Discussing international variations in timelines, approaches, model adoption and the potential for harmonisation

By Brandon Davies, Non-Executive Director, Obillex Limited

What, for you, are the benefits of attending a conference like the ‘FRTB: 4th Annual Forum’ and what can attendees expect to learn from your session?

As you know, these days I sit on the boards of financial institutions and what I can say is that boards are more and more challenging places for executives to interact with. The SMCR has changed the game and has put much greater emphasis on executive management not simply understanding changes in regulation, but also being able to explain them at board level and explain how the regulation is affecting other market participants. Conferences such as the FRTB’s 4th Annual Forum are vital to executives and management in being able to meet board expectations.

How can risk professionals manage new FRTB models parallel with existing models?

I do believe regulation is changing in purpose. The original idea behind Basel II was to create “risk based regulation”, though in practice Basel III became, in my view, regulation based risk management. The continued development of Basel and other regulation including FRTB is however on a track of looking more and more at extreme outcomes and its purpose to ensure financial institutions are capitalized against very extreme outcomes. In these circumstances, I believe boards will increasingly look to understand the risks of their business model with regulatory breach being one such risk rather than an accurate calibration of their business risk.

 What impact do you think Brexit have on FRTB?

I keep saying to anyone who will listen, that Brexit will not be as big of an issue in practice as the press and the politicians think it is – just like life, business finds a way. We are already in a world where countries are pursuing their individual interests and for the time being we have, I believe, seen the high water mark of international co-operation. The US is already reconsidering its financial institutions and markets regulation and I believe the UK will act in a similar manner when free of the constraints of the EU. Indeed from my own experience, the homogeneity of EU regulation can be much over estimated. This will create not only arbitrage opportunities but also problems such as trapped capital and illiquid markets, dealing with these issues is something I will focus on in our discussions.

What are the challenges faced while implementation FRTB in multiple jurisdiction and how can we combat them?

As I said above, the FRTB will be subject to different interpretation in different jurisdictions and this will create more fragmented markets which will produce the risks and opportunities of dealing such markets and will produce hedging issues for bank treasurers. It will also trap capital which will affect returns, pushing risk is up and return down. Managing such changes will affect business models as well as treasury functions and will be a matter for boards to consider.

What do you see ahead for the future for new FRTB models?

FRTB sets minimum capital requirements for market risk as such it poses significant data challenges as well as measurement challenges especially in light of the need for desk level reporting. It is tempting to suggest BCBS 239 for the data, Risk Factor Eligibility Testing for the models and Expected Shortfall for the risk measure. I am sure this route will be more or less where people start from but the problems of the dynamic and conditional nature of markets always makes their modeling a problem. If there is one area you need “future data” in it is markets but of course there is no such thing so the accuracy of any model prediction in markets must be treated with a degree of skepticism. I guess in a nutshell I am saying “don’t over sell your models to the executive or the board, if they are good they wont believe you and if they are not you will surprise them, never a good idea.