements and risk measures at desk level – FRTB rules are explicit in proposing the reporting structure of market risk to management and regulators will be checking this at the trading desk level3. As we see it, banks will also need to obtain the data and run their risk calculations at a trading desk level and to adjust their data sourcing and calculation strategies accordingly.
The implementation of these rules pose significant challenges to banks as they seek to achieve compliance. Some major areas of focus include strengthening existing market risk infrastructure and technology capabilities; positioning additional computational capacity to support FRTB calculations; and planning for additional complexity in operations and processes due to changes in their desk structures (although we believe that some banks may seek to incorporate this into ongoing Volcker Rule implementation activities) and the standardization of data sources.
If we examine the FRTB rules and their impacts on business functions within banks, we will observe that majority of FRTB rules have a direct or indirect impact on banks’ data management strategies (see Figure 1). Solving for data challenges will constitute a big portion of implementation efforts of the banks as they mobilize their resources to commence compliance efforts.
Figure 1. FRTB Impact Analysis Framework
Source: Accenture Analysis
We will continue to examine some of the data issues confronting banks in the next few blogs of this series.
For more information see SlideShare deck: “Fundamental Review of the Trading Book (FRTB) – Data Challenges“
- “Minimum Capital Requirements for Market Risk,” Basel Committee on Banking Supervision, January 2016. Access at: http://www.bis.org/bcbs/publ/d352.htm
Visit www.accenture.com/RegulatoryCompliance for latest insights on regulatory remediation and compliance transformation.
This blog is intended for general informational purposes only, does not take into account the reader’s specific circumstances, may not reflect the most current developments, and is not intended to provide advice on specific circumstances. Accenture disclaims, to the fullest extent permitted by applicable law, all liability for the accuracy and completeness of the information in this blog and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professional.
Accenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Combining unmatched experience and specialized skills across more than 40 industries and all business functions—underpinned by the world’s largest delivery network—Accenture works at the intersection of business and technology to help clients improve their performance and create sustainable value for their stakeholders. With more than 373,000 people serving clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Its home page is www.accenture.com.
Copyright © 2016 Accenture. All rights reserved.
Accenture, its logo, and High Performance Delivered are trademarks of Accenture. This document is produced by Accenture as general information on the subject. It is not intended to provide advice on your specific circumstances.
If you require advice or further details on any matters referred to, please contact your Accenture representative.