The greatest misconceptions about the preparation for FRTB
3 November 2016
The Fundamental Review of the Trading Book, also known as the new market risk capital charge, is one of the most significant regulations that financial institutions currently have to plan for. And to comply on time, banks have to get this right.
FRTB is mainly an issue to do with regulatory reporting
BCBS 352 covers a broad range of topics and processes that apply to various
departments throughout the bank. The most immediate and prominently
discussed effects indeed are the regulatory reporting requirements and the
corresponding demands from IT in implementing new fields and interfaces
required for the derivation of the market risk capital charge.
However, the framework also includes explicit organisational requirements that
originate from the trading and risk control units. Among these are specific rules
for the setup of the trading desk structure as well as new pillar II requirements for
the risk management of trading positions.
Additionally, the new banking book / trading book boundary and its limited
permeability in terms of internal risk transfers may put entire trading strategies
and business lines at risk due to higher capital costs.
If you have no trading book, FRTB will not affect your organisation
The FRTB framework comes along with a new definition of the boundary
between the banking book and trading book that is based on stricter rules and
presumptions about the part played by various product types within a bank’s
portfolio. This means that the question of whether or not your institution is a
trading book institution has to be posed anew on the basis of BCBS 352. The
prevailing effect from this new boundary observed in change-impact analyses is
a migration of former banking book positions to the trading book. Furthermore,
commodity and foreign exchange positions fall under the FRTB approaches for
calculating capital charges regardless of the book they are held in.
If you are only aiming for the new standardised approach, you still
With the observation period for FRTB-compliant reporting beginning in 2019,
there are roughly two years left for tackling the major workload. Within this time
frame, there are various pressing tasks to be performed:
The relevant portfolio – i.e. the new trading book according to BCBS 352 − needs
to be defined and the application for special treatment of specific positions with
regard to the trading book / banking book boundary has to be evaluated.
The technical implementation, including new interfaces between front office and/
or risk controlling systems and the regulatory reporting engine, has to include
roughly 45 new fields that are not yet in use in the regulatory reporting.
The restructuring of the trading floor in line with the new organisational
requirements needs to be completed by the end of 2018. The regulator requires
up to one year’s time for the validation and approval of the desk structure and the
trading book / banking book boundary.
Where you have internal model approval, the standardised approach will
not have as much importance
The regulator intends to impose floor regulation to the capital requirements from
internal models which is based on the FRTB standardised approach. This means
that institutions are required to calculate the standardised approach regardless
of their application of an internal model. The use of an internal model for the
derivation of capital requirements has to be approved on a desk-by-desk basis
with the standardised approach serving as a fall-back whenever the regulator
deems the internal model insufficient to reflect a trading desk’s risk profile.
More about Finbridge
Finbridge is an official partner of Misys and is a consulting firm that specialises in
financial services. It is based near Frankfurt, Germany. Finbridge supports banks
and other financial institutions in the creation and successful implementation of
their changing processes along the entire value chain. Specialised know-how and
many years of project experience demonstrate Finbridge’s expertise in regulatory
reporting and risk control. Highly qualified and engaged employees offer a very
high standard of support.
Finbridge’s regulatory advisors focus on business conception, technical
specification, and testing of new regulatory topics within the context of EU
implementation of the Basel Accords.These include, FRTB, SA-CCR
AnaCredit, SA-CR, IRRBB and Market Disclosure, among others
How Misys can help with Misys FusionCapital Risk – FRTB
The Fundamental Review of the Trading Book, is one of the most significant
regulations that financial institutions currently have to plan for. Banks must act
now and analyse FRTB’s likely impact to ensure their operations and infrastructure
can deliver full compliance by 2020.
With Misys FusionCapital Risk, you get the standardised approach off-the shelf as
a baseline with pre-packaged reporting which includes rich sensitivities and full
data control by desk and on an aggregated level.
For the internal model approach, FusionCapital Risk offers shared service
applications designed to incorporate the major leap in calculation volume and
complexity, intraday calculation speed and front-to-risk coherency – all ready to
cater for wider transformative activities in the future
FusionCapital Risk is a componentised solution with an open infrastructure that
offers an agile path to phased transformation. For more information, please
visit us at www.misys.com/solutions/fusioncapital/fusioncapital-risk-frtb
or email email@example.com