FRTB survey shows firms using the Basel III delay to consider options

Tuesday, July 28, 2020 | By Hamza Cherrabi, Risk Solutions Specialist, SS&C Algorithmics

FRTB survey shows firms using the Basel III delay to consider options

The SS&C Algorithmics webinar “FRTB market trends amidst the Basel III delay” held on July 8th provided an opportunity to engage in insightful discussion and gain market-led insights and perspectives with a panel of risk practitioners. The panelists are close to the implementation of the revised market risk capital requirements under the Fundamental Review of the Trading Book (FRTB). The session covered known and emerging FRTB challenges in the current COVID-19 climate, characterized by unprecedented market volatility and uncertainty, counterbalanced by a recent decision by the Basel Committee on Banking Supervision (BCBS) to defer the implementation of the new standards to 2023.

We polled webinar participants about the different FRTB implementation-related themes examined in the webinar and found some interesting results.

Impact of the Basel III deferral due to COVID-19

Poll question 1: How is your organization adapting its FRTB program given the recent BCBS Basel III delay announcement due to COVID-19?

Chart shows responses to the poll question

Based on these responses, there is a 50/50 split between firms sticking with “business as usual” in terms of FRTB readiness planning and other firms looking to either delay, re-scope the implementation or decide on the approach in due course. This reflects a high degree of uncertainty on economic recovery prospects, regulatory responses at jurisdictional level and market shifts as we emerge out of the COVID-19 crisis.

FRTB rules interpretive complexity

Banks have also been grappling with a degree of interpretive complexity or ambiguity, even with the Standardised Approach (SA)—the implementation of which should be significantly underway for most banks in order to meet jurisdictional timelines for early reporting, e.g., EBA announced a 6-month extension to Sept 2021 for mandatory SA reporting. One example of such an interpretive challenge relates to the set-up of the Internal Risk Transfer (IRT) Desk under the new FRTB operating paradigm.

Poll question 2: How is your organization considering to operationalize FRTB requirements for the treatment of internal risk transfers (banking book-to-trading book, trading book-to-CVA capital)?

Chart shows responses to the second poll question

A high proportion (over 80%) of respondents have either not decided or have not yet considered that a virtual consolidated IRT desk, as opposed to desks split across regions or asset classes, would be permissible according to the “letter of the law.” Among those who have decided on an approach, there is an equal split between the two configurations of IRT desk set up under FRTB.

On the question of SA rules calibration

Conservatism is, to a fair extent, already built into regulatory capital requirements under FRTB by design of the prudential framework, including with the SA, which is now considered sufficiently risk-sensitive to allow better comparability and act as a credible fallback to the Internal Models Approach (IMA).

SA under FRTB in particular has gained popularity in the industry vs IMA. And for some banks, including IMA banks in the current Basel II.5 regime (pre-FRTB), SA is seen as the most viable option due to the high cost and complexities associated with IMA under the stringent new FRTB rules. However, this comparison (SA vs IMA) and the question of rules calibration also needs to be gauged relative to the severity of the market crisis and the interaction of the different approaches during the stress period.

Poll question 3: How do you see the current FRTB SA capital rules (e.g., risk weights, correlations, etc.) being calibrated during the crisis?

Chart shows responses to the third poll question

Based on responses, to date and specifically among those decided, there is a clear indication that the SA rules under FRTB are sufficiently conservative, either adequate or over-conservative, to cover trading book P&L volatility during the crisis. The outcome, though not definitive, lends more credence to the popularity of SA in the current climate.

Role of technology: “FRTB as a Service”

The final segment of the webinar considered the role of cost-effective technology solutions to overcome challenges in the current constrained COVID-19 environment.

Poll question 4: Which delivery models for external FRTB cloud-based solutions do you expect to see growth in demand for in 2020/2021, given the current climate?

Chart shows responses to the fourth poll question

Responses indicate a strong appetite for cloud solutions in the current climate, offered either by technology organizations directly to banks or through other banks.

SS&C Algorithmics offers an “FRTB-SA as a Service,” leveraging our leading market risk platform, recently awarded Best Market Risk Solutions Provider at the 2020 Waters Rankings, to provide banks:

  1. Rapid deployment of SA, giving more time for strategic analysis and planning
  2. Flexible deployment options (sensitivities provided by the client; sensitivities generated by the service; market data provided by the service)
  3. Automatic upgrades to new versions, allowing you to quickly adapt to the evolution of the regulations and to multi-jurisdictional rules support
  4. What-if and stress scenario analysis in a highly scalable environment to assess the impact of market developments on capital on an ongoing basis
  5. Platform for bank-to-bank FRTB offerings

To hear the full discussion of FRTB market trends, watch the "SS&C Algorithmics: FRTB market trends amidst the Basel III delay" webinar recording.

Regulation, Risk Management

Theme picker