1. The revised FRTB framework aims to address weaknesses in capital requirements and distinguish between trading book and banking book holdings by requiring higher capital for trading book assets.
2. Firms seek to move assets between books to minimize capital requirements based on liquidity and profitability as positions change.
3. Key impact areas of FRTB include OTC derivatives, securitization, and more complex instruments. Firms will need new business models and technology to implement FRTB.
Overview of the Basel Committee's revised "Minimum capital requirements for market risk" (formerly FRTB), with notes and tips for technical implementation.
everis Marcus Evans FRTB Conference 23Feb17Jonathan Philp
everis was Gold Sponsor of the Marcus Evans Conference ‘4th Edition: Impact of the Fundamental Review of the Trading Book’ at Canary Wharf, London on 23-24th February 2017.
This was a timely opportunity to catch up with banks and solution partners as we move into the implementation phase of Fundamental Review of the Trading Book (FRTB) programmes. We heard views and case studies across a range of topics including market risk methodology, operating model definition and data and systems architecture design.
Our presentation at the conference focused on the architectural challenges posed by FRTB.
CH&Cie - Fundamental Review of the Trading BookC Louiza
Arbitrage opportunity Banking book vs Trading book • The classification of assets between the banking book and trading book was unclear allowing arbitrage opportunity for RWA
Solving the FRTB Challenge: Why You Should Consider an Aggregation SolutionFIS
Many banks face multiple challenges around market risk, with outdated infrastructure, fragmented systems, and inflexible reporting tools. And now FRTB raises the stakes. The Fundamental Review of the Trading Book is the biggest change in market risk rules that we’ve seen in a generation.
The answer to the FRTB challenge is a centralized aggregation solution that allows you to source required prices from one or more front-office and risk engines, perform bank-wide FRTB calculations using those inputs, and combine the results with intermediate data and expose inputs via reporting and analysis tools.
View our slideshow to learn more about aggregation challenges and why you should consider an external solution.
Outlook and market survey on the fresh Standards for Minimum capital requirements for market risk, published January 14th, 2016.
FRTB will deeply impact banks on IT, process, organization and human aspects.
CH&Co can help banks cope with these changes.
Overview of the Basel Committee's revised "Minimum capital requirements for market risk" (formerly FRTB), with notes and tips for technical implementation.
everis Marcus Evans FRTB Conference 23Feb17Jonathan Philp
everis was Gold Sponsor of the Marcus Evans Conference ‘4th Edition: Impact of the Fundamental Review of the Trading Book’ at Canary Wharf, London on 23-24th February 2017.
This was a timely opportunity to catch up with banks and solution partners as we move into the implementation phase of Fundamental Review of the Trading Book (FRTB) programmes. We heard views and case studies across a range of topics including market risk methodology, operating model definition and data and systems architecture design.
Our presentation at the conference focused on the architectural challenges posed by FRTB.
CH&Cie - Fundamental Review of the Trading BookC Louiza
Arbitrage opportunity Banking book vs Trading book • The classification of assets between the banking book and trading book was unclear allowing arbitrage opportunity for RWA
Solving the FRTB Challenge: Why You Should Consider an Aggregation SolutionFIS
Many banks face multiple challenges around market risk, with outdated infrastructure, fragmented systems, and inflexible reporting tools. And now FRTB raises the stakes. The Fundamental Review of the Trading Book is the biggest change in market risk rules that we’ve seen in a generation.
The answer to the FRTB challenge is a centralized aggregation solution that allows you to source required prices from one or more front-office and risk engines, perform bank-wide FRTB calculations using those inputs, and combine the results with intermediate data and expose inputs via reporting and analysis tools.
View our slideshow to learn more about aggregation challenges and why you should consider an external solution.
Outlook and market survey on the fresh Standards for Minimum capital requirements for market risk, published January 14th, 2016.
FRTB will deeply impact banks on IT, process, organization and human aspects.
CH&Co can help banks cope with these changes.
CH&CO - VaR methodology whitepaper - 2015 C Louiza
In the framework of knowledge promotion and expertise sharing, Chappuis Halder & Co. decided to give free access to the “Value-at-Risk Valuation tool” named in our paper “VaR spreadsheet estimator”. It contains the detail sheets simulations for the three main Value-at-Risk methods: Variance/covariance VaR, Historical VaR and Monte-Carlo VaR. The presented methodologies are not exhaustive and more exist and can be adapted depending on the process constraints.
This paper aims to have a theoretical approach of VaR and define all relevant steps to compute VaR according to the defined methodology. And to go further, it seems important to define VaR for a linear financial instrument. Thus, illustrations to monitor the VaR for an equity stock has been performed with a European call option VaR simulations for a better understanding of the concept and the tool. This article only focuses on VaR but will provide opportunities to open to more quantitative risk indicators as Stress-tests, Back-testing, Comprehensive risk measure (CRM), Expected Tail Loss (ETL) or Conditional VaR… more or less linked with the VaR methodologies…
everis was Gold Sponsor of the Marcus Evans Conference ‘4th Edition: Impact of the Fundamental Review of the Trading Book’ at Canary Wharf, London on 23-24th February 2017.
This was a timely opportunity to catch up with banks and solution partners as we move into the implementation phase of Fundamental Review of the Trading Book (FRTB) programmes. We heard views and case studies across a range of topics including market risk methodology, operating model definition and data and systems architecture design.
Our presentation at the conference focused on the architectural challenges posed by FRTB.
Because the VaR starts to be « old fashioned » and not so "Normal" :-), CH&Co. and its GRA team wanted to pay a last tribute to this world famous Market Risk Method.
This paper comes along with a Excel Tool
Challenges in Practical Market Risk Management - a presentation by Anshuman Prasad, Director, Risk and Analytics at CRISIL GR&A made at the 15th Annual GARP Risk Management Convention, New York.
Operational Risk Loss Forecasting Model for Stress TestingCRISIL Limited
Presentation on ‘Operational Risk Loss Forecasting Model for Stress Testing – A Three-Stage Approach’ made by Dr. James Lu, Director, Risk & Analytics, CRISIL Global Research & Analytics (GR&A) at The 17th Annual OpRisk North America 2015, New York
With our experience and our experts, Chappuis Halder & Co would provide appropriate incentives at every level of your organization. It could help you at the time to manage “modern” risk alongside performance
The Fundamental Review of the Trading Book (FRTB) is a major challenge for the banking sector. This new Accenture Finance & Risk Services presentation explores the key implications of the new requirements and highlights key differences with previously published standards. Access this link for more information on FRTB: http://bit.ly/1NnY1RN
Fundamental Review of the Trading Book - What is FRTB and why start now?Morten Weis
Presentation on new minimum standard for market risk capital, known as Fundamental Review of the Trading Book "FRTB", issued by the Basel Committee January 2016. Given by Dr. Morten Weis, independent risk management expert, at a workshop arranged by KPMG Denmark 9 June 2016 in Copenhagen, Denmark. Focus is on general introduction to the new capital standard, with emphasis on the standard method as it is used by most banks in Denmark. Advice is shared on why to start FRTB preparations now, despite rules expected in force first from 2019.
The presentation is in pdf format, but might not display correctly unless downloaded.
As the race against time to comply with IFRS 9 guidelines begins, several software solutions are being bandied about as a quick fix solution for automating the entire impairment modelling process. While automating is definitely the way to go in initiatives such as these, the question remains as to whether the software architecture should be of a strategic integrated nature or one that is decoupled and modular. In Aptivaa, we believe the answer to this lies in the 4Rs question: Readiness, Reflectiveness, Redundancy and Regularity.
CH&CO - VaR methodology whitepaper - 2015 C Louiza
In the framework of knowledge promotion and expertise sharing, Chappuis Halder & Co. decided to give free access to the “Value-at-Risk Valuation tool” named in our paper “VaR spreadsheet estimator”. It contains the detail sheets simulations for the three main Value-at-Risk methods: Variance/covariance VaR, Historical VaR and Monte-Carlo VaR. The presented methodologies are not exhaustive and more exist and can be adapted depending on the process constraints.
This paper aims to have a theoretical approach of VaR and define all relevant steps to compute VaR according to the defined methodology. And to go further, it seems important to define VaR for a linear financial instrument. Thus, illustrations to monitor the VaR for an equity stock has been performed with a European call option VaR simulations for a better understanding of the concept and the tool. This article only focuses on VaR but will provide opportunities to open to more quantitative risk indicators as Stress-tests, Back-testing, Comprehensive risk measure (CRM), Expected Tail Loss (ETL) or Conditional VaR… more or less linked with the VaR methodologies…
everis was Gold Sponsor of the Marcus Evans Conference ‘4th Edition: Impact of the Fundamental Review of the Trading Book’ at Canary Wharf, London on 23-24th February 2017.
This was a timely opportunity to catch up with banks and solution partners as we move into the implementation phase of Fundamental Review of the Trading Book (FRTB) programmes. We heard views and case studies across a range of topics including market risk methodology, operating model definition and data and systems architecture design.
Our presentation at the conference focused on the architectural challenges posed by FRTB.
Because the VaR starts to be « old fashioned » and not so "Normal" :-), CH&Co. and its GRA team wanted to pay a last tribute to this world famous Market Risk Method.
This paper comes along with a Excel Tool
Challenges in Practical Market Risk Management - a presentation by Anshuman Prasad, Director, Risk and Analytics at CRISIL GR&A made at the 15th Annual GARP Risk Management Convention, New York.
Operational Risk Loss Forecasting Model for Stress TestingCRISIL Limited
Presentation on ‘Operational Risk Loss Forecasting Model for Stress Testing – A Three-Stage Approach’ made by Dr. James Lu, Director, Risk & Analytics, CRISIL Global Research & Analytics (GR&A) at The 17th Annual OpRisk North America 2015, New York
With our experience and our experts, Chappuis Halder & Co would provide appropriate incentives at every level of your organization. It could help you at the time to manage “modern” risk alongside performance
The Fundamental Review of the Trading Book (FRTB) is a major challenge for the banking sector. This new Accenture Finance & Risk Services presentation explores the key implications of the new requirements and highlights key differences with previously published standards. Access this link for more information on FRTB: http://bit.ly/1NnY1RN
Fundamental Review of the Trading Book - What is FRTB and why start now?Morten Weis
Presentation on new minimum standard for market risk capital, known as Fundamental Review of the Trading Book "FRTB", issued by the Basel Committee January 2016. Given by Dr. Morten Weis, independent risk management expert, at a workshop arranged by KPMG Denmark 9 June 2016 in Copenhagen, Denmark. Focus is on general introduction to the new capital standard, with emphasis on the standard method as it is used by most banks in Denmark. Advice is shared on why to start FRTB preparations now, despite rules expected in force first from 2019.
The presentation is in pdf format, but might not display correctly unless downloaded.
As the race against time to comply with IFRS 9 guidelines begins, several software solutions are being bandied about as a quick fix solution for automating the entire impairment modelling process. While automating is definitely the way to go in initiatives such as these, the question remains as to whether the software architecture should be of a strategic integrated nature or one that is decoupled and modular. In Aptivaa, we believe the answer to this lies in the 4Rs question: Readiness, Reflectiveness, Redundancy and Regularity.
In our earlier blog, we discussed PD terminology and PD calibration approaches as applicable to the IFRS 9 framework. In this blog, we have discussed the methodologies for adjusting PDs for the ‘forward-looking’ macroeconomic scenarios and development of PD Term Structure.
A key metric that summarizes the credit worthiness of a bank’s obligor is the Probability of Default (PD). Besides credit worthiness assessment and capital computation under IRB, PD is one of the key metrics required in the updated IFRS 9 accounting standards. At present, there are many PD related terminologies used in the banking industry, such as: PIT PD, TTC PD, 12-month PD and so on. Such a wide spectrum of terminologies has led to confusion among users, especially when it comes to IFRS 9, which lays special focus on PIT PD and lifetime PD. This blog intends to clarify these key terminologies.
As discussed in our previous blog, PIT PD describes an expectation of the future, starting from the current situation and integrating all relevant cyclical changes & all values of the obligor idiosyncratic effect with appropriate probabilities. A PIT PD mimics the observed default rates over a period of time. TTC PDs, in contrast, reflect circumstances anticipated over an extremely long period, and thus nullify the effects of credit cycle. Basing it on these definitions, the current article focuses on range of PD Calibration approaches for aligning internal rating model output with actual default rates.
Transition matrices and PD’s term structure - Anna CornagliaLászló Árvai
A transition matrix is a square matrix describing the probabilities of moving from one state to another in a dynamic system. In each row there are the probabilities of moving, from the state represented by that row, to the other states. Thus each row of a transition matrix adds to one.
Banks are scrambling to meet with IFRS 9 guidelines and are setting down on the path to implement various ECL estimation methodologies and models. But a topic that hasn’t been given enough attention is the need for governance of these models and the attendant model risk management framework that needs to be set up to lend credibility to the model estimates. This blog touches upon the need for validation of models and how model risk governance has become paramount in view of the new guidelines.
Credit Impairment under IFRS 9 for BanksFaraz Zuberi
A quick overview of credit impairment under IFRS 9 for banks. Those with limited or no understanding of new requirements for loan loss accounting, will get a quick high level understanding of an accounting standard that is the most significant change in accounting for loan losses in more than a decade.
This new Accenture Finance & Risk document presents an approach to addressing the reporting demands and challenges of an evolving regulatory environment. Learn more about Accenture Finance & Risk Practice: bit.ly/2j2JD6X
Considerations for an Effective Internal Model Method Implementationaccenture
In this Accenture Finance & Risk presentation we discuss an approach banks can use to develop, manage, and monitor a robust and effective Internal Model Method program. Learn more about the Accenture Finance & Risk Practice: bit.ly/2j2JD6X
Fundamental Review of the Trading Book (FRTB) – Data Challengesaccenture
In this Accenture Finance & Risk presentation we explore the challenges facing banks responding to the new Fundamental Review of the Trading Book (FRTB) rules and offer guidance on how to respond to these. http://bit.ly/2fojCKB
In this new Accenture Finance & Risk presentation we explore how our Regulatory Reporting Dashboard and offerings can help clients create greater efficiencies in their financial reporting process.
For more on regulatory reporting, view the presentation "User Defined Tools": accntu.re/2qAJBaO
For more information about Accenture Finance & Risk Practice, visit bit.ly/2j2JD6X
With Accenture's digitally-enabled corrosion management services and solutions, companies can maintain and protect assets from corrosion before it becomes a problem. By embracing digital technologies such as artificial intelligence, 3D modelling, advanced data analytics, video analysis and more, chemical and energy companies can move beyond reactive maintenance to predictive, proactive asset performance management.
1. The Business Model of Banking and how institutions will have to adapt themselves to the new regulatory environment
2. Investments in capital and human resources
3. Changes/improvements to the Banks’ technology capacity and structure
4. Business Profitability, Staff Compensation and Competitiveness
Future-Proof Your Risk Management & Compliance with Graph TechnologyNeo4j
In the aftermath of the Lehman crisis of 2008, financial services firms face a number of new regulations and risk management challenges.
One key regulation is the Fundamental Review of the Trading Book (FRTB), which is part of the upcoming Basel IV set of reforms. The new regulations require banks to reserve sufficient capital to maintain solvency through market downturns and avoid the need for government bailouts.
However, in this challenge lies an opportunity: Banks are using FRTB mandates in order to build a firm foundation for future risk management and compliance applications that lower development and staffing expenses, optimize reserve ratios, maximize available capital and drive investment profits.
The spring 2017 Insight newsletter from Quantifi, discussing FRTB and whether it is strengthening market risk practices, and whether banks are prepared for the changes it will bring
Evaluation of Capital Needs in Insurancekylemrotek
Presentation on capital adequacy analysis for property casualty insurance companies, as presented to Milliman\'s 2008 Casualty Consultants Forum in Denver
Outlook and market survey on the fresh Standards for Minimum capital requirements for market risk (FRTB), published January 14th, 2016.
FRTB will deeply impact banks on IT, process, human and organizational aspects.
CH&Co can assist banks navigate through these fundamental changes
Financial Due Diligence via Operational Perspective | Co-Authors Steve Koinis...Tom Atwood
Having diverse subject matter expertise on hand can benefit Deal Teams - starting at indication of interest (IOI), to diligence, and all the way to post-close value creation.
Mercer Capital's Value Focus: FinTech Industry | Second Quarter 2015Mercer Capital
Mercer Capital’s quarterly newsletter, FinTech Watch, provides an overview of the FinTech industry, including public market performance, valuation multiples for public FinTech companies, and articles of interest from around the web. This newsletter focuses on FinTech segments, including payment processors, technology, and solutions companies, examining general economic and industry trends as well as a summary of M&A and venture capital activity.
Forward-Looking Practices in Wealth ManagementCognizant
To keep up with growing regulations in wealth management sector, firms need to future-proof their operations with a robust risk-control system and transparent trading practices.
Broadridge Multi Asset Class Conundrum WhitepaperBroadridge
As trading across multiple asset classes increases, operating in silos is no longer
an effective strategy for optimizing operations, mitigating risk and capitalizing
on market opportunities. In less than ten years, multi-asset class trading has exploded, as buy- and sell-side firms utilize an increasingly broad array of investment strategies to improve performance and exceed their peers. This diversification has occurred across both asset segments and geographies, as financial firms seek out new opportunities for growth.
In a decade of low interest rates, regulatory change and cost-reduction mandates, the growth in trading of alternative assets has been a response by many firms, including those in traditional equities and debt markets, to improve returns. This is also reflected, for example, in the quadrupling volume of futures and options contracts traded from 2003 to 2011.
The low-interest period is forcing most insurers to control and monitor their financial investments. In contrast to a risk focused
approach seen in recent years, yield controlling and monitoring will have top priority. In order to reach this goal, many
insurers are modernizing and enhancing their data warehouses. BearingPoint is offering a predefined investment data warehouse comprising the most required KPIs, reports and the underlying data model.
The future of the OTC Derivative Market - Eugene stanfieldLászló Árvai
Impact of mandatory central clearing on OTC derivatives
Cost of doing business
Collateral management efficiency
Regulations still to shape how we do business
2. The revised FRTB seeks to address weaknesses in the current market risk framework and capital adequacy
requirements. It aims to distinguish the trading book and banking book holding in order to define capital adequacy
requirements, especially as trading book assets require higher capital. Liquidity and profitability is key here as firms
seek to move assets to bank book when position goes against them where capital requirements are lower. Pricing
is a factor here in determining capital requirement. As a result firms‘ need to distinguish between short term
market trading strategy and long term investment holding. Major impact areas are OTC derivatives and
securitization, and more complex instruments. Hence FRTB, considered either as a regulatory subject or risk issue,
definitely requires a new business operating model with technology as a critical delivery component.
Dynamic allocation of positions between
books throughout the trade life cycle
Firms’ Value
Objectives
Defined Trading
and Investment
Strategy
Select
Markets and
Instruments
Aligned
Profit and
Risk Model
Capital
Adequacy and
Cash Flow
Technology Infrastructure
FRTB Impact and Strategy
3. Boundary: Definition of trade book and bank book boundary and restrictions on migration across the boundary.
Sensitivity: A revised standardised approach for market risk based on price sensitivities, which is intended to be more risk
sensitive compared to the existing standard approach, and reduce the gap between internal models and standard rules.
Measure: The substitution of value at risk and stressed value at risk with an expected shortfall risk measure to capitalise
for loss events in the tail of the P&L distribution.
Liquidity: Incorporation of market liquidity risk into internal models. Application of liquidity horizons in the expected
shortfall calculation to reflect the period of time required to sell or hedge a given position during a period of stress.
Risk: Replacement of the incremental risk charge with an incremental default risk model, which is designed to capture
default risk in the market risk framework.
Data: Eligibility of market data sources, treatment of data gaps, and liquidity horizon relation.
Model: Desk level model approval and P/L attribution. Back-testing requirements of internal models at trading desk level.
Failure to meet the validation criteria would force a desk to revert to using the standardised approach.
Disclosure: Enhanced public disclosures on market risk capital charges, including regulatory capital charges calculated
using both standardised and internal models approaches.
Key FRTB Proposals
4. Process Architecture & Governance
Market
Data
Pricing
Portfolio
Position /
Valuation
Quote /
Analytics /
Deal
Models
SA & IM
Risk Capital,
Limits &
Allocation
Modelled
Risks
Capital
Calculation
Risk
Assessment
Non
Modelled
Risks Vs
Stressed
Scenarios
FRTB/CVA/EC
Alignment
Capital
Charge
Reporting
- Desk &
Regulatory
Modellability Boundary Capital
5. 1. Market Risk waiver to be determined at Desk Level.
2. Risk sensitive calculation for non-linear and linear risks.
3. Capital floor as percent of Standardized Approach even if Internal Model is applied
4. Internal Model can be switched off and on at Desk level, this increases capital volatility.
5. No diversification between asset classes (inter-asset). Diversification (intra-asset) allowed on correlation
matrices.
6. Liquidity horizon increased from 10 days to 1 year. High impact on fixed income, medium impact on equities,
and low impact on foreign exchange.
7. Measurement method switched to Expected Shortfall from VAR. Credit spread capital requirements increase
disproportionately to other asset classes.
8. Incremental Risk Charge requires Banks‘ to calculate capital using a constant level of risk over a one year
capital horizon is replaced by Incremental Default Risk.
9. Market data, pricing and valuation key to risk coverage and capital computation.
10. Higher capital charge for risks not modelled.
11. Audit trail required for market data.
12. Market discipline requiring qualitative and quantitative disclosures.
Major Impact Areas
6. Risk Factor Category Liquidity Horizon
Interest Rate 20
Interest Rate ATM Volatility 60
Interest Rate (Other) 60
Equity Price (Large Cap) 10
Equity Price (Small Cap) 20
Equity Price (Large Cap - Volatility) 20
Equity Price (Small Cap - Volatility) 120
Equity (Other) 120
FX Rate 20
FX Volatility 60
FX (Other) 60
Credit Spreads 20 – 250
Commodities 20 – 120
Energy Price 20
• A liquidity horizon is the time required
to exit or hedge a risk position without
materially affecting market prices in
stressed market conditions.
• Increase in liquidity horizon from 10
days to 250 days maximum.
• Expected Shortfall calculated using
instantaneous shocks equivalent to
movement of risk factors during time
span of associated liquidity horizon –
ignores dynamic rebalancing and trade
maturity, and ignores path dependency.
• Risk factor dependent, not product
dependent, and independent of position
size
Liquidity Horizon
VAR is applied to calculate potential loss based on price volatility, lack of liquidity can cause additional loss necessitating
additional capital to absorb losses. This is an important element in the revised proposal.
7. Model Determination
Assessment of Banks’ Firm
Wide Internal Risk Capital
Model
Bank nominates Trading
Desks in-scope amd out-f-
scope for model approval
Standardized
Approach for entire
Trading Book
Pass
Pass
Assessment of desk level
model against quantitative
criteria
Model Approval Criteria:
P/L Attribution,
Backtesting,
Model-Independent risk assessment
Independent Risk Factor
Analysis – frequency of
update, available historical
data, etc
Pass
Standardized
Approach for specific
trading desks
Fail
Out of
Scope
Modellable:
Global Expected Shortfall
with diversification
constraints
Non-Modellable:
Capital Add-On based
on Stress Scenario per
Risk Factor
Modellable:
Capital Charge for
Default Risk
Standardized
Approach for specific
trading desks
Determination of Eligibility for Internal Model Based Approach
Attributes of a trading desk:
It is an unambiguously defined group of traders or trading accounts
with a clear reporting line to senior management and a compensation
policy linked to its pre-established objectives;
It has a well defined business strategy, including an annual budget and
regular management information reports;
It has a clear and formal risk management structure, including trading
limits and regular risk management reporting processes.
Identification of modellable risk factors:
For a risk factor to be classified as “modellable” there must be a
sufficient set of representative transactions to allow for an appropriate
historical data series and should have at least 24 observations per year,
with a maximum period of one month between two consecutive
transactions.
A price is “real” if:
• It is a price at which the Firm has transacted on an arms-length basis
• The price is taken from a firm executeable quote
• It is a price for an actual transaction between two other independent
third parties
Fail
8. Boundary Management
Trading intent has proven to be difficult to
govern, a trading evidence based approach and
a valuation based approach are considered. Key
considerations - objectivity in the definition of
the boundary, degree to which capital arbitrage
opportunities can be mitigated, extent to which
the boundary can be made less permeable,
extent to which the definition of the boundary
aligns with banks’ risk management processes,
and effectiveness of application.
Portfolio
Objectives
Trading Strategy
Instrument
Selection
Valuation
Method
Risk Control
Process
Liquidity
Management
P/L Booking
Process
Capital
Requirement
Focus :
Instrument and Trade Switching
Inventory Ageing
Daily and Intraday Limits
Market Liquidity