Gaining Value Beyond Your FRTB Investment

Julien Gautier |
April 4, 2019

This article was written jointly by Azar Khurshid, Director, Global Market Risk Management at Mizuho, Jeanine Prezioso, Content Marketing Manager at ActiveViam and John Le Hunte, Senior Sales Manager at ActiveViam, based on their experience with the deployment of ActiveViam’s FRTB Accelerator at Mizuho.

Every bank subject to global regulations has experienced the laborious, expensive and somewhat painful process of implementing an FRTB project. On the other hand, the driving principles and motivations for the regulatory changes are based on sound risk management principles, which should eventually lead to a better risk control environment.

Once a bank has integrated everything it needs (data, workstreams, governance structure) to meet a bank supervisor’s approval, it makes sense to leverage all this hard work and channel it into other projects beyond meeting a stream of regulatory requirements. The ability to look at the synergies during the development process and create a more integrated operating model and put a system in place makes perfect sense.

Achieving a more controlled environment can mean increased costs for the risk-taking part of the business. Or it can enable balanced risk taking, by having a good understanding of your risk models, and more confidence in the data used within those models. For some institutions, regulatory risk project costs can mean that spending in BAU development and improvements loses out. This is forcing managers to re-think their FRTB investment to drive the best value for the entire organisation.

Alignment between front office pricing models and data is the central plank of FRTB IMA. However, this need not stop at the computation of capital. Sharing a common understanding of models also means sharing a common understanding of risks. This could pave the way for conversations around risk controls and business costs. Even for institutions only applying the FRTB-SA, the more risk sensitive calculations are more desirable than the current SA approach which penalises the size of the portfolio rather than the riskiness of it. In this context, portfolio managers will have added incentive to effectively hedge the market risk for all the major risk and asset classes.

This requires a flexible set of solutions which can go beyond meeting regulatory requirements to help with enterprise-wide market risk and operational challenges.

Where Meeting Regulatory Requirements Intersects with Operational Solutions

The regulatory standards landscape is changing at uncompromising speed. IFRS-13 and IFRS-9, for example, are closely aligned with principles driving FRTB. Practitioners should see this as an opportunity to de-silo the business and operating models.

We can organise the value drivers in these developments into three core principles:

Principle A: Focus on the business model. Know your revenue drivers and ensure that any model improvements and capital prudential decisions benefit this core. Stress test the core business model to find any weaknesses. This part of the business is probably best suited for an internal model treatment.

Principle B: See the big picture. What may seem like unrelated development requirements, may turn out to have a big overlap. For example, the treatment of risk factors in IFRS-13 and the NMRF framework could be addressed together, while IFRS-9 and the trading book/banking book boundary would benefit from a common review.

Principle C: Review of the operating model and the data model. If FRTB IMA means the risk department aligns with the front office for model and data, then independent price verification results and adjustments need to be strengthened and fed into the risk systems as qualitative and quantitative inputs. Automation as well as advanced analytics are needed to ensure value can be extracted from the high-quality inputs and extensive calculations that are required as part of regulatory calculations. The data model should leverage an institution-wide business domain model to source data from the proper origin.

In the following, we share some thoughts on the wider overlaps between regulations and operational tasks that can drive some very real payoffs.

Enterprise-Wide Data
One of the more challenging FRTB tasks is corralling the data across the enterprise from various sources to arrive at the correct input for regulatory reporting. Requesting approval from senior management and making sure the risk engines produce the proper output are time-consuming processes. Collating data from primary trading systems across the enterprise and creating a common taxonomy requires substantial cost. Hopefully if you are able to galvanise senior-level governance to get access to everything you require, you may now integrate your FRTB SA and IM.

Could you further integrate other processes that are driven by the same data?

The answer is yes. The most significant challenge is likely to be too much data. The ability to aggregate all this data and need to see the trees for the forest is even more difficult. This data collection is only a starting point, a means to an end, if you will – and likely multiple ends. Good quality data is the most important commodity in this information age and being confident in the data should be a start to leverage it to drive business decisions

BCBS 239 – Principles of Aggregation

Having put off this irksome regulation for quite a while, now may be the right time to take further steps down the road to compliance. After all, you have the data in place and may have even defined common data dictionaries and product taxonomy across the organisation. If you have a governance structure in place to get access to all that data, why not use this model and start generating aggregation across all the required nodes and hierarchies to design the reports your management team could use to drive informed decision making and actions?

Financial Reporting

The IFRS-9 guidelines for the treatment of the trading book and banking book, and IFRS-13 for fair valuation inputs and fair value hierarchy have major potential to overlap with FRTB. The commonality in the requirements could be used to drive deeper integration of functions traditionally seen as separate silos or independent. So if you treat levelling of inputs as aligned to the NMRF framework, then you can be sure to have a much more consistent view between regulatory reporting and finance, for example in the common treatment of XVA accounting.


You now have the correct aggregated data in place, so ICAAP reporting should be less taxing with lots of room to automate what is generally a very intensive manual process – this will save lots of time, effort and annoyance. The ability of different functions to use a common view of the data is just the kind of start needed to enable this.

Market Risk Management & Reporting

Since the FRTB IMA necessitates the FO-Risk alignment, perhaps for the first time, risk management will not have the challenge of reconciling two different sets of outputs and models. Even for FRTB-SA, being more risk sensitive gives incentive for a more effective, risk driven approach in an integrated manner, compared to the current SA. Risk and regulatory capital management should be easier, provided you are able to put the right operating model in place, and put accurate, timely and actionable information at your risk takers’ and risk managers’ fingertips.

From a reporting perspective, the improvement in the overall data and model infrastructure should allow for more widespread use of “what-if” analysis, stress scenario construction as well as slicing and dicing of different risk measures to gain quantitative and qualitative insights into the portfolio. With a little stretch, one could also enable more effective intra-day risk measurement, reporting and monitoring. Management teams can now monitor their risk profiles, drill down to offending trades that raised the profiles; look at what-if analyses to bring the profiles back down to target levels; and show the regulator that they are in charge of their domains.

Insightful Trend Analysis

The investment in the risk management systems for FRTB should allow for more time now to concentrate on the future as you are the proud owner of a database with all the figures you need over past years to perform trend analysis and give you insights into future strategy. Senior-level decision making is facilitated.

Indeed, there are many benefits to be gained from your newly streamlined systems and data architecture. The domains of responsibility (VaR, Expected Shortfall, Sensitivity analysis, P&L reporting which are all done in sync) can now work collaboratively – from Risk to Finance; from Front Office through to Compliance; and from Internal Reporting to Regulatory Reporting.

In this way, an FRTB implementation empowers you with the right tools that help you streamline your operations.

Whether you saved or spent money on your FRTB-IMA implementation, you needed to do it from a regulatory capital perspective. The cost of implementation is something that can now be leveraged in terms of creating a more streamlined operating model, the ability to measure and control risk more effectively, and the ability to execute effective risk management and you’ve outdone the justification for your investment. The right tools provide a holistic approach to risk management which supports optimal performance across your organisation.

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About the author

Picture of Julien Gautier

Julien Gautier

Head of Product Marketing
Julien Gautier, Head of Product Marketing at ActiveViam, has a successful track record of driving product adoption and growth in the technology industry. His expertise in marketing strategy development, market research, and cross-functional collaboration ensures that ActiveViam's products meet the target audience's needs. Julien's proficiency in building successful partnership programs demonstrates his ability to drive business growth through successful collaborations.

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