Dec 29, 2016

Numerix Vantage Point Series | Five Questions that Reveal FRTB’s Real Business Impact


Satyam Kancharla, Chief Strategy Officer of Numerix, discusses the latest requirements and challenges driving evolution of risk management under the Fundamental Review of the Trading Book (FRTB). He examines the top five questions that reveal the true business impact of this new regulation.

One irrefutable fact is that banks will likely have to invest anywhere from a few million dollars to upwards of tens of millions dollars into their risk infrastructures in order to adequately adopt and implement FRTB regulations. This will also have the effect of pulling together separate departments within the bank organization. Specifically, the trading, risk and finance functions will have to be more closely aligned, and not just from an operational standpoint, but technologically as well.

But within this realm of what will certainly be a significant technological overhaul, what are the key issues that will matter to trading desks, finance departments and risk managers? What are the macro level implications you need to know and understand? And just as important, how may it affect your daily functions?

Knowing the right questions to ask IT during the early planning and analysis stages of FRTB implementation can help you more quickly grasp the critical elements of the technological and operational dynamics that will take place.

So with that in mind, we’ve identified the following five key questions that raise awareness of some core business concerns.

1. “What assumptions will be made when designing our technology architecture?”

The scale and scope of building the technology structure for FRTB implementation can be massive. It is crucial to make sure that the right assumptions are being made by the technology architects before they build the structure. Also, if some of those assumptions turn out to be invalid, what will the challenge and costs be to course correct?

That’s why the business lines should engage early and often with the IT team to review the assumptions and identify any adjustments that may need to be made. Some areas where assumptions might be lurking include: adherence to standardized vs. internal models in various desks, trade volumes and trends, data management needs, system response times ranging from real-time to end of day batch, and methodology for ensuring P&L test compliance.

Make sure that all the assumptions are understood at sufficient levels of depth and agreed on prior to making any final decisions.

2.“Will the architecture be responsive?”

Markets continuously change and business decisions may need to be re-evaluated. The infrastructure choices you make will likely be in place for upwards of a decade, which is why you want to ensure that the system has been designed to allow for current and future needs—real-time performance, dynamic product innovation, and agile responses to changing regulations— so trading desks can continue to adapt as markets and the regulatory landscape evolve.

Additionally, any architecture that is developed will need to be flexible and able to adapt to internally driven change. What if, for example, a bank wants to switch desks between standardized and internal models for calculating capital charges? Or what if a desk wants to trade a new asset class or apply new hedging strategies? How long would it take to implement those changes into the system? Will it take a few weeks, or several months? It is critical to develop a system that can quickly and efficiently address changes.

3. “How usable will the system be?”

Given the scale of the technological overhaul, system usability will be paramount. As such, the new IT architecture will have to be deeply integrated into the business lines’ existing work flows as trading, risk and finance will evolve towards a more cross-collaborative structure. Bespoke solutions will have to be developed that take into account the unique interdependence that will exist between these functions.

Creating the right system will require firm-specific choices. It would not help to duplicate another institution’s information architecture, because what may hold true for one bank may not hold true for another. Every business is different, even if they are in the same industry and the same peer group.

4. “How should we work with you?”  

While it can’t yet be fully understood as to what a future under an FRTB regime will look like, its implementation should be viewed as a partnership between the business and IT lines. This will require patience, understanding, and strong coordinated action, as this will be a complex undertaking. By listening, accepting guidance, and communicating clearly and frequently, the right choices and decisions can be made for the institution as a whole—and help ensure that profitability endures. Establishing and maintaining efficient communication channels is a critical success factor and this should be worked out early with the IT team.

5. “What will the technology impact be on the operating model in the front, middle and back office?”

It will be important to have a comprehensive understanding of how risk, trading and finance will operate post-FRTB implementation. The way the new rules will be implemented in practice is far away from banks’ internal practices today. Fundamental changes will be made to operations and the main challenges will revolve around data feeds, desk structures and approval workflows for each desk. IT should have a strong understanding of these operational changes and incorporate this into their design decisions.

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