Data management and business complexity are now fundamental drivers of RWA and returns
Basel IV (FRTB): It’s All About Data (Part 1)
- Financial Services
Fundamental review of the trading book (FRTB), or Basel IV, has been in development for a long time and introduces a paradigm shift in the market risk regulatory framework as it imposes a complete overhaul of market risk capital rules across the globe.
Although FRTB introduces a number of quantitative changes, its data management and business complexity implications present the most formidable challenges for banks. In order to meet regulatory requirements with an ironclad strategy, it’s pivotal to understand some of the impending changes.
Data Quality will be a Crucial Component in Modeling and Reporting
One of the key data issues addressed is the concept and treatment of Non-Modelable Risk Factors (NMRFs), underscores regulators’ long-held concern that market risk models have been introduced where there is insufficient data or issues with data quality.
Going forward, firms must demonstrate that model inputs are derived from real data based on real transactions. Ultimately, NMFRs will alter the way model approval is granted and monitored.
FRTB also introduces an Enhanced Standard Model Approach (SA) along with the Internal Models Approach (IMA). The SA will use a set of sensitivities that are defined and determined by the regulator. Despite an enhanced sensitivities-based regulatory approach, there is still likely to be a gap between IMA and SA.
Risk measures are currently calculated at an entity level. Under the new framework, they will need to be calculated at the desk level. This will lead to a monumental increase in data, analysis and reporting compared to what is required today, shifting banks from a traditional approach of using RMDBS to store data to using technologies like Hadoop, Spark and Scala. In short, poor data will lead to higher capital requirements.
Since risk modeling and reporting will occur at a desk level, its ability to calculate RWA and demonstrate good returns under the new framework will determine desk’s viability and survival.
Complex products and data gaps will drive the appropriate model approach along with what proportion of the RWA calculation is driven by the ‘other’ sensitivity bucket for SA as well as NMRFs for IMA.
Addressing the Underlying Systems to Achieve Alignment
While data quality is important, desks also need to be able to run processes and calculations efficiently and quickly. Given the amount of data involved, any delays can result in catastrophic processing queue build-ups that will put an enormous strain on any firm’s infrastructure. Basically, the whole technology stack must change with the introduction of these strict standards.
Despite significant investment, large banks will still face fragmented and siloed system infrastructure. FRTB insists that data and processing practices must be brought together in a single system where enrichment and transformation is managed consistently and uniformly. This is something that can be done in a Data Lake-type big data store and permits transformation and enrichment can happen using different technologies.
Backtesting and PnL attribution are essential tools in assessing how aligned PnL produced by the risk infrastructure is to that produced by the Finance sub-ledger. Again, data will become an integral part to ensuring alignment. Consistent data sourcing and snap times both imply that the Risk and Finance functions will need to be re-assessed in terms of role and underlying systems.
Implementing Real-World Data to Validate Analyses
Although FRTB is primarily concerned with determining absolute risk and the requisite capital, banks’ senior managers must also understand and explain movement in RWA and pin-point which sensitivity was the cause. This vital measurement tool will help effectively manage businesses. In addition, if managers wish to know the capital requirement impact from acquiring certain assets or trading positions, they will need to implement some form of ‘what-if’ analysis.
Yet another important element to FRTB compliance includes desk structure validation. Banks will have to submit their desk set-ups to regulators in prior to January 2019. The regulators will then grant the appropriate model approach for each submitted desk structure. Data lineage and quality needs to be established for each business unit or desk and has to be BCBS239 compliant. In some cases, this will be a huge undertaking and will need to be ready by mid-2018.
Fortunately in Europe, MiFID II will help deliver improvements to market data quality and coverage since no single bank will be able to offer sufficient data on its own. The establishment of trade repositories – particularly for OTC derivatives – has also increased the availability of real transaction-based data. Data projects are notoriously difficult and come with a great deal of inertia to overcome. Therefore, banks must now design and build a single trusted data source.
Hello. How Can We Help You?
-
BECOME A CUSTOMER
+1-267-759-9000
-
JOIN OUR TEAM
+1-267-759-9000
-
SEND A MEDIA INQUIRY
+1-267-978-7688
-
BECOME AN INVESTOR
+1-267-759-9000 x 59419
-
ASK US ANYTHING
+1-267-759-9000
Our Offices
-
Canada
-
Mexico
-
Guadalajara
MapPeriférico Sur #8110,
Col. El Mante
45609 Tlaquepaque, Jalisco
MexicoP: +52-33-462-400-98
-
-
United States
-
Newtown, PA
Map41 University Drive,
Suite 202,
Newtown, PA 18940
USAP: +1-267-759-9000F: +1-267-759-8989 -
Bellevue, WA
Map110 110th Ave. NE,
Suite 310
Bellevue, WA 98004
USA -
Boston, MA
Map21 Drydock Avenue,
Suite 410 W,
Boston, MA 02210
USA -
Conshohocken, PA
Map101 East 8th Ave,
Suite 201,
Conshohocken, PA 19428
USAP: +1-484-382-1300 -
Los Angeles, CA
Map11601 Wilshire Blvd,
Suite 350,
Los Angeles, CA 90025
USA
-
Mountain View, CA
Map465 Fairchild Dr,
Building B,
Suite 221,
Mountain View, CA 94043
USA -
New York, NY
Map24 West 25th Street,
5th Floor,
New York, NY 10010
USAP: +1-267-759-9000F: +1-267-759-8989 -
Philadelphia, PA
Map30 South 15th Street,
9th Floor,
Philadelphia, PA 19102
USA -
San Francisco, CA
Map222 Kearny Street,
Suite 308,
San Francisco, CA 94108
USA -
Washington D.C.
Map7901 Jones Branch Drive,
Suite 400,
McLean, VA 22102
USA
-
-
Austria
-
Vienna
MapNottendorfer Gasse 11,
1030 Wien
Austria
-
-
Bulgaria
-
Sofia
Map69 Bulgaria Blvd.,
Infinity Tower,
1404 Sofia
BulgariaP: +359-700-20-273
-
-
Czech Republic
-
Prague
MapCity Tower building,
Hvezdova 2b,
Prague 4
Czech RepublicP: +420 22 888 28 23
-
-
Germany
-
Frankfurt am Main
MapFranklinstrasse 56,
60486 Frankfurt am Main,
GermanyP: +49-69-31019090
-
-
Hungary
-
Ireland
-
Dublin
MapAlexandra House,
The Sweepstakes,
Ballsbridge, Dublin 4,
D04 C7H2
IrelandP: +353-(0)-1-631-9280
-
-
Netherlands
-
Poland
-
Gdańsk
MapAl. Grunwaldzka 472E
80-309 Gdańsk
Poland -
Katowice
MapChorzowska Str. 148
40-101 Katowice
PolandP: +48-12-222-02-02 -
Krakow
MapOpolska Str. 114
31-323 Kraków
PolandP: +48-12-222-02-02 -
Warsaw
Mapul. Grzybowska 62
Browary Warszawskie, building J, 9th floor
00-844 Warszawa
Poland -
Wroclaw
MapUl. Piotra Skargi 1,
Budynek A,
50-082 Wrocław
Poland
-
-
Spain
-
Malaga
MapAv. Imperio Argentina, 19-21,
2º Planta,
29004 Málaga,
España
-
-
Sweden
-
Switzerland
-
Glattpark
MapBoulevard Lilienthal 2,
8152 Glattpark (Opfikon)
SwitzerlandP: +41-43-500-21-49
-
-
Ukraine
-
Dnipro
Map17A Volodymyra Monomaha Street,
49000 Dnipro
UkraineP: +380-56-790-5651 -
Kharkiv
Map33G 23 Serpnya Street,
61072 Kharkiv
UkraineP: +380-57-728-06-22 -
Kyiv: Registered office
Map28 Fizkultury Street,
03150 Kyiv
Ukraine
P: +380-44-390-5457F: +380-44-390-0861 -
Kyiv: Visitors office
Map14B Kudryashova Street,
03035 Kyiv
Ukraine
P: +380-44-390-5457 -
Lviv
Map45 O.Stepanivny Street,
79018 Lviv
UkraineP: +380-32-242-4642F: +380-44-390-5458 -
Vinnytsia
Map51 Ovodova Street,
21000 Vinnytsia
UkraineP: +380-432-551-294 +380-432-551-275F: +380-432-551-293
-
-
United Kingdom
-
Australia
-
Sydney
MapLevel 19, 68 Pitt Street,
Sydney, NSW, 2000,
AustraliaP: +61-28-310-82-72
-
-
China
-
Guangzhou
MapUnit B01, 23/F,
Yuexiuxinduhui Building,
No. 236, 6th Zhongshan Road,
Yuexiu District, Guangzhou,
China 510180 -
Shanghai
MapRoom B509, 5th Floor,
48 Weihai Road,
Huangpu District, Shanghai,
China 200000P: +86-21-53080606 -
Shenzhen
Map3/F, Block 5, Vision Shenzhen Business Park,
9th Gaoxin South Road,
Shenzhen Hi-tech Industrial Park,
Nanshan District, Shenzhen,
Guangdong, China 518057
P: +86-755-36899008 -
Suzhou
MapBuilding 12, Creative Industrial Park,
328 Xinghu Street,
Suzhou Industrial Park,
Suzhou, China 215123
-
-
Hong Kong
-
Hong Kong
Map198 Wellington Street,
17F, Central
Hong KongP: +852-5808-6018
-
-
India
-
Bangalore
MapSmartworks,
Global Technology Park,
Block C, Outer Ring Rd,
Adarsh Palm Retreat, Bellandur,
Bengaluru, Karnataka 560103
India -
Hyderabad
Map10, 11 & 12th Floors,
Salarpuria Sattva Knowledge City,
Plot No. 2, Phase - 1,
Survey No. 83/1,
Raidurgam Village,
Serilingampally Mandal,
Hyderabad, Telangana - 500081
IndiaP: +91-40-47979900 -
Pune
MapSmartWork Business Center Pvt Ltd,
Suite 8, Level 1,
West Wing, Nyati Unitree,
Samrat Ashok Road,
Yerwada, Pune - 411006,
Maharashtra
IndiaP: +91-20-4913-6025
-
-
Japan
-
Tokyo
MapFloor 1-10-11
Shibadaimon Centre Building 10th
Shibadaimon Minato-ku
Tokyo 105-0012
JapanP: +81-03-6880-9198F: +81-03-6880-9201
-
-
Singapore
-
Singapore
Map5 Shenton Way
UIC Building, #10-01,
Singapore (068808)P: +65-6911-6888
-
-
United Arab Emirates
-
Dubai
MapEPAM Systems FZ-LLC Dubai Branch
2307 Arenco Tower, Dubai Media City
PO Box 501929 Dubai
United Arab EmiratesP: +971-4-568-3569
-
-
Armenia
-
Yerevan
Map15 Khorenatsi Street,
Elite Plaza Business Center,
0010 Yerevan
ArmeniaP: +374-10-60-00-65
-
-
Belarus
-
Brest
Map6A Masherov Avenue,
224030 Brest
BelarusP: +375-162-52-5268F: +375-162-50-9888 -
Gomel
Map80 Rechitsky Avenue,
246012 Gomel
BelarusP: +375-17-389-0100, ext. 54079F: +375-232-70-50-31 -
Grodno
Map87B Gorkogo Street,
230005 Grodno
BelarusP: +375-17-389-0100, ext. 69011 -
Minsk
Map1/1 Academician Kuprevich Street,
Suite 110,
220141 Minsk
BelarusP: +375-17-389-0100F: +375-17-268-6699 -
Mogilev
Map19 Cosmonaut Street,
Suite 510,
212009 Mogilev
BelarusP: +375-17-389-0100, ext. 1001 -
Vitebsk
Map11-a Stroitelei Avenue,
Suite 311,
210032 Vitebsk
BelarusP: +375-17-389-0100, ext. 54433
-
-
Kazakhstan
-
Russia
-
Moscow
Map9th Radialnaya Street,
Building 2,
115404 Moscow
RussiaP: +7-495-730-6362F: +7-495-730-6361 -
Izhevsk
Map150 V. Sivkova Street,
426000 Izhevsk
RussiaP: +7-3412-27-13-37 -
Nizhny Novgorod
Map30 Poltavskaya Street
603089 Nizhny Novgorod
Russia
-
Ryazan
Map16 Gogolya Street,
390035 Ryazan
RussiaP: +7-4912-55-99-10 -
Saint Petersburg
Map22/2 Zastavskaya Street,
MegaPark,
196084 Saint Petersburg
RussiaP: +7-812-611-1094F: +7-812-611-1094 -
Samara
Map21 Michurina Street,
443110 Samara
RussiaP: +7-846-200-0970 -
Saratov
Map37 Tankistov Street,
410019 Saratov
RussiaP: +7-8452-692-981 -
Sergiev Posad
Map7 Akademika Silina Street,
141313 Sergiev Posad
RussiaP: +7-496-547-11-39F: +7-496-547-11-39 -
Togliatti
Map31E Yubileynaya Street,
445037 Togliatti
RussiaP: +7-495-730-6360, ext. 47650 -
Tver
Map8 Kolodkina Street,
170002 Tver
RussiaP: +7-4822-630-070 +7-4822-630-071 +7-4822-630-072F: +7-4822-630-073
-