With changes as complex and as far-reaching as those introduced by the FRTB, it helps to classify the challenges they pose and deconstruct them into concrete, feasible tasks leading up to December 2019 and consists of either new IT developments, changes in work methods or, more commonly, a combination of both.
A change of scale in IT requirements
As outlined in our previous post, the exponential increase required in data storage and computational power, along with the costs associated with these, are among the main concerns of business and IT managers in charge of implementing the FRTB. Ideally, a viable, cost-effective solution would exist which was pre-set and optimized to conform to the demands of the FRTB while retaining enough flexibility to adapt to each individual situation.
Following the discussions at the round-table event we organized with high-level managers from international banks, we have identified three industry-wide practices that, if they were adopted, would constitute as “being many steps in the right direction”.
3 ideas to control and mutualize costs
- As market data is a commodity, the relevant market data should be packaged and provided as a utility for all banks by market data providers.The sheer number and diversity of market data providers, and the formats they use, already represent a challenge for banks who must consolidate the data they acquire from all of them. Having pricing and risk data specific to FRTB reporting packaged up by the data providers and then sold as an FRTB package to banks as a sort of “one-stop shop” would save a lot of time and money.
- Standard Approach calculations should be available to everybody as an application so this component would be consistent across the industryEven banks who choose an Internal Model Approach for some of their desks need to be able to reverse to the Standard Approach at a moment’s notice. Developing an industry-wide application that does the Standard Approach calculations in a way that is both consistent and efficient would greatly mutualize the costs of implementation.
- Extra computational power should be scalable and leveraged in the cloudA cloud-based architecture appears to be the best way to control the cost of these new requirements – both for storage and computational power. It is also the most flexible solution to anticipate potential future evolutions of the rules. Some concerns remain however about how to adequately secure the most sensitive data involved with risk calculations.