Chatting with an FRTB Expert as the countdown to FRTB in the U.S. ticks down

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The U.S. Federal Reserve is expected to release a draft regulation of the Fundamental Review of the Trading Book (FRTB) for public comment sometime this year, followed by a hypothetical portfolio exercise. Both the comment period and the portfolio exercise will likely have a quick turnaround time. How U.S. banks approach this implementation and their choice of tools will determine their success in regulatory compliance which will, in turn, directly impact their capital and ability to generate profits. 

Colleen Cosgrove, Global Director of R&D Apps at ActiveViam has overseen the deployment of FRTB-ready market risk systems at dozens of banks and has kept on top of the regulation as it has developed. The FRTB Accelerator provides banks with a roadmap to implement the regulation. It molds itself to a bank’s existing technology architecture and conforms to extract the data needed to perform the regulatory calculations. 

Last year, under Colleen’s direction, ActiveViam software engineers successfully ran and passed the International Swaps and Derivatives Association (ISDA)’s unit tests for FRTB SA.  

Here we ask Colleen about the challenges that banks face in implementing FRTB and how ActiveViam solves this with the FRTB Accelerator. 

Q: Regulators have essentially given banks a choice of two models – the Standardized Approach (SA) and the Internal Models Approach (IMA). Each of them come with their own set of rules and hurdles. Can you give us one example for each model that has vexed banks in their implementations?

A: The SA  is a less data intensive, somewhat more forward process but the downside is a bank usually incurs a higher capital charge. The Basel III regulators said in 2019 that under the SA the capital charge could increase as much as 18.6%  for large banks in Europe. The regulators also said that banks using the IMA could provide as much as a 10% capital savings.  The IMA gives you more control over your regulatory capital but it’s a more data intensive process. For example, you need to perform backtesting on portfolios to prove the worthiness of your risk models to regulators. This requires employing historical data. You also need to source risk factors to thinly traded financial instruments in order to meet the criteria for a “non-modellable risk factor”. (The DTCC used ActiveViam’s software as an engine to do provide this data).  

Q: Can you provide an overview for banks just beginning the process as to what kinds of tools they need?

A: Banks definitely need to think broad in this category. The technology they choose will be there for as long as this regulation stands – and it will stand for a long time. The IT department needs something that is intuitive and fairly easy to implement, that sits atop the bank’s existing architecture. Business users need flexibility to drill down into the numbers and explore any inconsistencies in market data, for example, or in the final results. They also need an intuitive front-end.  Users will focus on the front-end UI because that will be the “eyes” to their data. It needs to be easy-to-maneuver with dashboards designed around the regulatory calculations, but also tailored to each organization’s individual needs.What you need is a tool that can just as easily perform internal risk management functions as meet the regulatory requirements. 

Q: What would you say are the three most important factors that banks need to pay attention to in implementing this regulation? 

Flexibility around data exploration: This is a very data-intensive regulation. You need to be able to explore all manner of data to calculate top-level risk numbers as well as be able to drill into the numbers to explore any issues you find that may hold up compliance.

Configurability:  As regulations are released we are starting to see different national jurisdictions adding their take on it. You don’t want to reinvent the wheel with each change  and subsequent add-on by regulators. The solution you choose initially should be flexible enough to support multiple jurisdictions through configuration so you don’t have to spend time rewriting code.

Fully automated testing: ActiveViam’s FRTB Accelerator provides fully automated testing so you don’t risk any mistakes with each upgrade. 

Q: What is on the horizon for banks that have already implemented the FRTB? 

A: Right now, people are focused on two things: European banks are slated to go live with this regulation this fall and are ramping up for that and the U.S. Fed is expected to release regulatory guidance soon. We will be focusing on supporting multiple regulations across borders since our clients who have already implemented FRTB will have to do that. Draft rules on SA-CCR and CVA are expected shortly after FRTB in the U.S. 

Q: Any final thoughts? 

A: It seems like we have been talking about this regulation forever! There have been multiple delays but now, it is finally becoming real.  The window for implementation in the U.S. is suddenly very short, and banks need to get their plans in order.  We are here to help with a proven solution that has become the industry standard, recognized as such by ISDA, by regulators and by the banks themselves.