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Embracing the sea change to come with FRTB

Embracing the sea change

Firms have until 2021 to implement FRTB, and those yet to begin compliance efforts risk putting themselves at a disadvantage. EY‘s financial services risk partners Shaun Abueita and Sonja Koerner explore the current level of readiness within the industry, what firms have done so far to prepare for FRTB and how those still in search of the most suitable solution for them can exploit innovative technologies to get ahead of the curve

Sonja Koerner, EY
Sonja Koerner, EY
Shaun Abueita, EY
Shaun Abueita, EY


FRTB overhauls the market risk capital framework to meet the Basel Committee on Banking Supervision’s objectives of addressing shortcomings in the current Basel 2.5 framework and reducing risk-weighted asset variability across firms and jurisdictions.

The final rules are expected to be published by the Basel Committee by the end of 2018, with an anticipated go-live date of January 1, 2022. Through Basel Committee consultation over 2018, the industry welcomed a number of framework revisions. However, uncertainty still remains in a number of key areas, including the identification and capitalisation of non-modellable risk factors (NMRFs), profit-and-loss attribution (PLA) and elements of the standardised approach (SA).

Calibration of PLA thresholds continues to present challenges, and for NMRFs the choice of risk factor bucketing, impact of seasonality and lack of diversification benefit continue to raise concerns. Moreover, within the SA framework, the treatment of foreign exchange curvature risk and the correlation trading portfolio perimeter are still subject to industry discussion.


Industry readiness 

Against this backdrop, firms are at various levels of strategic FRTB readiness and have taken a range of approaches to achieve compliance.

Most firms have engaged in some form of impact analysis, either as part of industry or regulatory impact studies, or under internal firm initiatives to size up the potential capital impact and plan for optimal compliance.

For compliance, most firms have prioritised the development of the mandatory SA framework over the internal models approach. This is due to the SA framework design’s relative certainty and its role as a backstop to any unanticipated accelerated jurisdictional compliance timelines.

Some firms are running standalone strategic FRTB compliance programmes and are managing the risk of final rule uncertainty by building flexibility into their implementation. They plan to refine their models and methodologies, if need be, once the rules are finalised. Others have focused on embedding core FRTB requirements within up-and-running strategic change programmes with a view to consolidating these once the rules are finalised. These initiatives have focused on:

  • Increasing data, systems and methodology alignment across the front office, risk and finance
  • Data remediation and consolidation
  • Increasing risk factor coverage and granularity within the value-at-risk (VAR) model
  • Broadening the use of full revaluation for risk measurement.

In addition, the compute and operational demands  of FRTB have highlighted a need to leverage innovative new technologies. This includes the use of machine-learning and artificial-intelligence techniques to check and cleanse market data at source, building single enterprise-wide data repositories, using cloud technology to expand compute capacity, and developing intelligent predictive analytics to better report, monitor and manage risk and capital.


What should firms be doing?

Although the final FRTB rules and timelines are still evolving, the scale of change required to comply with the proposed framework is, by any standards, enormous. 

Firms yet to begin their compliance journeys should urgently seek to engage senior stakeholders across business, risk, finance and technology functions to mobilise in an integrated fashion. Those that have sought to prioritise the development of core FRTB capabilities should ensure those capabilities are indeed able to address the requirements of FRTB; for instance, the treatment of variable liquidity horizons under full revaluation, dynamic exclusion and reinclusion of NMRFs within the model, the ability to run full revaluation calculations over a 10-year scenario history by risk type or factor, or at book, desk or top-of-house level, as well as the analytics capabilities to query and understand model outcomes.

Firms should also be thinking about leveraging innovative technologies to more quickly and efficiently measure, manage and optimise risk exposure. This will undoubtedly provide a competitive advantage to those that effectively and proactively embrace these technologies from the outset.


This article contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgement. Member firms of the global EY organisation cannot accept responsibility for loss to any person relying on this article.


Read more articles from the 2018 FRTB Special Report

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