Overcoming the key regulatory issues and challenges on FRTB implementation

Overcoming the key regulatory issues and challenges on FRTB implementation

By Alan Smillie, Head of Capital & Ratings Methodology, Nomura.

Ahead of the FRTB 2017 Summit, Alan has shared his insight into preparing for FRTB Implementation. 

Alan, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

I’ve been in the Risk Methodology team at Nomura since 2010, before that I was at Citi for six years working on market risk methodology. Currently my focus areas are FRTB, and also looking at credit risk modelling including IFRS9, which is a relatively new area for me given my market risk background.

At the FRTB Summit 2017, you will be speaking on your insight regarding – Regulatory challenges with FRTB implementation. Why do you believe this is a key talking point in the industry right now and what can risk professionals gain from this insight?

I think the FRTB rules are highly complex, and open to interpretation in several areas. It’s also well known that certain aspects of the FRTB might be modified, which can have a huge impact on bank’s implementation plans and the cost of FRTB compliance. So I think having a handle on this is very important for firms.

In regards to P&L attribution, what do you believe are the essential considerations that need to be made when designing the test?

I think the key question is to figure what is being tested in PLA and what is not, as the final FRTB rule is ambiguous on this. The test is highly sensitive, so trying to use it to test every aspect of the risk model and system could lead to many ‘false positives’, where a good model fails PLA.

What, in your opinion does the future hold for capital risk professionals, and how can they keep up the increasing change?

The most effective way of doing this is to make an effort to maintain your network of contacts, both within your institution and outside of it. It’s always easy to neglect this when one is busy, but it’s the most effective way to stay up-to-speed. And CefPro conferences are a good way to do this, of course!

In your experience, how can financial institutions best manage potential rule changes?

I think the best approach is to maintain an open dialogue with supervisors and trade associations, in order to remain as up-to-date as possible, and understand how regulators’ thinking is evolving. That way firms can avoid misunderstanding rule changes, and either failing to meet the requirements or spending money on the wrong solution.