The Fundamental Review of the Trading Book:
Why Banks Should Act Now
Despite the FRTB guideline being finalized in January 2016, there is still a certain amount of ambiguity and uncertainty surrounding the profound regulation. With the intention of creating a greater understanding, Marcus Evans Webinars, along with market leading financial services company, Oracle, invited a board of experts to discuss the Basel committee’s overhaul.
Oracle’s Global Solutions Specialist — Treasury, Ziauddin Ishaq moderated the much anticipated discussion with industry leaders, Hany Farag, the Head of Modelling and Methodology, Capital Market Risk Management at CIBC and Hjalmar Schroder, the business head FRTB program from Zurcher Kantonalbank.
Banks Must Act Now, Otherwise Issues may only Worsen
Despite the lingering lack of clarity that surrounds FRTB, Hany made clear that establishing a baseline from which to start is essential. He referred to the ‘chicken and the egg’ situation, where banks want more information and data to be able to plan a structure. However, the availability of this information is non-existent. Using the Standardized Approach, one which is often underestimated, to inform some decision making is a good option and some assumptions have to be made. It is clear there is a lot of work to be done; meaning procrastination among banks in setting their processes in place could be detrimental as the timelines are not as generous as they seem.
Concern is Justified, but Success is Possible
The ‘PLA’ test has come under widespread scrutiny and precautions must be taken to ensure compliance. Failing this test was a huge concern according to Hjalmar.
Hany’s precautions to limit failure:
- Establish all the possible risk factors and put them into the PLA. Confirming this, the bank then should understand those needed and those not.
- It may take some time, but it will be worth it in the long-term. Covering all possible risk factors takes time, however if the desk takes short-cuts, then it is unlikely to be successful and the fix time will be long and challenging.
- Flexibility is important in having a successful PLA test. While this is bank dependent, failure of the test can cause backward steps for the desks, and can result in ‘a cliff like increase in regulatory capital.
The Challenges of Data Management
To implement FRTB banks must align data. There is widespread concern among banks on the most effective way of doing so. It seems that within banks, every system and function is dependent on how data is handled and captured. Therefore for data alignment to be achievable, collaboration and mutual understanding across units needs to be prioritized.
Furthermore, where applicable, vendors need to play more of an advisory role to overcome data management challenges, by using experience with other banks to problem solve. That being said, every bank has individual needs/prerequisites that require attention and highly nuanced problems may even require more bespoke solutions.
The Implementation Challenges
- Lack of adaptability: Flexibility is recurring theme — adapting your approach to be able to deal with a reasonable amount of uncertainty is necessary.
- Static Data: This is an inevitable frustration and being sensitive to it is a challenge due to the emphasized importance on flexibility.
- A lot of work still to be done: By developing analysis capabilities, the understanding of whether the numbers are plausible becomes easier and there is less work to be done.
Has any Positivity Come From FRTB?
Both panel members believe this is the right evolution for Market Risk Management and this is reflected by the rest of the industry and their belief in the principles. They believe that if all the forces align, then improvement in the capability to measure risk globally, is possible. Bank contribution can solve the workings of regulations; they have the ability to identify the problems and help the FRTB resolve and prevent them. The practicality of the principles means that it possesses many benefits which will be seen long term as it propels the industry forwards.
The introduction of the regulation has created confusion amongst banks and the lack of information appears to be causing uncertainty in regards to how to implement FRTB. The instructions appear to be to make preparations now and to reap the rewards later. This may be a long process, but it is more likely to be a successful process. Once this plunge has been taken, an overall understanding throughout the banks has to be established, so each desk is organized and working in the same direction.
Ultimately, FRTB appears to be a positive introduction. Its principles are well looked upon, they are practical and should result in the industry moving forwards, despite the need for work to be done.
James Baker
Digital Content Coordinator
Marcus Evans
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London, EC2A 1RS
