FRTB – An optimised approach for capital charge estimation

FRTB – An optimised approach for capital charge estimation

By Pushpak Tripathi, Senior Manager in the Financial Institutions – Risk Advisory practice, Zanders

Could you please tell our readers a little bit about yourself, your experience and what your current professional focus is?

I studied Materials and Metallurgical Engineering during my first degree and worked in technology consulting in Capital Markets for a number of years in the US and the UK. Given the quantitative nature of the field, I have enjoyed working in risk at some of the largest investment banks as well as at consulting firms advising the banks. During this time, I diversified my knowledge and skills by completing an MBA in Finance from Oxford University and obtaining the CFA and the FRM charters.

I have been engaged in implementing various aspects of risk and regulatory change at banks for well over a decade; starting from Basel 2, 2.5, 3 all the way to FDSF, CCAR and now FRTB. Most recently, I have also been involved in scenario analysis and stress testing initiatives to measure and monitor the impact of recent geopolitical events such as BREXIT, US Elections etc.

What, for you, are the benefits of attending a conference like the FRTB forum and what can attendees expect to learn from your session?

Personally, I am looking forward to attending this conference to learn from some of the most experienced industry practitioners. I am sure other risk professionals will also benefit from the various perspectives on how to navigate the challenges posed by a regulatory requirement as complex as the FRTB. 

What are the current challenges Financial Institutions face with regards to capital charge estimation and how can Institutions overcome this?

One of the biggest challenges Financial Institutions face with regards to capital charge estimation is often data-related. It has become quite apparent that compliance with FRTB (both SA and IMA) will require banks to hold vast volumes of market data. I have read about some banks contemplating coming together to form data pools to overcome this challenge. Also, quality, consistency and granularity of data is another challenge banks have been grappling with. In my view, early compliance BCBS 239 principles can work as a foundation for compliance with other data-intensive regulations such as FRTB.

Could you provide a brief insight on implementation and cost challenges of SMA and IMA?

Both approaches come with their own unique challenges. For the Standardised approach, the need for infrastructure to calculate and aggregate capital under the Sensitivities Based Approach across all the buckets of all the risk factors can be challenging for some banks. Under the IMA, the PnL eligibility test and the ability to handle NMRFs can also be a potential hurdle for many banks.

In your opinion, why is it important to be flexible when choosing IMA on a desk-by-desk basis?

Given the stringent and granular eligibility rules and the implementation cost for IMA, flexibility and a pragmatic approach will be the only way for banks to weigh up their potential overall capital savings against implementation cost before deciding the approach for a desk.

How do you see FRTB landscape progressing over the next 12 months? 

Progress has been rather sluggish since the deadline has been extended until early 2022. With the rules getting finalised later this year, I expect renewed focus and more activity in 2019, especially after the Brexit dust settles in 2019.

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