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Revised FRTB deadline poses further challenges for Asia‑Pacific banks

Revised deadline poses further challenges for Asia‑Pacific banks

Essan Soobratty, product manager for regulatory data, New York; Eugene Stern, global head of product, market risk, New York; and Vicky Cheng, head of government and regulatory affairs, Asia‑Pacific (Apac), Hong Kong, at Bloomberg explore the additional regulatory and operational difficulties likely to arise as a result of the Basel Committee on Banking Supervision’s alteration of the Fundamental Review of the Trading Book (FRTB) implementation deadline

Essan Soobratty, Bloomberg
Essan Soobratty, Bloomberg

Banks in the Apac region continue to face regulatory and operational challenges in their implementation of FRTB capital requirements, exacerbated by uncertain times and volatile markets despite a new deadline. 

On March 27, the Basel Committee on Banking Supervision endorsed a set of measures to provide additional operational capacity for banks and supervisors to respond to more immediate challenges resulting from the impact of Covid‑19 on the global banking system. As a result, Basel III’s official go-live date – as well as its market risk component, FRTB – has been deferred by one year. In line with the announcements, the four leading Apac financial centres – Australia, Hong Kong, Japan and Singapore – have also made deferrals for Basel III implementation.

New FRTB deadline, higher standards

The Australian Prudential Regulation Authority, for instance, has stressed that FRTB’s adjustments to the reallocation of capital across portfolios have merely been deferred, not diluted. Japan’s Financial Services Agency has stated that the regulation contents for finalising Basel III remain unchanged.

While banks have more time to prepare, there is an implicit expectation they should be able to meet the new deadline to an even higher standard than before. The Hong Kong Monetary Authority’s recent survey on individual bank’s preparedness for FRTB implementation helps send an early prompt: while being temporarily relieved of the short-term compliance pressure, firms should start examining their needs and identifying gaps that need to be addressed to fulfil FRTB’s requirements. Just as the regulators have emphasised: timelines have changed, but the rules remain and full implementation is expected. 

Regulatory fragmentation

As the region works towards the new timeline for FRTB implementation, jurisdictions are also awaiting detailed guidelines and clarification from their respective regulators. Regulatory fragmentation across the Apac markets raises concerns about varying timeline and implementation details, which may lead to unintended challenges such as a mismatch in operations within financial institutions operating across the region. 

This will have an impact on firms’ regional operations and headquarters. To mitigate this risk, flexible solutions and open communications between regional banks and their headquarters – as well as between banks and local rulemakers – are crucial. Practical implementation challenges should be flagged, assessed and discussed across the board.

Vicky Cheng, Bloomberg
Vicky Cheng, Bloomberg

Banks with predominantly regional activities in the Apac region, and those with global footprints, operate against a regulatory backdrop that is increasingly global, yet still fragmented. Regulatory changes over the coming years – and the banking industry’s response – will determine how institutions in the region compete and serve their customers locally and internationally. Many global, regional and local market factors will continue to drive decision-making and planning as banks continue their path towards implementation of FRTB requirements.

Sound risk management a key focus for Asia‑Pacific regulators

Introduced as a result of the global financial crisis that began in 2007–08, FRTB aims to enhance financial stability, operational resiliency and investor protection through highly evolved and prescriptive risk management practices. A resilient banking system supported by a robust regulatory framework that is able to support the real economy remains important, particularly during times of market stress. Sound risk management is therefore an overarching theme for Apac regulators.

Uncertain markets

Apac banks face an array of common challenges: increasingly volatile and uncertain markets requiring updates to risk systems, and acquiring and managing larger amounts of data. Trading books of varying complexities and localised risks in some markets are recurring themes: volatile commodities, differing levels of transparency, difficulties in deciphering the risk in fund products, and managing the risks in their structured products books.

Data requirements pose challenges

The quantity and variety of data required for effective FRTB implementation introduces a number of governance and operational challenges for banks in the Apac region, especially if they are to ensure many FRTB workflows are aligned. 

Eugene Stern, Bloomberg
Eugene Stern, Bloomberg

Adding to these data management challenges is the need to implement the large volumes of desk-level calculations required for both the standardised approach (SA) and internal models approach (IMA). These data management and computing challenges have forced banks to accelerate the upgrading of their systems and the underlying technology. These are common challenges faced by many banks globally, not just those in the Apac region. Banks adopting a strategic approach to implementing FRTB have begun to acquire and manage data that benefits their organisations, and not just for the purposes of FRTB implementation. They are already seeing benefits across their trading, risk and back-office operations.

Modelling structured notes – A major Apac hurdle

One global challenge with particular resonance in the Apac region is the modelling of structured notes and other complex derivatives products. These products are used heavily across the region by large and small banks. Their non-linear nature means they typically incur material charges across all components of FRTB, making it especially important to represent the instruments and model their risks accurately, and capture any capital offsets that arise from hedging so the bank is charged only for the risks it wants to keep on its books. In addition, since pricing structured notes often requires direct Monte Carlo simulation of the payout function, the complexity in computation associated with FRTB poses a particular challenge.

Analysing funds’ positions with the look-through criteria

Another area presenting continued challenges for banks in the Apac region and internationally is the need to analyse their positions in funds by applying the Basel Committee’s look-through criteria and treat underlying positions in funds as if the bank held the underlying positions directly. 

It is not uncommon for banks in Asia to hold positions in funds of varying complexity, liquidity and leverage with exposures across multiple asset classes. These factors compound the challenges in acquiring the necessary data – which must be sufficiently complete and frequently available to be useful for FRTB – and in using risk analytics to compute risk exposure. 

Direct analytical challenges include modelling complex securities (for example, many fixed income funds invest heavily in securitisations) as well as capturing derivatives overlays (these do not typically constitute a large part of most funds’ holdings, but still play a role, especially for fixed income funds). As with structured notes, the largest indirect analytical challenge coming from funds is the volume of calculations required. Portfolios of 100 or more funds could pose a challenge for small banks even under the SA, and might challenge even a large bank using the IMA.

Important decisions on IMA implementation

Apac banks continue to grapple with important decisions relating to IMA implementation. These decisions include whether to implement the IMA – and, if so, for which desks – or whether they should only implement the SA

While the majority of banks in the Apac region with implementation programmes under way are focusing only on the SA for now, a number of the larger banks are actively working on preliminary plans for the IMA. Many of these plans incorporate flexibility, allowing banks to pivot if necessary while still working towards IMA compatibility.  

Cost versus benefit is an important consideration, but it is neither simple nor the only consideration. In many cases, the perceived benefit is estimated based on assumptions including data availability. For many Apac markets, where the necessary data can be more difficult to obtain, these assumptions are important. IMA implementation is also more complex. For example, correlation trades are driven by risk factors that may be challenging to simulate, prove modellable and pass the profit-and-loss attribution test. This is before taking into consideration the computational power required to model these trades out to multiple liquidity horizons required by IMA. For firms with global footprints, operational workflow complexities are important considerations. 

Bloomberg’s approach to FRTB – Beyond complying with the rules

In the post-Covid‑19 environment, in which market and credit risk must be considered from additional perspectives, Apac banks are approaching FRTB implementation with a holistic mind-set. Banks with implementation plans in place are moving towards full compliance in 2023, while simultaneously making upgrades to systems and acquiring data that benefit their organisations. 

Bloomberg continues to work closely with banks across the region in providing access to the foundational reference, pricing and risk analytics data that banks require to better manage their evolving market, credit and liquidity risks. In conjunction with FRTB regulatory datasets designed for specific workflows such as the important classification of exposures under the SA and risk factor eligibility test data for IMA, banks are able to acquire aligned and consistent datasets in formats that are ready to be used and in machine-readable format.

Bloomberg’s Multi-Asset Risk System (MARS) offers both SA and IMA analytics as part of its overall risk platform, powered by FRTB-specific data, and extends as far as a full, end-to-end, out-of-the-box calculation of total FRTB capital under SA. MARS also provides a front-office risk module that works in parallel with Trade Order Management Solutions, and runs on the same underlying data and analytics engines as the FRTB calculator. All MARS modules are built on Bloomberg’s in-house data and pricing analytics. 

The Derivatives Library (DLib) is a comprehensive platform to structure, price and risk-manage complex derivatives, structured products and dynamic strategies. It has unlimited coverage from vanilla to the most complex structures. DLib is fully integrated into MARS, and this allows banks that use it to script and model their structured notes to have them automatically available to any MARS workflow, including SA and IMA under FRTB.

Regardless of systems, Bloomberg’s suite of pricing and reference data can be integrated into banks’ system infrastructures, while helping them to support risk factor eligibility tests, create classification and bucketing logic, as well as model funds using a full look-through approach. Banks also have the option of running this end-to-end pricing and reference data on the MARS platform.

Implementing FRTB presents numerous challenges for banks. Establishing a strong data foundation and risk calculations is vital. Banks that are able to meet the challenges will reap benefits beyond just complying with a rule; they will have data, analytics, workflows and governance in place to prepare them for the next crisis or an unexpected event, regardless of its source.


FRTB – Special report 2020
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