Bloomberg: Banks face FRTB data and modelling hurdles

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Eugene Stern, head of market risk product at Bloomberg.

Banks facing challenges in their implementation of the Fundamental Review of the Trading Book (FRTB), the rules issued by the Basel Committee for Banking Supervision (BCBS) to revamp how banks across tackle market risk on their trading desks, according to a recent poll conducted by Bloomberg.

Progress is uneven across the industry, and the significant data and risk modelling decisions FRTB requires across an organisation are posing the most difficult challenges, according to the survey.

FRTB is one of the most significant proposed regulatory changes to come from the wave of post-financial crisis reforms known as Basel III. While the implementation deadline for FRTB was delayed one year to January 2023 by the BCBS due to the COVID-19 pandemic, the first reporting deadlines are approaching in Q3 2021, and it remains a top item on the banking regulatory agenda.

At a recent online event, ‘FRTB – Nearing the Finish Line’ Bloomberg asked over a hundred senior trading, compliance and regulatory professionals from across the sell-side how their institutions are preparing for FRTB. As a result of the BCBS’ delay, over half (57%) of respondents1 said they have slowed their implementation programme, with 47% saying implementation has “slowed somewhat” and 10% saying implementation has “slowed significantly.” Only 2% of respondents have accelerated implementation, and 41% reported no change of pace.

With the first reporting deadline approaching later this year, there was a similar split in how institutions are feeling about their preparation. Exactly half of respondents2 (50%) felt they were on target—barring minor challenges—to begin reporting later this year, and 3% said they had finalised their solution and had no open issues. However, the remaining 47% saw challenges ahead: 25% anticipated challenges implementing analytical system and risk sensitivity calculations, and 22% anticipated challenges in data bucketing and the treatment of funds.

“FRTB presents all of the major data challenges banks face in a nutshell, from cleaning the data to categorising it and ultimately making it applicable for risk management and regulatory compliance,” said Brad Foster, head of enterprise content at Bloomberg. “The upcoming implementation of this major new rule should be a reminder for banks to evaluate their overall data strategy and make sure their data aligns across the front, middle, and back office, from the trading desk to the compliance department.”

Data was by far the number one challenge identified to FRTB implementation with 59% of respondents saying that the data aspect of FRTB was their main challenge, including cleaning data, obtaining historical data such as volatility and curves, data bucketing, and capturing real price observations for the Internal Models Approach (IMA). Other challenges respondents identified including deciding on the Standard Approach (SA) versus IMA (34%), and aligning market risk and front-office pricing models across the institution (28%).

“Despite the delay, banks should continue to keep FRTB implementation high on their radar,” said Eugene Stern, head of market risk product at Bloomberg. “FRTB is about more than just checking the boxes: it requires banks to make some major decisions about their risk management processes and data practices which go far beyond market risk. Combined with the ongoing LIBOR transition, the next two years promise to be full of change for the global sell-side.”

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