FRTB management solution of the year: S&P Global

Asia Risk Awards 2022

S&P Global wins FRTB management solution of the year for its highly adaptable Traded Market Risk Solution that keeps banks up to speed on all things FRTB. The Fundamental Review of the Trading Book (FRTB) is one of the most onerous post-financial-crisis pieces of legislation that banks must comply with. The new rules, which revamp the way individual trading desks at banks measure risk on their books under stress, have been bogged down by delays. S&P Global has navigated the uncertainty by polishing its FRTB solution so that banks can carry out dry runs and be ready to hit the ground running when they go live.

Jean Zottner, traded market risk product manager at S&P Global, says: “The product set combines our established risk-factor modelling, risk calculation engine and datasets (real price observation and time series data), with new software innovations, which we have built from the ground up. They combine advanced risk analytics with the latest big-data technologies to offer best of breed for implementing the next generation of risk framework in full compliance with FRTB.”

Banks will inevitably have to put aside more capital to trade certain products, especially rare, riskier ones that are tricky to benchmark. These products will need to be backed up by good quality data to show to the regulator, otherwise, they will be deemed ‘non-modellable’ and incur higher charges.

Therefore, banks will need to have access to reliable sources of historical trade data to calculate capital charges accordingly. This is particularly true for large banks that will shun the cookie-cutter regulatory calculator – the Standardised Approach (SA) – for a bespoke formula, the Internal Model Approach (IMA).

To that end, S&P Global has expanded its data coverage over the past 12 months by enriching its FRTB ‘real price observation’ pool across interest rate, credit, fixed income, foreign exchange and equity derivatives. This in-depth reference data enables banks and regulators alike to map risk factors to instrument types across asset classes and analyse modellability trends at different levels of granularity in production. The platform uses real price observation and historical pricing data to generate FRTB-compliant scenarios and can be supplemented with internal or third-party datasets.

Banks can also play with these combinations of data to run stress tests, both internal and regulatory, in an interactive, easy-to-navigate interface. The flexible cloud-based scenario engine can expand regulatory prescribed shocks to the risk factors in bank portfolios.

The new trading book rules have been pushed back by regulators grappling with industry unreadiness and then the pandemic, and now individual countries are choosing to go live when suits them best. S&P Global has handled the uncertainty well by keeping its Traded Market Risk Solution for FRTB highly configurable.

We have been able to release regulatory changes from the Basel Committee or from local regulators very quickly. This has allowed banks to run different analyses for local jurisdictions and consolidate them consistently at group level

Jean Zottner, S&P Global

Zottner says: “We have also been able to release regulatory changes from the Basel Committee or from local regulators very quickly. This has allowed banks to run different analyses for local jurisdictions and consolidate them consistently at group level.”

S&P Global also received a nod from the judges for making its solution more cost-effective for banks to implement, by extending its Traded Market Risk use cases. This has created more synergies between value-at-risk, expected shortfall and stressed capital add-ons under FRTB and standard initial margin model calculations by leveraging common infrastructure and execution.

Banks now use the solution for more than just compliance with FRTB. It helps them understand the relationship between IMA capital and upstream data or model choices, which helps them when dealing with regulators. Zottner explains: “Through this approach, they have been able to lead more informed and substantiated discussions with their local regulators.

He adds: “We have also started onboarding regulators themselves onto our Modellability Service for increased visibility on the Risk Factor Eligibility test, in particular, recent trends during and after the current pandemic.”

The three building blocks of the Traded Market Risk Solution offer banks state-of-the-art capital analytics, a must in today’s highly regulated times. The Traded Market Risk Modellability Service maps real price observations onto custom risk-factor buckets, by combining data and flexible analytics to assess and validate risk-factor modellability as defined within FRTB and bank-specific IMA requirements.

The Traded Market Risk Scenario service delivers historical pricing time series derivation and governance across asset classes in a user-friendly scripting language. This lets banks fill in the gaps, experiment with various proxy methods and generate flexible scenarios for FRTB, taking into account risk-factor modellability at all required stages of the calculation.

Lastly, the Traded Market Risk Capital Analytics tool gives banks a new level of transparency and control, which made S&P Global’s solution stand out from the crowd. It computes and provides a complete view of the different FRTB pricing requirements and risk measures.

This helps trading desks and senior risk managers make capital management decisions with full drill-down capability. It is designed to co-exist with existing pricing and risk analytics infrastructures to offer seamless integration between risk analytics, SA, IMA, profit and loss attribution and back-testing.