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Fundamental Review of the Trading Book

The new Minimum Capital Requirements for Market Risk (d352) that resulted from the Fundamental Review of the Trading Book (FRTB – BCBS 265) at the start of 2016 have set a high bar for banks’ risk management processes and the infrastructure that supports them. Even the simpler Standardised Approach places major demands on firms in areas such as data quality, firm-wide aggregation and sensitivity calculations. The challenges around the Internal Models Approach have already been widely documented:

  • A substantial increase in processing power and storage requirements.
    • We estimate ~30x more storage and compute requirements
    • Leading to an overhaul of risk architectures to cope with the demands
    • Extending risk infrastructure to use cloud-based architectures
    • Percentile’s approach to creating centralised FO and Risk pricing utilities can help reduce discrepancies in calculations and increase alignment in P&L calculations.
  • Uncertainties over P&L attribution tests
    • The industry has lobbied Basel about the easily failed tests
    • Issues surrounding the cliff-effects of failing PLAT and falling back to SA
    • The consultation paper of March 2018 looks to address a number of these concerns.
  • Identification of non-modellable risk factors (NMRF)
    • Defining risk factors, hierarchies and mappings
    • Issues surrounding use of proxy
    • Availability of valid observation data to prove modellability
    • Complexity in generating the NMRF stress scenarios
    • The substantial parts of firms assets that are non-modellable and attract the punitive NMRF charge.

Percentile’s RiskMine FRTB Solutions

Percentile’s RiskMine software has evolved over more than a decade to keep pace with complex, changing demands from regulators and day-to-day risk management. With RiskMine FRTB solutions, our flexible, scalable approach to Risk Technology is applied to the challenges of FRTB – not just meeting today’s requirements, but providing a platform to meet future requirements.

  • Standardised Approach – calculations, what-ifs, reporting and advanced analytics
  • Internal Model Approach:
    • Risk Factor Modellability (NMRF) – data management and visualisation
    • Scenario Generation:
      • NMRF Stress Tests
      • Expected Shortfall
    • P&L Attribution Test – integration with Front Office pricing models
    • Distributed Computation
  • Aggregation and Reporting
    • In-memory technology to slice and dice
    • Integrated with Excel and most leading BI reporting tools

Percentile gives businesses an edge through out-of-the-box regulatory compliance. Going beyond the tick box of compliance by providing the tools for Risk Management to be more aligned with the business and help make better risk/reward decisions.

Key Benefits of RiskMine FRTB Solutions

  • Specifically designed to easily integrate with existing risk infrastructure
  • Consolidated view across multiple desks covering both SA and IMA.
  • Desktop application for real time analysis, Excel for flexibility and dashboard for reporting
  • For Internal Models Approach, integrates directly with Front Office valuations to address P&L Attribution test challenges.

Standardised Approach

Advanced What-ifs

A real-time calculation engine to produce the position-by-position capital charge and show intermediate calculations, allocation of buckets and correlations. Out-of-the-box what-if capabilities to understand and experiment with capital drivers.

Drill into drivers of capital charge

Quickly assess the capital impact and identify the drivers of the capital charge right down to individual portfolios or positions. Easily identify bad reference data and see the effect of changing positions and metadata in real time.

Clearly defined data model and file formats

The input format clearly defines the data needed to calculate the Standardised capital charge. It also provides a clear integration point when consolidating data from disparate systems.

Flexible reporting

The results and intermediate calculations are directly accessible for analysis via Excel and for reporting via interactive dashboards and scheduled reports.

 Internal Models Approach

RiskMine Internal Models builds naturally on RiskMine’s proven market data management, scenario generation and distributed pricing – the move to Global Expected Shortfall, with its varying historical date ranges, liquidity horizons and risk class combinations, is simply a matter of configuration.

RiskMine FRTB

Market Data Management for NMRF

RiskMine manages time series to drive scenario generation for historical simulations and stress testing, providing:

  • Time series importers: available for many vendors (Bloomberg,
    Reuters etc) and types of data (equity prices, volatility surfaces,
    credit curves etc), with a simple API to import other data.
  • A graphical application: to view and edit time series, with a
    powerful exception search facility. This gives you flexible tools
    to find and flag time series, eg non-modellable risk factors, factors
    that don’t span the full FRTB date range or simply bad data.

FRTB Capital Computation

Quickly assess the capital impact and identify the drivers of the capital charge right down to individual portfolios or positions. Easily identify bad reference data and see the effect of changing positions and metadata in real time.

  • IMA Historical VaR/ES
  • SA sensitivities
  • Historical and hypothetical stress scenarios
  • Any other “shock-based” risk measures

Development of new risk models stops being a barrier to trading new products – once the analytics are in place in the Front Office, they are available for risk.

Firmwide Aggregation

The Global Expected Shortfall results are loaded into RiskMine’s Cube, which calculates the top level capital charge on the fly and allows you to drill down to individual positions and P&L strips and see the effect of removing books and positions.

This is then available through the native Excel interface, interactive dashboards and scheduled reports.

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