FRTB regulatory update

FRTB regulatory update

By Hendrik Sumpf, Manager, Finbridge & Stefan Scheutzow, Manager, Finbridge

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

Hendrik is Manager at Finbridge. He is specialised in running projects that interface between functional concept work and technical implementation in financial institutions. His recent projects in regulatory reporting and risk controlling encompass implementations of new regulatory requirements in liquidity, credit, and market risk as well as the broader BCBS 239 context. His current focus is the reconciliation and integration of extensive heterogeneous reporting landscapes in order to prove BCBS 239 conformity.

Stefan is Manager and market risk team lead at Finbridge and responsible for the interpretation and implementation of current banking related regulations following Basel III. Stefan worked for several years in financial risk management covering supervisory requirements as well as quantitative risk models across capital markets and banking. Today, he is in charge of conducting impact studies for Finbridge clients on current treasury and capital markets related regulations such as FRTB and SA-CCR and develops achievable recommendations for implementation. He is also helping his clients to embed future supervisory requirements with their business strategies.

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

We appreciate the input we receive from discussions with other professionals and from the various interesting sessions throughout the day. These allow us to better understand and/or foresee existing pain points in the market and adjust our research and publication efforts accordingly to maximise the value of our consultancy services for our clients.

At the same time, we aim to facilitate an exchange of practical experience that runs both ways. While we learn from the other conference participants, we also give insight into our project work with multiple banks that may be helpful to others directly (in terms of lessons learned) or indirectly (in terms of questions to be raised in the future).

Our session will, among other things, provide practical examples of how we approach the choice of a target IT infrastructure w.r.t. FRTB with our clients in light of regulatory uncertainty. We will discuss pros and cons of various options to set up a working FRTB infrastructure and provide recommendations. We work together with some institutions where the FRTB implementation efforts started comparatively early such that we expect these insights to be valuable to other banks’ projects that might be in earlier stages or even just at the start.

Regulatory uncertainty has also been the key topic of your session at RiskEMEA this year. How does it affect your approach towards FRTB projects?

Due to the lack of clarifying publications from regulatory authorities in 2018 up until now and the further prolongation of the consultation phase through BCBS 436, uncertainty w.r.t. the final FRTB rule has increased further. EBA’s published opinion against the separation of reporting and capital charge requirement, which directly contradicts the recommendations by the European Council from May 2018, does not help in this respect. Banks currently deal with various potentially hard deadlines for fulfilling reporting requirements and the calculation of capital charges. At the same time, key aspects of the rules they are expected to comply with by those deadlines are still shifting.

At this stage, prudence on the one hand demands to prepare for one of those deadlines becoming effective. Business rationale on the other hand keeps institutions from casting finalised FRTB solutions in stone – or code for that matter – because this might lead to a waste of implementation budget once the solution needs to be adapted to further regulatory changes. We currently advise our clients to prepare for the ad-hoc introduction of best-effort reportings and capital charge calculations, which we support with flexible medium-stable tools that can be easily adjusted to shifting regulations and are able to provide what we call “95 percent solutions” when push comes to shove. At the same time, we use these tools to help different parts of the organisation – especially the trading units – to get used to the dynamics of FRTB capital charges. Furthermore, we start operationalising the new trading book / banking book boundary where feasible.

In your opinion, what are the lessons learned from the TRIM exercises? What are the implications for institutions’ approaches towards FRTB?

The TRIM exercise has provided ample empirical support to the incompatibility of most banks’ current risk factor databases with the concept of NMRFs as included in the current drafts of FRTB regulation. TRIM has forced participants to walk through replications of the very insightful NMRF analyses that we had seen at the November 2017 CEFPRO FRTB Forum, e.g. as provided by Tim Becker of Deutsche Bank. For our clients with internal models this has produced further reasons to grow accustomed to the idea of ditching the IMA and focusing on the standardised approach going forward.

How do you see FRTB landscape progressing over the next 6-12 months?

The publication of BCBS 436 and the discussion contributions by EBA and the EU Council have all but diminished the chance of a final FRTB rule being included in what is generally dubbed CRR II, which is still to be expected until end of this year. The May 2018 recommendations by the EU Council refer to a delegated act scheduled for end of 2019 which shall include an FRTB trial period. The next 6-12 months will create opportunities for institutions to influence the further regulatory development, provided they participate in the ongoing discussion and the quantitative ad-hoc exercises. This underscores our approach as laid out above: Meaningful contributions to the discussion should be supported by quantitative evidence based on change-impact analyses carried out using up-to-date draft regulation and real portfolio positions. We support institutions with the means to contribute.

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