Following the publication of the final FRTB text by the BCBS in January, banks should now be preparing in earnest for the incoming regulation. And yet, questions remain. We thought the time was right to bring together regulators and market participants to debate some of the open issues and discuss the most pressing challenges. Hosting the discussion in London, we invited the Bank of England and European Banking Authority along with the FRTB leads from J.P. Morgan, Santander, UniCredit, Standard Chartered and Lloyds Banking Group to discuss the path to FRTB go-live.

We were also joined by our client, ING, whose head of FRTB implementation gave a presentation on how our FRTB solution sits at the heart of the bank's risk architecture, helping them to carry out the Risk Factor Eligibility Test (RFET) and assess the impact of proxies on IMA capital alongside SA. The discussions were broad and varied, but five keys takeaways emerged:

1. The January 2019 FRTB text from the BCBS is final
   Despite numerous revisions and postponements to the guidelines, the message was made loud and clear that the January 2019 text is indeed the final FRTB text. David Phillips, Head of Traded Risk Measurement at the Bank of England, confirmed this at the event saying, "The FRTB text is final and banks should not expect any additional changes. If there are future clarifications, it is expected to be in the form of FAQs."
2. Banks will be required to get model approval for "reporting requirements"
   Some banks opined that they can manage with an approximation for IMA in the reporting phase. The assumption is that it is not binding and therefore they have more time to prepare their actual mappings, proxies, desk structure and PLA for when holding capital takes effect. However, Phillips refuted this assumption stating that, "We expect that banks will need regulatory approval to use internal models for the reporting phase; and they must start to work in earnest now to meet the timelines."
3. Cloud adoption will be common-place for reducing the cost of FRTB compliance
   With all banks seeking to aggressively control costs, many are turning to off-premise solutions for risk factor management. For example, a bank with a bespoke RFET configuration can use a programmable SaaS to run the test off-premise while still maintaining full ownership of its IMA model.
4. NMRFs remain one of the biggest challenges for banks
   With banks' trading operations already struggling to maintain risk-adjusted profitability under high capital requirements and infrastructure costs, the banks involved in our panel discussion agreed that they are looking for strategies to mitigate punitive NMRF-related capital. Our own research shows that a mix of data pooling and proxying can help banks manage NMRFs. Data pooling can increase the modellability of risk factors and lead to capital reductions of as much as 40%, while the use of proxies - where a risk factor is non-modellable - can deliver further capital savings. To read more on this topic, click here.
   
   A number of banks also highlighted the complexity of the EBA FRTB discussion paper published in March 2018 as an additional challenge.
5. Regulators expect a rational, rather than prescriptive, approach to FRTB compliance
   Finally, during the event, Phillips said that, "While banks are concerned about what they can do, regulators are more concerned about what banks should do." The regulators do not intend to be overly prescriptive by explaining what banks need to do, but rather explain why they should do it.

If you are interested in finding out more about the discussions or joining our New York event on 8th May where the Federal Reserve will be our keynote speaker, please get in touch with Paul Jones.

Posted 27 March 2019 by Paul Jones, Global Head – FRTB Solutions, S&P Global

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.